Blockchains – what are the key issues for insurers?

What are Blockchains?

Blockchain technology allows two people or entities that have never met to carry out digital transactions without the need for an intermediary. It is a transparent and secure information storage and transmission technology, which operates without validation by a central third-party authority. Blockchains can be likened to vast and anonymous virtual public ledgers that record every transaction made by users.

In practice, all transactions are organised into groups referred to as "blocks", and each unique and time-stamped transaction block forms the basis of the next block in the chain. After storing all of the recent information, this block is incorporated into the global chain in chronological order.

This global database is completely decentralised and impossible to falsify:

• each block formed is replicated throughout the entire network, which makes it impossible to hack into or delete information;
• the blocks are created by innovative encryption technologies which prevent any subsequent modification of the information contained within the blocks.

Blockchain technology was used for the first time in 2008 to create the virtual currency called the Bitcoin.

What are the possible uses of Blockchain technology in banking and insurance?

In short, Blockchains can be used for three types of applications:

• asset transfers: transfers of money (micro-payments, consumer micro-loans, etc.), but also for transfers of shares, bonds and votes, etc.
• ledger applications: Blockchains can be used to ensure the traceability of items and assets by certifying ownership of documents and real estate (e.g. for the creation of a land and property register) or works of art, etc.
• automated execution of contracts via "smart contracts", involving stand-alone computer programs of the "When..., then…" type, which automatically execute contract terms and conditions without any need for human intervention once they have been launched.

Blockchains and insurance – for what type of applications?

Blockchain technology promises to make major changes to current insurance systems and will eventually offer significant development potential thanks to smart contracts. Verifications of whether or not the parameters required for the application of a contract have actually been attained are no longer carried out by a trusted third party but by the technology itself; in order to operate, a smart contract is based on reliable data sources capable of supplying the information required for the automatic fulfilment of the contract. This mechanism opens up a large number of potential applications in general insurance, savings and personal risk, etc.

Here are a few examples:

• index or parametric insurance: for an agricultural insurance policy covering drought risk, for example, a smart contract linked to a database of rainfall levels could trigger compensation payments once the threshold level established by the contract has been exceeded;
• delay coverage: for flight delay coverage, compensation could be paid directly and continuously from the moment at which a flight is delayed until its departure;
• automated payment of compensation in the event of death or hospitalisation;
• management of the decision-making strategy for units of account: automated decision-making according to the risk profile entered in the smart contract;
• justification of property for property insurance (a ledger allowing for the certification of property ownership).

Blockchains – a source of savings for insurers

In the medium term, Blockchain technology has significant potential to reduce transaction costs and improve reliability for banks and insurers.

By automating the execution of contracts, smart contracts will allow both policyholders and insurers to dispense with the declaratory phases: forms, claim, checking, initiation of compensation, etc.

By acting as an automated trusted third party, Blockchains promise to reduce structural costs while speeding up and improving the reliability of decision-making processes. This should eventually help to increase the satisfaction of policyholders due to the provision of faster and more intuitive services.

Limitations of Blockchains

Despite the significant long-term potential of Blockchains, certain limitations may hinder the emergence of new examples of practical uses of this technology in the short term: overly complex user journeys, lack of legal status for the innovations introduced by Blockchains, substantial computational infrastructures required for massive use (only seven transactions can currently be performed per second), only a small number of people (developers) are qualified to develop Blockchains, emergence of private Blockchains, etc.

The Crédit Agricole Group and Blockchain technology

Crédit Agricole is taking part in deliberations concerning Blockchain technologies:

• "Labchain" initiative: the French Consignments and Loans Fund has asked 17 partners in France, including Crédit Agricole, to take part in an analysis of the subject.
• Crédit Agricole is considering joining forces with the R3 global consortium (of international banks led by New York financial technology firm R3). The aim is to use a private Blockchain to record their transactions. 

Sources: Crédit Agricole – Blockchain France – White Paper on "Understanding Blockchains", January 2016