Federal advisory insurance blockchain

With the introduction of 2017, the blockchain technology is seeing more adoption and regulation than it did in 2016. As government agencies are becoming more interested in blockchain technology their oversight could bolster mainstream adoption.

During a U.S. Treasury Department advisory council meeting in Washington DC, the Federal Advisory Committee on Insurance (FACI) discussed blockchain technology and how it can revolutionize the insurance industry. Matt Higginson, an Associate Partner in the New York office of McKinsey & Company, introduced and discussed blockchain technology in the insurance sector. Higginson is a member of the Americas Payments Practice, specializing in Payments Strategy and Banking Operations, and leads the Firm’s education in blockchain and digital ledgers.

Matt Higginson begins his speech with an introduction about how he got into blockchain technology, then lists the three things he would like to cover: What is the blockchain? What are the applications they’re seeing in the insurance industry? What are some of the challenges in the future?

What is the blockchain, where are we seeing it applied in companies today, and when can we see proofs of concept?

  • Blockchain is a nascent technology with the potential to bring about step-function improvements in efficiency and security to the financial industry.
  • 60 nascent use cases exist across multiple industries with a primary focus on financial services. (~40%) and cost reduction (~70%).
  • Investments in the blockchain are gaining momentum (~$1 billion of Venture Capital investments over the last 24 months) and it’s expected to grow rapidly. The banking industry is expected to spend ~$400 million by 2019.
  • The success of these investments is highly dependent on the collaboration in an emerging ecosystem primarily driven by innovation in the insurtech and fintech industry.
  • 70% of financial organizations are in the early stages of experimentation- most executives expect to see material impact from the technology only in 5+ years.
  • Most of the impact from the blockchain in financial services is likely to come from payments and capital markets. Preliminary sizing of four user cases suggest significant value creation – the estimated impact of these use cases alone is $70-$85 billion, but feasibility varies significantly.
  • However, blockchain is not the silver bullet solution for all the pain points in the industry.
  • Enabling collaboration, shaping a positive regulatory environment, and identifying clear business cases justifying the transition costs will pose the biggest challenges to implementation.
  • By overcoming these challenges, blockchain technology could reach its potential within 5 years.
  • The cost and compliance benefit in this industry will be massive and realized in the next three to five years.

Blockchain technology is applicable across multiple use case categories as a static store of secure information, or a dynamic store of tradeable information. In insurance, the blockchain has the potential to make an impact across the entire value chain. The blockchain can be applied to product development and distribution, pricing and underwriting, payments and collections, claims, policy in administration and back offices, and risk capital and investment management.

Blockchain benefits to insurance:

  • Static registry
    • Manage registry of asset ownership
    • Provide automation of specific assets
      • Land title
      • Gift card ownership
      • Chain of custody
  • Identity
    • Securely store, confirm, and distribute identity-related info
    • Revise personal/other data
      • Store bank/credit card identity info on blockchain to enable user to easily access proof of identity
  • Smart Contracts
    • Create and execute semi-autonomous contracts on distributed digital platform
      • Insurance claim payouts
      • Cash equity trading
      • Release of new music
  • Dynamic registry
    • Exchange of physical and digital assets on a digital platform
      • Streamlines low transaction settlements to address liquidity mismatches in load funds
  • Payment infrastructures
    • Efficient

Companies successfully applying blockchain technology to use cases in the insurance industry:

  • Tradle is providing Know-your-customer application to ease and speed up onboarding processes (PoC phase) Aug 2015
  • SafeShare has launched a blockchain-based platform to register on-demand insurance in the UK (underwritten by Lloyds of London) Mar 2016
  • Allianz announced a successful prototype to automate catastrophe swap transactions- Jun 2016
  • Blem, a provider of reinsurance solutions, is working with z/yen group to record claims in a blockchain for accurately dividing cost between insurer and reinsurer- May 2016

While Higginson believes that the blockchain brings solutions to the insurance space, he also points out success of early proofs of concept (PoC) have been achieved primarily by consortia working together. He also reveals that shaping the regulatory environment is the biggest challenge to unlocking the potential value of the blockchain.

Regulatory environment challenges:

  • Decentralized ownership
  • International jurisdiction
  • Encryption and user anonymity
  • Blockchain transaction of non-digitized assets will require legal consideration of off-chain settlement
    • Key consideration:
      • Educate and involve regulators
      • Propose solutions to unique regulatory questions
      • Communicate regularly, especially on uses related to consumers

The three main hurdles of blockchain adoption are the establishment of legal and regulatory framework, viability of business cases (including justifying costs of implementation and integration), and lastly, agreement on key standards and active collaboration across all required players. As Higginson stresses the importance of collaboration and regulation, he states:

“Frankly, the area where we are going to have to sort out regulation is where we make blockchain-based contracts legally binding. And that’s something that doesn’t exist today, but we know that there are discussions, particularly in the state of Delaware, to try and push legislation through to make that a reality.”

As Higginson closes his speech, he explains that the path to adoption lies in digital identity and that the blockchain is able to solve this issue with a paradigm shift in how we approach identity management today. As identity management platforms look into blockchain solutions, the success of a blockchain identity system will catapult the technology into mainstream adoption.

Brianne Rivlin has been writing within the internet field for over seven years. During the last few years, she has been heavily influenced by blockchain tech, virtual currencies, and Ethereum.
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