Are insurers in Asia ready for blockchain?

The first place to start may be in DLT-automated claims processing.

The first time most people heard about blockchain was when Bitcoin burst onto the scene, allowing people to exchange a virtual currency with the record of ownership distributed over the Internet rather than centralised. This technology is more broadly known as distributed ledger technology (DLT) and has seen 2,500-plus patent filings and over US$1.4b in investments in just three years, according to Deloitte.

At least 24 countries are investing in it, 50 corporations have joined consortia around it, and 90 banks are in discussions about it worldwide. One prediction has 80% of banks initiating projects on it by next year.

DLT has captured the imaginations, and wallets, of the financial sector, but now even insurance forms are going to have to look at how to integrate it into their processes. What is DLT that it could make all this pain worthwhile? Simply put, it’s a technology that allows parties to transfer assets to one another in a way they can trust, through a computer network, without relying on intermediaries.

Transactions are recorded in a public, tamper-proof repository organised in chronological blocks. An asset is represented as a token. All parties to a transaction may access this repository. It enables transparency, immutable records and allows autonomous execution of business rules, allowing superior automation capabilities.

For insurers the first place to start may be in DLT-automated claims processing which has the potential to reduce fraud and improve assessment through historical claims information.

Submitting a claim
Commercial property and casualty (P&C) insurance (covering generally commercial motor, property, and third-party liability) is the second biggest category of insurance, trailing life and health (L&H).

In 2014, global premiums for P&C insurance totaled US$728.6b, growing at a rate of 5.1%. Claim and loss processing are major sources of friction in this valuable market, however. In 2016, they made up 11% of insurers’ overall written premium (revenue).

On closer examination, it’s easy to understand why. To submit a claim, the insured typically must complete a complex questionnaire accompanied by physical receipts of all the costs incurred by the loss. Brokers mediate this process, sometimes creating delays.

Insurers, for their part, rely on third parties to provide asset, risk, and loss data in the adjudication and underwriting process. Collecting the data is a manual effort andthe data may not be updated to boot.  Assessments take place by insurer, and the information isn’t shared amongst insurers. This raises the potential for fraud and manual rework.

Claim processing
Then there’s claim processing. A loss adjuster must review the claim for completeness, finding support for the claim, validating the loss coverage, gauging the scope of the liability, and calculating the amount of the loss.

DLT, on the other hand, can streamline the claim submission process by using smart contracts or even smart assets. Broker intervention becomes unnecessary and processing times shrink. Meanwhile, business rules encoded in a smart contract relieve loss adjustors from having to review every claim. With a record of prior claims and asset provenance on the distributed ledger, suspicious behavior is that much easier to identify.

The technology also facilitates the integration of trusted data sources, reducing the need for manual review. Even payment is automatic, again using smart contracts to deliver without back office involvement.

DLT’s potential has attracted attention from both incumbent institutions and new entrants in the commercial P&C insurance sector. Whatever one’s views on Bitcoin are, its underlying technological mechanism definitely will need to pay attention to.