Blockchain Technology presents a number of opportunities for various businesses, including insurance companies. There are various possibilities which Maltese insurance companies could explore, as we shall highlight below.
Origins of Blockchain Technology
It is very interesting to observe how the use of the internet is today being pushed into a second era. In the last few decades, the internet made it possible to share and transfer a vast range of information resources and services. We are now experiencing a transformation from the ''internet of information'' to the ''internet of value''. While the first era was mainly characterised by the combination of computing and communication technology, this second era will be driven by an ingenious convergence of cryptography, software engineering and behavioural economics (the combination of psychology and economics to traditional models). This new era will be based on Blockchain technology (also referred to distributed ledger technology). Similar to the internet, Blockchain technology has the potential to turn over business models and disrupt various industries.
Who has invented Blockchain?
But who has invented this new technology one may quite rightly ask? The roots of Blockchain are a bit vague but most probably the motivation to develop this technology emerged following the global economic crisis in 2007. A person or group of people known by the fictitious name Satoshi Nakomoto developed and launched the technology in 2009 as a means to send payments between two parties (in a digital form and anonymously) without an intermediary to authenticate the money transfer. In fact, Blockchain technology was originally developed to facilitate, approve, and record the transfer of cryptocurrencies such as bitcoins and other virtual currencies.
What is Blockchain Technology?
Blockchain technology is truly quite easy to understand at its core. Simply put, it is a shared and common database holding a large number of entries that must be approved and coded. Essentially, Blockchain technology provides a way (which is highly secured and efficient) to create a log of sensitive activity which is unable to be tampered. This can include everything from money or property transfers to employees or customers records.
A research study released by BIS Research (a renowned market research firm which specialises on emerging trends in technology) suggests that nowadays there is a broad consensus among participants that Blockchain is one of the most disruptive technology in the financial services sector including the insurance industry. The rising interest in Blockchain technology by various participants within the insurance industry is mainly being driven by the increasing need to recognise the inefficiencies in the current technology and processes together with the increasing mistrust of policyholders. Obviously, laws will need to address the various insurance activities that will be shifted to Blockchain technology.
Blockchain Technology: The Global Insurance Industry
If we had to go back in 1686, when Lloyd's was born in a London coffee house, the insurance industry globally was a business of utmost good faith, as it remains today. However, the insurance industry is nowadays experiencing major challenges which are causing low customer satisfaction and negative industry reputation mainly: (i) deceitful claims; (ii) data spread over several systems; (iii) complex underwriting practices; (iv) error-prone manual processes; and (v) disjointed data sources. In this respect, Blockchain technology can provide the opportunity to drive major change (which has been needed for a long time) in the insurance industry while at the same time improving transparency across the entire value chain. In this respect, in October 2016, five major global insurance and reinsurance undertakings namely, Aegon, Allianz, Swiss Re, Munich Re and Zurich Re (called the B3i group) joined forces and launched the Blockchain Insurance Industry Initiative to look at the impact of the new technology on the industry. A few months later, ten new companies joined such group.
The B3i group and the launch of the Blockchain Insurance Industry Initiative
The aim of the B3i group is to provide a central point for insurance companies to share ideas, develop models and test cases that may eventually fundamentally rewrite how insurance is delivered. These and other insurers believe that Blockchain technology has the potential to offer clients a better experience through quicker, convenient, secured and transparent service. In September 2017, during the 61st Monte Carlo RVS conference, the B3i group declared that 23 new insurance/reinsurance undertakings have joined the initiative. During the same conference, the B3i group also launched the working test of a reinsurance prototype. The market testing of this prototype is expected to commence in the coming months after the relevant training is provided to the participating companies. The B3i group is also inviting other insurance industry participants, including, brokers and agencies, to take part in this important project.
"B3i has brought insurers and reinsurers together with a real spirit of collaboration. We are now looking forward to launching the market beta-testing program with the rest of B3i," B3i Group's Antony Elliott had told the Insurance Business Magazine.
A new era for the Insurance Industry
The B3i group is confident that this prototype will mark the commencement of a new era for the insurance industry based on increased transparency and efficiency. In fact, various members of the B3i group are of the view that this prototype (and other Blockchain initiatives) will offer a solution to the industry's inefficient back-office processes. During the testing stage of the prototype, each participating company will create a simulation of property disaster insurance contracts in order to test the whole process (from the creation of the contract to the automated calculation and settlement of claims). The testing companies will provide feedback based upon their experiences using the test platform, thereby contributing to the development of a viable production platform for the insurance and re-insurance industry by the second half of 2018. The B3i group will also embark on developing and prototyping further test cases during 2018 for market adoption.
Another interesting initiative was announced in September 2017 by AXA Insurance Company (an Irish based insurance company), whereby it launched an insurance product which is based on Blockchain technology. The idea is to automate payments of compensation for late flights for air passengers between the Charles de Gaulle airport in Paris and the United States. AXA Insurance Company announced that it is planning to introduce this new insurance product internationally through partnership agreements with major worldwide airlines.
Blockchain Technology: An Opportunity for Insurance Companies in Malta
Malta has a reputation in being extremely efficient at adapting to new developments. When looking back, as a country we succeeded in restructuring our financial services sector in such a way as to remain attractive, while at the same time being compliant with EU regulation and directives. Meanwhile, in a recent study – the ''Global Competitiveness Report 2017-2018'', prepared by the World Economic Forum (the ''WEF''), has once again placed Malta amongst the top jurisdictions in terms of the provision of financial services. With respect to competitiveness, the WEF Report has placed Malta 37th out of 137 countries meaning that the jurisdiction has climbed three places (when compared to last year) in its competitiveness levels across the board, thereby enhancing the attractiveness of Malta as a leading investment location. Furthermore, the WEF Report places Malta: 31st for business sophistication, 22nd for technological readiness and 38th for innovation out of 137 countries.
Likewise, Malta was always at the forefront in developing new and innovative insurance structures and legal frameworks. In fact, Malta is considered to be highly-attractive for the establishment of commercial insurance and reinsurance undertakings, captives and insurance management companies. Furthermore, the insurance industry is considered as one of the main pillars which aided Malta to establish itself as a renowned and stable financial services hub, together with the Malta Financial Services Authority (the ''MFSA'') which has created a stable, yet innovative, jurisdiction aimed at encouraging the growth of insurance and reinsurance business. An interesting milestone occurred in 2016 when the MFSA granted the first licence to a Reinsurance Special Purpose Vehicle (RSPV) in terms of the Reinsurance Special Purpose Vehicles Regulations (2016). The RSPV was established as a Securitisation Cell Company in accordance with the Securitisation Cell Companies Regulations (2014). Additionally, Malta's legislative framework is also innovative and Malta is the only EU member state to have a legal framework for the creation of Protected Cell Companies and Incorporated Cell Companies (currently there are 12 PCCs licensed in Malta).
Malta in the future of Blockchain technology
In this context, the next big step for the insurance industry in Malta is to make the most of Blockchain technology. Blockchain and all the derivatives from such technology presents a real opportunity which local insurers, together with the MFSA should explore. Recently, the Maltese government has signalled the intention to be the key facilitator to drive the Blockchain opportunity forward. This may prove to be a highly beneficial opportunity for local insurers, especially in view of the fact that the local insurance sector is composed of both locally owned businesses and foreign entities that opted to re-domicile their business in Malta. Accordingly, insurance participants in Malta are highly encouraged to become more proactive in the application of Blockchain technology in their processes. The B3i group initiative could be an opportunity for insurance companies in Malta to be directly involved in key pilot projects to study Blockchain's use with the aim of facilitating growth in the local insurance industry.
In conclusion, insurance industry participants in Malta have the opportunity to be part of the future as Blockchain technology will change insurance and the financial services industry in a very positive way. It is evident that technology has brought markets closer than one sometimes imagines and this provides an opportunity for Malta and the insurance industry to build competence and authority in key areas such as Blockchain technology. Certainly, as with all economic and technological transformations, those nations that manage to adapt first are the ones that will find themselves at the centre of new, emerging economic ecosystems. In this respect , Malta has all the right ingredients to become a hub for this new ecosystem – with collaborative regulators, educated workers and mature local expertise in multiple sectors including the insurance industry.
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