How blockchain boosts risk assessment in P&C
While until now, blockchain has largely been synonomous with bitcoin, it is In reality far more than a platform for cryptocurrency, blockchain is a technological system that allows people and organizations to store, organize, and selectively share data across a digital spreadsheet—also called distributed ledger technology, or DLT. Considering that insurance is a $4.8 trillion global business that processes billions of transactions on a daily basis, blockchain as an emerging technology seems ideally suited for use in our industry. We wanted to know more about its specific areas of utility, so we partnered with a team of MBA students from NYU’s Stern School of Management and Harvard Business School to look into its potential impact on the field of insurance.
The resulting study examined how the insurance landscape would likely evolve rapidly over the next few decades, due to the interplay and proliferation of three key technologies: distributed ledgers, smart contracts, and smart sensors. Advances in these three tools will enable more precise risk assessment by improving access to sources of information already in use, while improving historical information pertaining to either the underlying asset or the insured party.
In this first article of two, I’d like to lay out how blockchain—which plays across all three of these technologies, but sits squarely as the mode for adopting distributed ledgers and enabling smart contracts—can make the collection and dissemination of information critical to assessing risk easier and safer for property and casualty insurers:
Insurance companies rely on several sources of data for their risk assessment processes. Distributed ledger technology (DLT) can improve the ease of access to various records and reports such as motor vehicle records, Comprehensive Loss Underwriting Exchange (CLUE) reports, Dun & Bradstreet credit reports, and court records. As of 2018, this information is highly dispersed, and thus expensive and time-consuming to obtain and verify. Cognizant has predicted that the first major application for Blockchain in this space will involve the collaboration between various parties, leading to all information being stored in a single permissioned Blockchain. This will make the information sharing process much more efficient and reduce expenses associated with data storage and payment processing. These information providers (Motor Vehicles, D&B, etc.) could easily grant access through private-key permissions once they’ve received payment from a party, and easily revoke access if payments stop.
DLT also has promising applications for the creation of new sources of data useful in the risk assessment process. For example, the Everledger Blockchain is noted for its ability to provide information on the origination point or provenance of diamonds. This business model could be replicated across the housing and automobile industries, as well, dramatically affecting the risk assessment landscape. Provenance would enable insurers to more precisely ascertain the amount of risk associated with a house or vehicle: in addition to having indisputable proof of the asset’s creation date, risk assessors would also learn who all of the asset’s previous owners were. The insurer could conclude with absolute certainty and unprecedented efficiency that no data on the underlying asset has been manipulated.
While there are enormous applications for information flowing into insurance companies, it is also essential to consider the benefits of DLT for information outflow. Cognizant’s report states: “In addition to impenetrable security and cost effective storage, blockchains allow for easier and more efficient data-sharing among insurance industry stakeholders—a critical requirement in businesses—where core processes call for close collaboration among various players (reinsurers, agents/brokers, service providers, regulators and customers).” In other words, having the ability to selectively share data with only those recipients who should have access to that information is not only safer, it’s a more direct and easy way to get across the specific information that’s necessary to do the job.
One final consideration in the risk landscape is the role that smart sensors will play. Sensor data stored in a Blockchain can provide indisputable evidence of whether an automobile has previously been in any accidents, or if a home has sustained any fires or break-ins. Car manufacturers are ramping up their IoT game to make better use of all the data that is fed back by the vehicle—Audi’s Smart Car A7 is one example. Likewise, smart fire and smoke detectors that are connected to wifi—and thus to your cell phone—continue to make progress toward earlier detection and prevention of fires. Blockchain stores all this information and can help pinpoint the exact cause and time of an incident.
What is the potential payoff to the industry for adopting Blockchain? While some companies are developing and testing projects, one that we can point to is B3i’s Property Cat XOL, which predicts that it will deliver $210 million in savings across their membership. This initiative aims to bring coordination and contracts into permissioned Blockchains, eliminating the all-too-familiar string of paperwork and emails in favor of smart contracts in their place.
Next time, we will discuss Blockchain’s role in P&C claims processing—another area where IoT is involved.