The term blockchain electrifies the economy and media the same. The insurance industry is no exception. The fact that the cryptocurrency Bitcoin is based on blockchain surely contributes to the popularity of this actually very technical topic. What effects can this technology have on insurance companies and insured individuals?
In order to receive attention in the media, many startups and Fintechs are adorning themselves with the reference to blockchain. The expectations for the new technology are extremely high throughout all industries. And just as it is for all topics with increased attention, it is not very simple to differentiate between serious approaches and pure fantasy.
In the core, blockchain is a digital directory of transactions that is not located on a central server, but rather on the computers that participate in the transactions. The recorded transactions are based on each other through a special mechanism and therefore go together like the links in a chain. This ensures that the blockchain cannot be forged, because if a change is made to a transaction retrospectively, the chain is disrupted and the manipulation stands out.
The first concrete application of the blockchain is the cryptocurrency Bitcoin, but it is not the only thing that uses blockchain. The British startup Everledger uses blockchain to register diamonds. Dealers, jewelers and insurance companies can use this to verify the origin and authenticity of a stone.
Smart contracts and blockchain offer new possibilities
In October 2016, Aegon, Allianz, Munich Re, Swiss Re and Zurich founded the Blockchain Insurance Industry Initiative (B3i) to conduct research on this technology. What causes these large market participants to take an intensive look at blockchain?
So-called "smart contracts" are the cause and awaken particular interest among insurance companies. As soon as one or several predefined conditions are fulfilled, smart contracts automatically perform certain actions. Axa already started their first product here with "Fizzy". Air travelers can take out an insurance against delays. This is based on blockchain and works completely automatically from completion to payout in the event of a claim. Generally speaking, blockchain can always be used if multiple parties regularly exchange data with each other that has to be verifiable. While these transactions from the parties depend on each other.
The Allianz Risk Transfer AG already successfully completed a project with natural catastrophe swaps on the basis of a blockchain. Delays and incorrect entries were removed from the process through the reduction of manual input by the intermediary. Another application case can be found in retrocession. An existing problem for retrocessionaires is to keep an overview of the hedged risks. The blockchain permits the local deposition of risks. These remain transparent and understandable even with repeat reinsurance. Combined with smart contracts, payments can be made quickly upon the occurrence of a damage event. Purely technological virtually in real time.
All of these examples would also be solved with conventional databases. But, just as before, the problem of granted or specially built interfaces exists here. The blockchain is superior at this point, because there is already consistency on the basis of the basic system.
The blockchain will not make the human unnecessary to start with.
Blockchain and smart contracts will surely help the insurance industry optimize processes and reduce costs. Without a doubt, the technology has the potential to push digitalization forward in society. However, they will not make people and their expert knowledge superfluous in the near future. The previous pilot applications are perfect for more or less simple "if-then links". With more complex decisions, human knowledge will still be needed in the future. Human suspicion and critical expertise cannot be replaced when it comes to uncovering new scams for attempted fraud. Artificial intelligence may be able to provide support in the detection of patterns, but experience and intuition are very difficult to replace.
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