Application of Blockchain Capabilities in Insurance

Presumably, you're not new to the understanding, at least at a high level, of blockchain and DLT (Distributed Ledger Technology) concepts. Blockchain is the underlying technology architecture on which Bitcoin, a worldwide cryptocurrency, and distributed digital payment system, is built. Blockchain has been grabbing headlines for a few years now but has recently achieved a fevered pitch.

A few months ago, I posted an article titled Blockchain (and Emerging Technology) Hype Struggles which, not surprisingly, is still generating a large amount of discussion in the form of agreement, validation, and just plain love. Why am I not surprised? Well, in all my career, almost everyone seems to agree with the position that starting with the business design is the ONLY approach to achieving market successful solutions. In practice, however, organizations can't seem to operate this way. This validation was also met with some skepticism on how DLT technology can truly enable change in the Personal and Commercial Insurance sector.

Poor Design

Blockchain pilots in Insurance and any industry are primarily technology initiated projects in which the true purpose of the initiative is to prove the technology and to prove in many cases that the technology will fit into the current business design. Yes, there are changes to processes and departmental interactions which are the result of automation and other basic technology capabilities, but fundamentally the full potential to change business models are not pursued. Reading white papers and reports on insurance initiatives reinforce this industry approach. One may think there is little risk in this evolutionary approach, and many have argued that this will allow insurers to evolve to a future through an iterative approach with additional pilots and projects built on these early technology proof pilots.

Technology-driven initiatives miss the primary ingredient to success; purposeful, thoughtful, business designs where businesses are architected to solve a specific problem utilizing business capabilities made available by people, process, and technology.

Technology-driven initiatives miss the primary ingredient to success; purposeful, thoughtful, business designs where businesses are architected to solve a specific problem utilizing business capabilities made available by people, process, and technology.

Technology must inform, not drive business design. The excellent HBR article How to Design a Winning Business Model puts into perspective how companies think, operate and compete. My experience mirrors that which is offered in the HBR article, established companies of any size just don’t know how to compete with business models.

My experience mirrors that offered in the HBR article, established companies of any size just don’t know how to compete with business models.

Where To Go From Here

In the blockchain world, the only way to compete is through business models. Blockchain is a foundational technology, that is, it has the capability to change economic and social interactions in ways not historically possible. As a result, there are two fundamental truths to approaching business through blockchain. They are:

1. Traditional economic and blockchain economic models cannot co-exist and operate together.
2. For a blockchain business model to succeed, it must be built with the capabilities made possible by blockchain.

Blockchain enables capabilities that allow you to design business operating models for insurance that fundamentally change what and how businesses operate, interact, and what services they provide or are needed in an industry. Capabilities and example application of these capabilities include:

1. Immutability: An immutable ledger that holds the history of trusted data or transactions — “value not information based” — to be used in enforcing trust. Business Case: Any monetary transaction including payments, reinsurance, claims where the interaction between parties can exist without an Insurer's direct control over the interaction.
2. Trust: Trust that historically would be enforced through contractual, paper-based agreements and granted through centralized business process execution. Business Case: Any scenario including treaties, statutory reporting, and accounting, policy terms and conditions, mutual and cooperative insurance organizations where contractual terms and conditions can be automated or process eliminated due to the combination of immutable, trusted data sources.
3. Custody: Undeniable chain-of-custody where ownership and identity are resolute. Business Case: Transactional Master or Ledger data in which chronological documentation, such as fraud, warranty, ownership, or salvage, and subrogation conditions are being tracked.
4. Data Accessibility: Pseudonymous and openness of data eliminating complex ecosystems of companies and resources required to provide today's services and offerings. Business Case: Reimagining data, with the addition of IoT devices and blockchain, allows for a business design that eliminates the need for insurance products and services from property data aggregation solutions to claims solutions offerings such as Clue.
5. Peer-to-peer: Interactions in a network fashion in which peers interact to obtain an outcome directly without an intermediary. Business Case: A renaissance of insurance business models such as mutuals and cooperatives offering peer-based solutions modeled after product types such as perpetual products will re-emerge for the transferring and distributing of risk in which smaller groups of individuals work together to manage risk among participants in the group.

Moving Forward

Understanding, modeling, and assembling the building blocks made available by blockchain into a new-economy, competitive insurance business model takes strong focus from business leaders and an understanding that there is no short-cut. A top-down, thoughtful and guided approach is the only way to ensure that you're leaving the baggage of the centralized economy behind in favor of a flatter, distributed design that can live alongside insurance solutions of the future.

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