On Jan. 5, 2017, the Department of Treasury Federal Insurance Office held its first committee meeting of the new year. Several topics were addressed, including the use of blockchain/distributed ledger technology (“DLT”) in the insurance industry. Matt Higginson of McKinsey & Company presented this topic to the committee. While DLT’s impact on the financial services industry is still being examined, the industry sees the potential and is investing in research and experimentation to better understand that impact. In the insurance industry, there are three likely growth areas for DLT use: (i) underwriting, (ii) claims management, and (iii) back office efficiency.
- Insurance companies are increasingly using non-traditional data as part of their underwriting, including social media use. Consumers could provide consolidated data through blockchain technology, allowing underwriters access to their entire digital identity (held on the blockchain). Claims management could be revolutionized by the introduction of smart contracts.
- Smart contracts are an incredibly exciting innovation that would allow execution of, for example, an insurance claim based on binary information (e.g. a farmer would be provided drought insurance pay-outs based on weather data). If smart contracts are paired with an insurance company paying claims in digital currency, the contract could be executed completely automatically and almost instantaneously. Currently, any smart contract pay-out would be made through ACH. The biggest road block to implementation of this technology, according to Mr. Higginson, is his view that not all smart contracts are currently legally enforceable, but some state legislatures are currently reviewing potential changes to better accommodate the use of smart contracts.
- The use of DLT would allow customer onboarding for the entire industry rather than for a single company. This would provide companies access to customer information and might increase competition in pricing and coverage, allowing consumers more choice and a better understanding of the policies on offer.
Because DLT allows consumers to control access to their digital identity, privacy and security should be increased – cutting down on the data readily available for hackers who may attack insurance companies. Regulators are taking the time to understand DLT and instead of simply calling for stricter regulation of new technology, most regulators have realized DLT will simply provide a better version of the current recordkeeping systems.
Mr. Higginson said he encourages boards of directors to focus on educating themselves about the technology, getting involved with start-ups (large insurance companies can engage and partner with start-ups for relatively small investments and gain access to their intellectual property and expertise), and finally simply experimenting with the technology. The integration of DLT into the insurance industry will not happen very quickly and is likely on a three to five year timeline.