The average consumer could save over $500 in insurance and banking fees because of new ‘smart contracts’ based on blockchain technology, says Capgemini.
A report by Capgemini’s Digital Transformation Institute explains that ‘smart contracts’ work similarly to standard written contracts in serving as a legally binding agreement based on a set of agreed terms and conditions.
However, where smart contracts differ is that they are electronically programmed and based on distributed ledgers such as blockchain technology, meaning they can automatically enforce actions like payments as soon as the agreed conditions have been met, and without the need for independent verification or manual processing.
While smart contracts could be used in a wide range of scenarios, the report, Smart Contracts in Financial Services: Getting from Hype to Reality, focuses on the financial services industry, where contract technology and systems underpinned by blockchain are already in development by many major institutions such as BNP Paribas, Deutsche Bank, and Credit Suisse.
In terms of smart contracts’ impact on insurance, the report says they will speed up claims across areas such as health, motor, home and travel insurance, with fewer forms to fill out and interactions between claimants and insurers needed.
Capgemini explains that a smart contract system would bring all parties in the insurance value chain – consumers, insurers, claim agents and third-party vendors – together on one platform. This would result in fast and seamless claim processing due to reduced documentation, reduced dependence on manual checks and faster settlement of dues to vendors.
In the personal motor insurance industry alone, Capgemini says smart contracts are estimated to have the potential to result in approximately $21bn in annual cost savings globally for insurers through reduced processing costs. Were insurers to pass even half of these savings on to consumers this would lead to an average annual saving of $45 on premiums, according to the report.
Speaking to Life Insurance International about smart contracts and the report, Mahendra Nambiar, vice president, global insurance solutions and innovation lead at Capgemini, says the adoption of the technology by life and health insurers is very nascent and a lot of players are trying different types of experiments, but not really from a very serious perspective of it replacing a core part of their business.
Nambiar says: “It [Blockchain and smart contracts are] still evolving. There is still a lot of evolution from a technical perspective to make the systems more robust and make it easier to build applications and to really improve the level of confidence people have in the underlying technology.”
“While there is a lot of cost pressure and regulatory pressure in insurance, it has not reached that level of push where you are going to see the immediate adoption of something like this.”
In Nambiar’s view, he expects blockchain technology to become mainstream for insurers within the next 2-3 years. He says: “Coming into 2018, my guess is that the technology will become a lot more stable and the payments side is going to evolve so that people are going to want to use that side of it. And that adoption will drive more adoption in the insurance sector. Going into 2019 and 2020, you will see significant adoption.”
Nambiar’s comments come after Collin Thompson, co-founder and MD of Intrepid Ventures, a venture development company that engineers blockchain powered organisations told Life Insurance International (LII) in July 2016, Thompson explains that peer-to-peer models and in some cases machine-to-machine transactions will become more prevalent, as with the inherent cryptographic capabilities and distributed architecture of the blockchain, this will allow greater privacy while providing a greater capability to share data and information amongst collaborating parties.
Thompson says: “We are already seeing automated product offerings in life insurance and expect to see a movement of citizen science where consumers are empowered with their own information to manage their health and ultimately dictate the level of protection and service they garner from medical practitioners and insurance providers.”
In terms of which markets or insurers that are leading the way with blockchain, Thompson says incumbents are not "leading" per se, as many are still in the research and exploration phase.
However, he says: “The ones that have taken the time to experiment beyond research are the ones where we feel will have the ability to lead in the coming future.”
In emerging markets, a recent report from McKinsey & Company has said P2P blockchains with smart contracts could be applied to micro-insurance to offer them at low handling costs, if underwriting and claims handling can be automated based on defined rules and the availability of reliable data sources.
This means payouts to insured farmers, for example, might be triggered when drought conditions are reported by verified climate/weather databases.
Fast facts on Blockchain technology
- A blockchain is a distributed register to store static records and/or dynamic transaction data without central coordination by using a consensus-based mechanism to check the validity of transactions.
- As the Bitcoin backbone, blockchain was the first-ever solution to the double-spending problem that does not require a central administrator or clearing agent.
- It is therefore felt that blockchain technology can address the competitive challenges many incumbents face, including poor customer engagement, limited growth in mature markets, and the trends of digitization.
- The obvious impacts on insurance from blockchain will be in the area of decentralisation and automation.