Fitch Ratings views blockchain as a potential game-changing technology for the insurance industry over the long term. Benefits could range from significantly reduced operating costs, more accurate customer-specific data, and better risk pricing and improved efficiencies. However, the technology remains unproven, and greater clarity around its advantages and risks will be revealed over the next three to five years. As such, we do not see blockchain affecting insurer ratings over the short to intermediate term.
Blockchain, also known as distributed ledger technology, is used in a decentralized fashion to digitally record and verify a wide range and volume of information relating to commercial transactions. The technology was initially created as part of the bitcoin cryptocurrency network. Blockchain’s transparency, security and information storage capacity have recently attracted other industries to explore opportunities to leverage this technology.
Insurance is fertile ground for blockchain’s capabilities. With the industry’s large number of complex transactions between multiple parties, blockchain could theoretically offer significant cost reductions, improved processing speed, and enhanced underwriting and pricing, while reducing fraud. Efficiencies and cost reductions could be achieved by reducing the need for reconciliation and audits, automating certain processes and improving access to data. Estimates of the potential savings for the global (re)insurance industry from Pricewaterhouse Coopers and B3i, an insurance industry trade group focusing on blockchain, range from 15% to 30% of annual current expenses.
The uncertainties around this nascent technology remain pronounced. When and how much blockchain will be adopted remain major unknowns. Part of the challenge is that investment costs relative to benefits are uncertain, and there are numerous legal, regulatory and security issues that need to be addressed to facilitate wide-scale adoption. There is also no particular urgent crisis that blockchain would address to necessitate immediate application. Fitch believes that the ultimate viability of the technology for the insurance industry will depend on a select group of industry leaders adopting blockchain to gain competitive advantages.
The insurance industry is taking tentative steps to explore the technology. The aforementioned B3i initiative has grown to 15 insurance industry firms, up from five when the technology first became available in 2016. The RiskBlock Alliance was also created as an insurance industry trade group to facilitate blockchain use in risk management.