Lately, there has been much discussion about Blockchain. Can you explain what it is and what it seeks to achieve?
Firstly, we need to specify that Blockchain, the one with a capital B, which became famous with Bitcoin, is just one of the many applications of DLT (Distributed Ledger Technology), a broader technology that combines cryptography and peer-to-peer communications.
We can imagine it as a secure register (ledger), replicated within multiple nodes belonging to a more or less extensive network, in which information is connected to other information like the links in a chain.
This cryptographic link between transactions is unbreakable and allows the consistency and accuracy of new transactions that users propose to add to the chain to be quickly verified.
Furthermore, the fact that the same chain is identically replicated for each node of the network makes it impossible to hack without simultaneously attacking thousands of nodes, which is impossible given the enormous computing capacity that would be required.
The distributed ledger can contain information related to complex assets or simple financial transactions between the various users.
Blockchain cannot enable features that are currently unknown to end users, allows values to be transferred from one entity to another, as with a normal bank transfer, or allows registration and certification of asset ownership, just as the public automotive registry. The significant innovation is that, in order to function, it does not require the extensive banking/administrative and regulatory infrastructure typical of a bank or public administration.
Another element that has contributed to the success of DLT is smart contracts, i.e., IT objects that contain the trading rules of a contract, whose clauses are automatically validated and executed when certain events occur, which are verified and established based on the information in the Blockchain.
For example, you can establish that payment for a good is suspended until the receiving transaction is confirmed in the Blockchain. This allows individual parties to reach an “automatic” contractual agreement without needing to involve lawyers or notaries. In fact, it is the platform that guarantees the execution of the agreed terms when certain conditions are met.
Using smart contracts, two counterparties can incorporate the contract into the Blockchain, at which point it can no longer be changed and is available for everyone to view. Payments related to contractual services or agreements also take effect immediately and are recorded in chronological order for possible future access by competent authorities, for audits, or to resolve possible disputes between the parties.
Thus, we can say that the Blockchain is transparent, secure, and able to disrupt roles in traditional value chains, overturning the paradigm according to which the physical control of information corresponds to greater data security. The use of smart contracts is a concrete example of the sharing economy for technology infrastructures, that is, a decentralised and shared ecosystem of computational power that can be used to develop innovative services.
How can Blockchain be used and implemented in the insurance industry?
Due to the security, transparency, and decentralisation of the information managed, Blockchain opens disruptive scenarios in various insurance areas:
- In underwriting activities in the commercial sector: risk data would be available to all players, companies, and brokers, for more in-depth analyses. Not only would the last risk snapshot be available, but there would also be the possibility of evaluating the historical trend and all claim events to which an asset has been exposed, as each variation would be tracked and recorded transparently. There would also be the possibility of enriching the proprietary information for the asset that is about to be ensured, by accessing information produced by external partner companies or by connected devices (IoT).
- In developing retail products: packaged products could be sold that are connected with wearable or IoT devices which, through the use of smart contracts, would have an extremely light management, even of claims. Prototypes of insurance products have already been launched that rely on smart contracts to reimburse the cost of airline tickets in the event of flight cancellation or to compensate farmers in the event adverse weather damages crops.
- In identifying and evaluating customers: the process of identifying customers ("know your customer" - KYC) would become much more efficient, as it would not have to be repeated by every company or banking institution. Individual customer data would be entered (encrypted) for identification and verified only once within the Blockchain, would be enriched throughout the life cycle and, if the customer wanted to activate other commercial relationships, the data would be voluntarily accessible to the new company, greatly simplifying the registration and clearance activities for the new customer.
- In preventing fraud: insured items can be certified and tracked. The claim event and amount could be certified by third parties.
- Moreover, the claims management process deserves particular attention. With the use of DLT, the claim could be submitted without customer intervention via smart devices, the verification of the insured party, the validity of the coverage, and the completeness of the accident data would be automatic. In certain cases, based on information belonging to third parties already present in the Blockchain and through the use of smart contracts, the amount to be paid could be calculated without human intervention. Payment accounting would be automatically allocated to all parties involved; the customer would quickly receive the amount paid and the cost of the accident would be instantly divided amongst co-insurers and/or re-insurers.
What are the Generali Group projects related to the development and implementation of Blockchain?
In Generali, we believe that DLT has the potential to redefine the logistics infrastructure of financial markets, creating a new context in which B2B transactions can be performed without hassle, automatically and securely. Once the regulatory (privacy, smart contract) and technology aspects that limit the volume of manageable transactions per second are clarified, the technology will also be able to be applied in the B2C area.
Given network economies and cross-functional effects, these new DLT-based ecosystems can only be enabled in a collaborative context where existing companies decide to invest together.
Generali Group is one of the founding members of B3i, the global Blockchain insurance industry initiative. Through a joint investment of 15 insurance companies including Allianz, Zurich, MunichRe, Swiss Re, SCOR, Liberty Mutual, Sompo, and Tokio Marine, the initiative aims to build an infrastructure based on DLT, developing an ecosystem in which transactions can be managed more effectively, transparently and at a lower cost.
Currently, B3i is working on re-insurance placement processes with the intention of extending its application to all processes in the insurance value chain.
Furthermore, Generali together with Aon, AIG, UnipolSai and Willis Tower Watson, has promoted the application of DLT to placement processes between brokers and corporate insurance companies, enabling risk assessment and quotation that is simpler, faster, and more transparent.
The construction of the Blockchain prototype has confirmed the potential of this technology by significantly reducing trading times and improving the quality of risk data by identifying a shared standard.
How will this technology develop and what are the opportunities and risks for finance and insurance businesses?
The opportunities are many and we have described them above, but we must say that there are still some weaknesses that need to be resolved before Blockchain can be applied on a wide scale.
For example, in the case of Bitcoin, which is by far the most successful DLT application, the crypto-currency is not very liquid and, therefore, volatile. The cryptography procedure at the basis of the transaction execution process consumes a disproportionate amount of energy: the annual energy cost is calculated as equal to some percentage points of the entire value of all Bitcoins in circulation, not to mention the environmental impacts.
Fortunately, as this is an evolving technology with a high level of flexibility, initiatives are already being developed that can overcome the current technical constraints, but there is still no established winner.
In addition, to allow widespread adoption of DLT, companies will have to adapt or replace current infrastructures, which will entail significant time and investment, but, above all, a widespread consensus will have to be created around this technology.
There must also be the desire to collaborate with other players to work not only internally, but also in developing interfaces between partner companies and the market in general. The standardisation of some information and some parts of the processes is absolutely critical to realise the full potential of a technology that was created based on P2P logic.
Finally, it will also be necessary to create a legal and regulatory framework: we must adapt the current rules and define common standards in which responsibilities are clear, especially in regard to the use of smart contracts.