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The insurance sector has been slow to embrace technology, and the use of Blockchain technology is no exception despite some potentially very interesting ways in which it could be used. In very simplistic terms, Blockchain technology is likely to impact the insurance sector in two predominant ways: operationally - i.e. making infrastructure much less expensive in terms of the day-to-day way it conducts its business activities, and as an investor - i.e. the way insurance companies hold investments, as well as the types of investments insurance firms’ trade. The publication Raconteur highlighted that Blockchain technology is able to help the insurance industry in three ways by:
- streamlining third-party transactions
- smart contracts and re-insurance
- data management and security
Financial services companies, including life assurance firms, are being faced with the challenge of the transition from LIBOR to SONIA (interest rate benchmarks) in order to ensure any contracts with third parties are correctly updated. In its own report on this, the Investment Association points out there are a number of factors to consider. So, in view of this, why not use this time to replace paper-based agreements and embed smart contracts? As Robert Crozier at Allianz Technology has stated: “Leveraging blockchain can offer a significant leap forward in terms of productivity, something which financial services providers traditionally struggle to scale”. Furthermore, insurance companies need to be prepared for IFRS-17 which comes into force as of 1 January 2023, as this will present another set of challenges for the insurance sector with firms being required to be more transparent. According to EY: “Data, systems and processes will need to be shared between Finance and Actuarial departments”. The good news is that Blockchain technology has been proven to be highly effective at improving transparency and therefore ought to be able to support insurance firms to hold and share data more securely.
Meanwhile, the adoption of Blockchain technology - and the digital assets it can create - is not itself without real and perceived challenges, such as the negative reputation crypto currencies earned historically and the variety of legal and regulatory challenges that exist - although regulation such as MiCA will offer greater clarity. The transition of data to be held on a Blockchain is potentially the biggest challenge, i.e. the need for management to change and migrate from many of the existing analogue paper-based processes and procedures to retaining held data, digitally, in a structured format. However, for those companies in the insurance sector that are able to meet this challenge, the potential rewards are substantial.
The use of Blockchain technology to bring greater transparency will not only help firms comply with IFRS-17, but ought to create more trust. In time, higher levels of trust should lead to less uncertainty, thus lowering risks and, in turn, affording the ability to offer lower insurance premiums. Subsequently, it is not difficult to see that once the initial reluctance to change is overcome, and just one or two firms in the insurance sector adopt the use of Blockchain technology, we are likely to see many more firms embrace this technology too.