Blockchain – Has the potential to change the Nordic life insurance and pension industry!

We wanted to create a clearer picture of how well blockchain technology is suitable for applications in the life and pension insurance industry, given the current conditions and our knowledge about future requirements in the Nordic markets.

In spring 2017, Itello initiated an assignment for graduate work with two students from KTH Royal Institute of Technology in Stockholm. The purpose is to learn more about the underlying technology identify different blockhain platforms and evaluate the pros and cons of technology compared to more traditional system solutions.

Smart Contracts

Probably, Smart Contracts is the part of Blockchain technology that fastest will create crisp industry applications. The first phase will focus on the P&C insurance industry area, eg, to streamline and automate processes such as Internet-of-Things. It is likely that the smart contracts then will be used the life and pension insurance industry. However, regulatory alignment will be required to ensure that these smart contracts get the same legitimate validity as a more conventional contract.

GDPR and blockchain

One of the fundamental foundations of the blockchain technology is the concept of 'Immutable data' -. Simply described, block after block of information is continuously added to the blockchain. To ensure that the data in the chain can not be manipulated, there is a central mechanism in the technology that verify hard links information in the previous block into the subsequent blocks. The advantage is that it is impossible to change or alter information in the blockchain, which means that all partners can fully rely on their correctness.

The disadvantage, however, is that it also means that it is impossible to delete or change information in an existing block. This poses a big challenge regarding the handling of personal information. The introduction of the GDPR in May 2018 will make strict demands on giving the consumer the opportunity to easily move information. This also requires that personal information in some cases be completely shredded. This is then, as described above, impossible to accomplish that in a blockchain where the information has to be unchanged. This may be possible through encryption and anonymization of data, but ultimately it depends on how the practical application of GDPR will look like. 

Scalability and performance

Today, the blockchain technology is relatively untested in terms of ability to handle large transaction volumes. The volumes mentioned are in the order of 20 transactions per second, which of course imposes some restrictions on applications. However, performance in the slightly longer perspective is not a limiting factor, for example, referring to 'Moores Law'. In addition to this, a breakthrough for quantum computers is now expected to allow for staggering processor capacity. A challenge for the blockhain technology is that it is not only based on the hardware capacity. The blockchain principle is based on a distributed database that should be kept in sync between all stakeholders involved in the blockchain, the technology demands high network capacity and information transfer to all distributed databases. Since no single data can be deleted or archived from the blockchain, it means that the chain is constantly growing. A challenge that will need to be addressed for broader applications.

Distributed Trust vs. Hard-Regulated Industry

One of the key forces with blockchain is that it enables secure and reliable transactions and transfers of value between two parties without the presence of a key party that needs to be involved in the verification and execution of the transaction. However, the insurance industry is strictly regulated by the scope of legal requirements with a number of supervisory and supervisory bodies. In order for these worlds to not crash, it is unlikely that a completely clean public blockchain solution will be applicable. More likely, a hybrid solution  based on Circle-of-Trust, ie a number of trusted parties are invited to agree on regulatory verifications for transactions and where parties like the Swedish financial supervisory authority - Finansinspektionen can also be given access to tools in order to gain transparency and control performed transactions in the block chain.

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Blockchain and Itello - our way forward

This is undoubtedly a very exciting technology with great potential to disrupt the conditions for entire industries. The fact that so many major players (Microsoft, IBM, Amazon, Google etc) choose to invest enormous amounts show that it will most likely get a big impact over the next few years.

However, there may be a danger of relying heavily on the hope that the new technology will magically solve the obstacles  and challenges in the life insurance industry. Everything indicates that the life and pension insurance industry will still need to be relatively rigorously regulated even in the future. We see that several of the applications where blockchain could be relevant could also be addressed and resolved with more conventional and traditional system solutions.

The major challenge, therefore, is probably not primarily in the industry's ability to embrace new technology. Rather, it is primarily for the industry to be much better at supportive industry-wide solutions and then having the ability / ambition to implement the agreed solution both in terms of processes and IT support.

We at Itello will continue to monitor blockchain and its development extremely carefully and continuously evaluate how it could be used to streamline our customers' operations and create an improved customer experience and smoother process for end consumers. This is balanced with the requirements that surround the insurance industry regarding legal requirements and compliance.

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