Blockchain, the programming layer initially supporting the Bitcoin launch, is now the focus of several industry associations who are looking to leverage the technology’s built-in security and trust.
What is blockchain?
Blockchain is a programming platform where encryption and specific rules allow for the validation of entities, such as people, contracts, and things, such as currency or equipment. For example, a contractor could have his or her identity, qualifications and certifications validated by someone who knows this person.
Blockchain rules allow for connecting these blocks into a chain, which is validated again and hashed. An application in the insurance industry is to connect all related entities together with a “smart” policy. The technology can offer trusted and safe transactions, in either a public or private forum.
While secure payments is a major focus of blockchain, it’s also being vetted for a range of industry applications involving:
- Secure Contract Management – To manage the language, terms, process
- Trading Clearinghouse – To manage a secure ledger
- Secure Records Management – To manage the validity of records
- Supply Chain Validation – To manage the source and ownership of items entering a supply chain
What’s holding back adoption of blockchain in the insurance industry?
Blockchain is currently receiving worldwide attention from corporations, organizations and governments as a way to create a true consumer-to-provider environment, which can cut out the middleperson and reduce cost. However – as with all emerging technologies – there are technological and governance issues that must be addressed before wide-spread acceptance of blockchain is reached:
- Management: The introduction of a set of rules and how to enforce them is fundamental to managing a blockchain environment. The biggest questions are who sets the rules and how are they enforced?
- Processing speed: The transactions and data manipulation required needs significant processing power to accomplish, which is one of the primary reasons the technology has been limited to environments requiring low-to-moderate transaction speeds. Many of the pilots now being considered focus on higher value transactions that have greater savings potential, with the hope of higher transaction volumes in the future.
- Infrastructure demand: To overcome these speed requirements, some groups are investing heavily in processing equipment. This investment puts a significant demand on server and storage technology, data center space and power consumption. In the future, specialized encryption technologies and higher density computing platforms may ease some of this burden, with cooling and heat dissipation technologies likely to evolve to more efficient techniques.
- Governance: The value of blockchain is that it has many forms and participants, and allows point-to-point transactions, without the need for a middleperson. With most current systems designed and managed by either single organizations or a middleperson, this poses a problem for adoption:
- Government control must be addressed if these blockchain environments are to become reality. Third party cryptocurrencies currently dodge regulations regarding money laundering, sales tax and money supply.
- What is the controlling jurisdiction if an issue arises that requires legal attention? Who has the right to bring suit? In many cases, there would need to be a discovery of facts, which is not supported in this encrypted environment.
A hypothetical blockchain example for the Equipment Breakdown insurance business
In our hypothetical blockchain example for the Equipment Breakdown insurance business, a system is developed where every entity is validated:
- Insured Company (Name, Incorporation, Moody’s, Duns, EIN, Location, etc.)
- Employee from the Insured Company (Name, Function, Level of Authority)
- Participating Insurance Company (Name, Incorporation, Moody’s, Duns, EIN, etc.)
- Employee from the Participating Insurance Company (Name, Function, Role, Level of Authority)
- Equipment being insured (Identifier, Date of Manufacture, Date of Installation)
- Manufacturer of equipment (Name, Incorporation, Moody’s, Duns, EIN, etc.)
- Independent Service Provider (Name, Specialty, Certifications, Rating)
- Standard Policy (Identifier, Description, Terms, Exclusions, Riders, etc.)
Each of the entities listed above could be a block of validated, trusted data, and as entities change, new blocks can be added and timestamped. A Contract Policy is simply a linkage of these entity blocks with an additional block of the approved Contract Policy components (Identifier, Policy Description, Participating Company Level, Terms, Exclusions, Riders and Premium). All encounters with the Contract Policy, such as premium payments, modifications, renewals, claims and adjustments could also be blocks linked to the policy block, providing a self-documenting history.
In this example, all involved are working from a common knowledge base and the insured equipment is trusted, and can be specifically identified, linked to a manufacturer, a service provider, an inspector or perhaps a claims adjuster.
Near term impact
What’s the impact of Blockchain adoption in the equipment breakdown insurance industry?
The immediate equipment breakdown insurance impact if this technology is adapted is that rules need to be established, a validation process needs to be created and data processing ownership and use need to be decided. The transition would take time and the data processing impact, in terms of capacity required and the resulting power and cooling increases would be significant. If this technology overcomes the hurdles to its growth and has widespread adoption, it has the potential to create a completely new Secure Contract Management business model.
© 2018 The Hartford Steam Boiler Inspection and Insurance Company. All rights reserved. This article is for informational purposes only and does not modify or invalidate any of the provisions, exclusions, terms or conditions of the applicable policy and endorsements. For specific terms and conditions, please refer to the applicable coverage form.