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Blockchain Technology

Last Updated 11/09/2018

Issue: Blockchain is a ledger technology allowing the making and editing of transactional records certifiable and permanent. It uses a decentralized database to maintain a continuously-growing list of data records secured from tampering and revision. Blockchain consists of data structure blocks that may contain data or programs—with each block holding batches of individual transactions. Each block contains a timestamp and a link to a previous block.

Some are calling the emerging blockchain technology the greatest revolution since the advent of the Internet. According to a McKinsey report, in the banking industry, blockchain use cases are in the process of being implemented in technologies ranging from customer-facing payment technology to trading and exchange services. Although the insurance industry lags behind banking, in terms of technology adoption, blockchain technology could carry a promise of great opportunity and efficiency.

Emerging technologies such as blockchain are evolving rapidly. The insurance industry has taken a keen interest in blockchain because of the potential benefits the technology could provide. Records written to a blockchain are permanent and can't be deleted. As a result, blockchain-based solutions provide a reliable audit trail and could potentially reduce fraud risk, streamline policy administration and manage claims in a transparent and irrefutable manner. The possible benefits and risks of blockchain technology for insurers were discussed during a two-part CIPR webinar titled Understanding Blockchain Technology and Its Insurance Implications which provided an in-depth overview of blockchain technology and its potential uses in insurance. A replay of the event is available on the CIPR events website.

Background: Blockchain technology is software architecture, developed in 2008 as part of the conception of the cryptocurrency bitcoin. It provides-shared, immutable records—making processing transactions less error-prone. This software enables process efficiency, as well as organizational efficiency. The Bitcoin Network is a peer-to-peer network allowing for the proof and transfer of ownership without the need for a trusted third party. The influence of the Bitcoin Network has led to proposals of blockchain technologies that could automate and/or decentralize an insurance entity's processes.

Bitcoin transactions are one example of smart contracts. Smart contracts are any decision executed by a computer algorithm on a blockchain. Smart contracts can be more complex than a bitcoin transaction, although the concept of data encryption and decentralization still apply. For example, a buyer of a product sold on the internet might require the seller use a smart contract in the transaction of the product. The smart contract might be programmed to pay the seller only when the postal service tracking webpage says the package was delivered. The enforcement of the contract is recorded and enforced by miners that are compensated by a fee paid by the counterparties of the contract.

Once the contract is in effect, it cannot be changed by either counterparty. Any changes to the terms of the contract must be renegotiated as a new "block". The fact the smart contract cannot be edited by the counterparties, and the smart contracts are not enforced by the counterparties or any organization that may have a possible conflict of interest in servicing the counterparty, makes the smart contracts trustworthy.  In other words, smart contracts eliminate the risk the counterparties will not meet their obligations in the contract.

Blockchain's potential uses in insurance: There are many areas the blockchain protocol (BCP) may be used to improve insurance processes. For example, customers may be concerned with losing control of their personal data when it is handed over to a company. This concern is especially pertinent to data used in health insurance. A customer-controlled blockchain for identity verification would allow health data to remain stored on a user's personal device; the blockchain would show at what time and by whom the data was accessed by. This usage of the BCP would also eliminate the need for customers to repeat data entry processes when they see different doctors. It has been proposed this application of data encryption could be applied to credit scores and insurance credit scores, thereby reducing the risk a person's information is accessed by a malicious party while in the control of a third party. Additionally, the BCP may also be used in travel insurance plans by a smart contract that could collect premiums only when the smart contract is notified by the policyholder's smartphone the person is traveling. Furthermore, it has been proposed smart insurance contracts could be embedded into a vehicle and collect premiums based on the driving habits of the owners.

For insurance companies, the BCP could bring the possibility of reducing costs through enforcing a contract with a computer program instead of with personnel or third parties. Claims processing, amongst other processes, could be almost completely automated. For example, payouts to insured farmers might be triggered by a parametric smart contract when drought conditions are reported by verified climate/weather databases. From the consumer's point of view, the BCP could be used to enforce contract specific rules and offer a reliable and transparent payout mechanism.

Status: Given the vast possibilities, it seems blockchain technology is here to stay and will likely appear in many forms and adaptations in the future. In the near future, we may see more insurance processes operate on a blockchain, especially given the insurance industry itself is an administration-laden database. For now, blockchain technology in insurance is limited. While the impact of blockchain technology is sure to be vast, it will likely take many years for its extensive use to take hold.

The NAIC Innovation and Technology (EX) Task Force, created in 2017, is charged with monitoring emerging technologies like blockchain. The Task Force will provide a forum for discussion of innovation and technology developments in the insurance sector in order to educate state insurance regulators on how these developments impact consumer protection, insurer and producer oversight.