Blockchain and shipping insurance

Blockchain technology [1]has recently become a hot topic. Given its increasing and growing popularity, it seems interesting to see its possible implications in the sector of insurance, especially shipping insurance.

Blockchain technology – given its structure involving shared and immutable data being entered without third-party intervention – seems to have a high potential of application in the insurance field.

In view of the presence of an immutable and objective software code, which enables some functions once certain pre-determined conditions are met, particular attention should be given to the so-called “smart contracts”. Such contracts, which are based on and work through blockchain technology, are, in essence, automated contracts.

So, considering that the insurance business is mainly based on information gathering, blockchain technology can help manage all such information in an easier, safer and faster way, with obvious benefits in terms of cost reduction for the insurance companies using it.

At the same time, blockchain technology might enable the solution of two big issues inherent in the insurance business: (i) the fact of customers losing control of their data when put into the insurer’s hands and (ii) repeated data entry. Blockchain technology might resolve these issues through a transparent, reliable and immediate insurance process. This is actually the goal of Etherics, the first insurance based on Ethereum, a platform that allows the sharing of smart contracts.

Insurance companies are approaching such technology in different ways, namely, by creating insurance or inter-sector consortiums, making investments in start-ups operating in the blockchain field and partnerships with other companies, or by developing said technology within the company itself.

An example of insurance consortium (among AEGON, Allianz, Munich Re, Swiss Re, Zurich) is the project called “Blockchain Insurance Industry Initiative” (B3i). Its mission is to create an ecosystem in which insurance transactions may take place in an automated, integrated and transparent way. The final goal is to make transactions easier not only for the individual company but within the whole insurance value chain, by establishing common operating standards.

In practical terms, the insurance contract is generated in the form of a smart contract and published in the blockchain. In this way, the terms of the policy can be seen by each participant in the blockchain. The function of a smart contract is to verify independently the contract terms by obtaining data from multiple sources. As a consequence, there is no more need to fill in plenty of forms, which allows insurance companies to manage all the insurance processes (including claim settlement) in a faster and cheaper way. Moreover, the insured will retain control over its data, once automatically checked and certified by the Company. Indeed, since the insured only has the key to access its data, the insured is also the only person who can authorize access.

Therefore, the application of blockchain technology to insurance, especially (but not only) in the shipping sector, might have several advantages in terms of higher efficiency and speed of operational processes, thanks to the automatization of operations occurring in real time (e.g. determination of premiums, management of inspections, etc.). This may entail reduction of costs and a higher level of security, given the reliability and unchangeability of data.

Moreover, blockchain technology would also protect information, its origin and traceability as well as its, since only the participants within the blockchain network are in a position to access the data. As a consequence, insurance companies will gain trust from customers. Furthermore, thanks to decentralisation, blockchain technology may allow a more accurate assessment of a customer’s risk profile and the relevant data, once entered, may be stored in a permanent and detailed way without having to be entered repeatedly, which will allow avoiding mistakes and cutting down paper forms.

There are, however, certain limits that still need to be solved concerning the application of blockchain technology to insurance.

First of all, some partnership issues might arise (considering that potential partners are often competitors). Moreover, there may also be a need of developing a new type of governance and know-how, since not all insurance companies are familiar with blockchain technology.

There are also some issues related to the technology itself such as the need for more storage space as a consequence of the constant increase of data, the necessity to analyse cyber risks and improve software stability, considering the large amount of both participants and transactions as well as the need to identify common standards and protocols and create an easily accessible platform notwithstanding the complexities behind it.

Some tests are, however, already in place concerning the applicability of blockchain technology to the insurance sector. For example, a popular application was launched by an insurance company in Italy, by which a user can underwrite a blockchain-powered insurance flight delay policy. The insured whose flight is delayed will receive automatic compensation upon landing. The amount is calculated by parametric method based on the historical data of the previous seven years. Any delay is verified automatically and so is compensation, without the need to provide documents to prove the delay or fill-in any paper forms.

Another example in the shipping sector is the launch of a new platform based on blockchain and distributed ledger technologies[2], Microsoft Azure infrastructure and ACORD data standards. Such platform, launched by some leading players of the insurance world, is intended to support more than half a million automated transactions and help manage risk for more than one thousand commercial vessels in the first year. One of the most famous Danish shipping companies has played an important role, as a pilot client, in the development of such technology and decided to remain in the platform with its vessels’ portfolio.

Even some Lloyd’s Syndicates specialising in maritime risk, together with NTT Data Corporation, have tested blockchain technology to develop new policies in connection with trade, especially maritime trade.

Moreover, recent surveys concerning the insurance sector, show that 40% of insurers are expecting to introduce this technology into their business model within two years and more than 80% recognize that blockchain technology and smart contracts will revolutionise the relationships with their partners. However, to benefit from such technology, it is fundamental that companies’ employees, managers and other professionals may acquire the IT skills required for dealing with such technology. There is, however, still much to be done in this respect.

Today, several insurance companies prefer to wait for some time until the new technology is more widely used and known. On the other hand, insurtech start-ups are carrying out various experiments. The risk is that traditional insurance companies may lag behind, leaving the market to the new entities emerging from such technological revolution.

The new opportunities that may arise from the new technology suggest that it is time to take action by identifying business priorities, selecting the right technology, prioritising cases based on practical applicability and, most importantly, experimenting as much as possible.

This article is for information purposes only and is not intended as a professional opinion. For further information, please contact Ottavia Dalla Fior or Guglielmo Boursier Niutta.

[1]A blockchain is set of shared and immutable data. In other words, it is a distributed digital ledger, whose items are clustered in “pages” chained in a chronological order and whose integrity is guaranteed by cryptography.

[2]In a Distributed Ledger Technology (DLT) network, consisting of a set of participants, each participant has to manage a node of this network. Each node updates the Distributed Ledgers independently but subject to the consensual control of the other nodes.