In the last installment of our five-part blockchain series, we focus on the insurance industry.  Insurance and reinsurance companies are actively exploring and developing applications for blockchain technology.  And for good reason – distributed ledger technology has the potential to revolutionize the way insurance companies operate and engage with their policyholders and to open a window into new products and new markets.

At the retail level, the blockchain promises to benefit both the consumer and insurer by simplifying the claims process, increasing efficiency of underwriting and claims handling, improving risk management, and reducing operational costs.  The blockchain will help ensure the security of private or confidential information, improve auditability and transparency, and increase effectiveness in fraud detection.  These enhancements will also help lead to an improved customer experience.

At the wholesale level, blockchain technology can help streamline and enable new mechanisms for funds and risk transfer among institutions, with enhanced accountability and certainty around transactions.

Automating processes, including through the use of smart contracts, will also enable the development of new types of insurance products and the service of new markets, including products and underwriting processes tailored to emerging markets and to the Internet of Things.  Indeed, according to Lloyd’s 360° Risk Insight Report, the potential market for microinsurance in developing economies could be 1.5-3 billion policies.

Numerous insurance and reinsurance companies around the world are already exploring the use of the technology. In October, Aegon, Allianz, Munich Re, Swiss Re and Zurich formed B3i, the Blockchain Insurance Industry Initiative, to explore the use of distributed ledger technology, emphasizing its potential to provide clients with “faster, more convenient and secure services.” Among other things, companies are experimenting with the use of smart contracts for unemployment insurance and disaster relief claims.

While the possible applications of blockchain technology are endless, one common potential obstacle to these applications is regulation.  So engaging with regulators and policymakers, both in the US and abroad, is critical.  Insurers are subject to increasingly complex and prescriptive regulations and standards.  In addition, companies should be prepared for the legal issues surrounding the creation, execution, and enforcement of smart contracts.  How will regulators respond to this new technology?  Are new laws and regulations required for smart contracts, or do they mesh with existing legal regimes?  As we have written in this space before, for any industry, a legal strategy is a critical part of an overall strategy for adopting blockchain technology.  This industry is no exception.  Insurers and reinsurers know better than most companies how to assess risk and opportunity – and if the legal risks are addressed appropriately, the business opportunities presented by the blockchain could be extraordinary.