Blockchain: A $200 billion opportunity in insurance?
There are a number potential operational and economic benefits that blockchain technology could provide to the insurance industry, according to a new report from Boston Consulting Group.
Globally, the P&C industry had more than $2 trillion in grow written premiums in 2016, according to the First All-Blockchain Insurer report. Blockchains could help the worldwide property and casualty insurance industry reduce its combined operating ratio by 5 to 13 percentage points, while generating more than $200 billion more in technical margin from the current level of growth in written premiums.
Adoption is moving slowly, but in a positive direction. “Overall, in the past six months, we’ve seen several insurers around the world increasing their blockchain activity,” says Kaj Burchardi, managing director, Boston Consulting Group.
The BCG report offers potential impacts to specific lines of business. For instance,
· An all-blockchain motor insurer might use the data on a blockchain to lower its loss ratio, cut customer acquisition costs and improve its fraud-detecting abilities. Given those benefits, the motor insurer could possibly reduce its combined operating ratio 10 to 13 points over a traditional motor insurer.
· An all-blockchain marine cargo insurer could potentially lower risk management and operations costs. The carrier could improve risk management if the insurance contract and the satellite-tracking system of an insured cargo company were on the same blockchain, and then the insurer could automatically detect an increased risk and dynamically adjust premiums.
· Reinsurers could analyze the combined data on a blockchain to show risk concentration in a specific region, for instance. A blockchain could also automate risk trading among insurers and reinsurers on a specific contract.
The BCG report also presents barriers to wide-scale blockchain adoption in insurance, citing both managerial and technical obstacles. For instance, partnering can be problematic since insurers might have to cooperate with competitors and give up certain market differentiators. Also, most insurers aren’t yet familiar with blockchains and don’t yet have a handle on the technology’s ability to help them strategically. In addition, insurers must use private blockchains that require a different level of governance than public blockchains. Scalability and computational power is a big issue, as are security, software robustness and standards and protocols.
Despite blockchain’s nascence, BCG recommends that it’s a mistake for insurers to hold back with a wait-and-see approach and advises carriers to begin developing necessary capabilities now.
There aren’t many people with blockchain skills and experience since it’s a new technology, according to Burchardi. “Therefore, insurers will have to develop them for their own organizations,” he explains. “This takes time, and insurers will make mistakes defining the right use case, selecting the right platform and designing the appropriate business model and governance. Insurers need time to experiment at smaller scale.”
The BCG report offers up next steps for insurers that want to get into blockchain. Insurers should identify business priorities, assessing where they are and how blockchain would get them where they want to be, and they should prioritize possible use cases. In addition, insurers need to select the technologies that will help them achieve their specific objectives.