13th January 2017

Digital transformation in insurance is well underway, with a number of new technologies leading the charge in streamlining functionality of existing processes. Blockchain is set to be one of these innovations, with an estimated $1 billion invested in the technology in 2016 alone. As London Blockchain Week nears, we ask what exactly is blockchain? Why is it important? And how is it going to change the insurance sector?

Blockchain is a distributed ledger of information held on a large network of computers (known as nodes) that acts as a shared and continually updated database.

Blockchain processes transactions (whether involving cryptocurrency, contracts or simply information) through these nodes using algorithms to verify a user's status and identity.

Once verified, the system creates a new, permanent, unalterable block of data to add to the existing blockchain and complete the transaction.

There are various benefits to blockchain technology. As well as guaranteeing veracity of information, there is no single point of failure in a blockchain as the database is held simultaneously across a large network of computers - meaning that information held on a blockchain cannot be lost.

The shared nature of blockchain also provides greater transparency on the database's history and previous transactions made by companies or customers.

The very nature of blockchain means that the technology can streamline industries that rely on common information, such as the insurance sector. This leads to enhanced efficiency and reduced costs through shared, distributed processing and databases.

Blockchain can also help remove the barrier of trust required for consumers to invest in the sharing economy, which operates on the mutual trust of strangers and is mainly regulated by the social pressures associated with failing to provide a good service. By providing absolute proof of a user's identity or credentials, blockchain can help risk-averse users overcome this obstacle with peace of mind in cryptographically guaranteed quality of the service.

It's already here - many start-ups are developing new and exciting blockchain solutions for the insurance industry, particularly in the area of claims. Start-ups are already looking to blockchain technology as a tool in the fight against claims fraud. Traditionally, it has been difficult to detect claims made against multiple policies with different insurers unless cross-industry data is shared.

One company has taken steps to counter this risk, using blockchain to create a distributed ledger that records diamond certification and transaction history, including any previous claims that have been made on a stone. This provides verification for insurers during the claims process and helps to prevent, detect and counter fraud.

Another innovative blockchain technology that we can expect to see in the sector is the smart contract. Smart contracts, once signed by verified parties, facilitate efficient exchange of agreements and terms when managing digital assets and automatically enforce these using verified information from a designated blockchain.

The smart contracts can respond to information collected by data carriers, which are able to retrieve relevant real-world data from trusted sources, such as information regarding travel disruptions from government agencies, and feed this into the blockchain. The smart contracts can then respond to this information and automatically pay out for claims on these verified events.

There is little doubt that blockchain has huge potential to disrupt the insurance industry. By adopting a common blockchain, the shared, incorruptible nature of the distributed database could streamline the claims process and improve the customer experience, as well as reduce fraud through identity management and transaction history.