Anyone involved in the financial services industry is sure to have heard of blockchain. However, despite the term’s popularity, many insurance professionals only have a vague idea of how it works.
To give a clearer picture on how the emergence of blockchain will affect the insurance industry and brokers in particular, Insurance Business spoke with Bundeep Singh Rangar, founder and CEO of PremFina, a London-based premium finance solution provider catering to insurance brokers.
“The best way to understand blockchain is to contrast it with email, which involves an exchange of content,” said Rangar. “If a person sends an email, the sender and receiver both have copies of the same content.
“Blockchain, on the other hand, records an exchange of value. A person cannot keep a copy of £100 if they are also transmitting this value to someone else. The blockchain, therefore, records a negative accounting entry from the sender and a positive one for the recipient.”
Blockchain is one example of distributed ledger technology. According to Rangar, entries on the blockchain are recorded on a ledger that’s distributed across millions of computers.
“Blocks are a set of transactions that are bundled, recorded together and encoded via an algorithm referred to as a hash,” he said. “This record of transactions via blocks is transparent, verifiable and immutable.”
One may ask: “If each transaction is recorded on the distributed ledger, won’t the amount of data balloon to absurd sizes quickly?” Rangar explained that blockchain uses ‘hashing’ to efficiently remember transactions without having to go through the entire history.
“Hashing provides an efficient way of storing data while also recording and tracing previous transactions that have taken place so far,” he said. “The input is an entire set of transactions that have taken place so far, so new recorders of transactions need to remember only the hash itself and not all the transactions that occurred in the past. It’s akin to a closing balance in a previous year’s financial statement that’s used as the opening balance in a new financial statement.”
Blockchain, when applied to insurance, will govern various transactions throughout the insurance process – from payment of premium to payout of claims.
“Insurance is essentially a set of financial calculations and transactions,” Rangar said. “An insurance premium is the cost of underwriting an actuarial calculation of risk. The selling of insurance to end customers and the financing of insurance premiums via investors all involve a set of transactions for an exchange of value.
“Going by the above description of the blockchain, these transaction processes can be automated, streamlined and made much more time and cost effective than currently employed. Further, by using smart contracts that are embedded in blockchains, which entails the automatic pay-out of claims once certain conditions are met, some parametric insurance claims can be processed and paid out without much, if any, human intervention.”
Rangar advised brokers looking to embrace blockchain that they can start by using it to onboard their customers or for payment of premiums.
“For the former, new ways to perform know your client (KYC) verifications are being developed using the blockchain that should reduce costs and, more importantly, fraudulent claims,” he said.
“Second, certain parametric insurance policies involving flight or train delays, crop, marine and weather-related insurance, hold the prospect of immediate and cost-effective settlements since claims can be verified automatically on the blockchain and payments made instantly via smart contracts.”
According to Rangar, PremFina embraces technologies that make insurance business processes more efficient.
“In so far as the blockchain allows for a speedy and efficient settlement of payments and collections, we plan on utilising it to process payments as well as to finance the cost of premiums,” he said. “Insurance financing can be sold via tokens, which represent fractional ownership of the risk-adjusted financial return attached to credit agreements. Blockchain can make the process of issuing credit agreements, collection of monthly instalments and financing of such premium financing loans more efficient. It can make premium finance a more widely used product in the UK and elsewhere.
“This is just the start. There are many other applications and platforms under development that can be seen among new blockchain and insurtech start-ups.”