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Gregory J. Lestini, Esq.
Bricker & Eckler LLP
(614) 227-4893
Maureen Flahive, Esq.
BRICKER & ECKLER LLP
(614) 227-7710

BLOCKCHAIN AND THE FUTURE OF INSURANCE REGULATION

Blockchain is simultaneously one of the most exciting and confusing new technologies to emerge over the last decade. In its simplest form, blockchain is a ledger. In its more complex form, it is an incorruptible decentralized digital ledger existing simultaneously across millions of networks that is both transparent and veiled all at the same time.

It’s like Santa’s list, except instead of being checked twice it is checked hundreds of times per second, and everyone has a copy of it to see these updates. They don’t see names, only a series of numbers representing names – there is currently no evidence that they see you when you’re sleeping or know when you’re awake.

The ledger is not limited to just names. While this invention was originally devised to keep track of exchanges of the digital crypto-currency known as bitcoin, its potential uses stretch to almost every corner of business and industry. Insurance, real estate, private transport and ridesharing, online data storage, crowdfunding, public benefits, healthcare, real estate, and government affairs are just a few of the platforms blockchain has the potential to completely disrupt over the next several years.

This article will examine the potential for blockchain in insurance regulation and describe, as an example, recent use of blockchain by the County Auditor in Columbus, Ohio – a first of its kind use of the platform for real estate transfers.

Blockchain and insurance

Insurance is a data-rich and data-dependent industry. Blockchain has the capability of “re-democratizing” data, according to former CEO of Aon Benfield Analytics Stephen Mildenhall. [1] Mildenhall told A.M. Best that blockchain directly addresses three major concerns about databases, their integrity, security and validity. [2] But how does blockchain apply to the mass amounts of data insurers use every day?

Blockchain can help insurers by eliminating duplicity and by increasing security and confidence in the many financial and legal transactions that take place in the sale of insurance. [3] The ledger can also manage and facilitate sharing of large amounts of data critical to insurance transactions. [4] With the rise of digital devices and their use in the sale of insurance, Blockchain can help manage third-party transactions and verify the identity and validity of the parties to those transactions. [5] Similarly, blockchain can aggregate data from multiple sources to facilitate the creation of “smart contracts” personalized for each transaction. [6] Finally, and related to blockchain’s heritage in crypto-currencies, the ledger can be used to manage and calculate the reserves necessary to adequately manage reinsurance and exposure to various risks. [7]

Most notably, blockchain increases speed and security by eliminating middle men and women. [8] By allowing users to interact directly and utilizing a world-wide, shared database checked and rechecked by thousands of participants, supporters of blockchain boast that it is a one-stop-shop for eliminating fraud. [9] Insurers can utilize the technology to advance “bespoke” insurance and engender trust that a policy has been purchased and is in force in real time – whether that coverage is marine, travel insurance, ride-share coverage, or some other new type of price-per-mile policy. [10]

Major players in insurance have decided to collaborate in their study and use of blockchain through consortia like B3i, R3 and the RiskBlock Alliance. [11] Unlike traditional insurance innovation, the collaborative approach allows the industry to advance the use of this new technology more rapidly. And, while blockchain is revolutionary in its application to sharing and moving information and currency, one of the most impactful results of this technology is rather old-school – back-office costs savings through functionalities and operational efficiencies. [12]

Real-world application

A County Auditor in Columbus, Ohio, is using the blockchain ledger to execute real estate transactions that used to be time-consuming and paper intensive. Franklin County Auditor Clarence Mingo is the first public official in the state of Ohio, and likely in the nation, to utilize the technology in this way. [13] The Auditor tapped local startup SafeChain to manage the transactions which will record property transfers “in a fully digital process where the buyer, seller, bank, appraiser and title company never meet, but still complete the sale of a home.” [14] According to Mingo, the process is “nearly hack-proof, but still gives each party total control of their aspect of that transaction.” [15]

The program utilized SafeChain’s platform to transfer 37 properties sold through a foreclosure auction. [16] The Auditor allowed potential buyers to bid online; successful bidders can then retrieve their deed from blockchain after a bar code is added to the original paper record. [17]

For their part, lawmakers in Ohio passed a bill on cybersecurity in June of 2018 that added blockchain to the types of technology considered an electronic record for purposes of business transactions and cybersecurity. [18] They are not the first state to recognize the need to encourage, and regulate, the use of blockchain.

As of July of 2018, 10 states have passed bills regarding the use of blockchain in business and public transactions. [19] These laws range from creating study groups (CT, IL, WY), to limiting regulatory power to the state (AZ) to recognizing blockchain as a legitimate business apparatus and regulating its use/harmonizing its functionality with existing state laws (AZ, DE, NV, OH, TN, VT, WY). [20] Furthermore, 13 states have enacted legislation controlling the use of blockchain for crypto-currency transactions. [21]

Finally, the industry is already seeing use of blockchain for purely regulatory purposes. The American Association of Insurance Services has announced the use of blockchain to help insurers share information with regulators in a secure and rapid fashion. [22] IBM and Hyperledger Fabric’s openIDL service will “streamline the regulatory reporting process…improve[ing] security, accessibility and accuracy of data for regulators.” According to AAIS’s CEO Ed Kelly. [23]

Conclusion

Insurers must be in a position to leverage blockchain in many different aspects of their business. Consultants EY stated that “the insurance industry must make investments now to be in apposition to take advantage of efficiencies and opportunities blockchain technology can deliver long term.” [24]

One of the first applications of blockchain in the insurance space is through policy and claims management for marine hull insurers. This application was developed through collaboration between EY, Guardtime, A.P. Moller-Maersk, Microsoft and Willis Towers Watson, XL Catlin, MS. Amlin, and ACORD. [25] The breadth and depth of insurance and business experience in this team shows the seriousness of the industry when it comes to blockchain. It also demonstrates that marine hull insurance is just the beginning of a new frontier in insurance innovation and regulation. Many new applications and questions will follow

The use of distributed ledgers in the insurance industry will only continue to grow. As the world becomes more complex and insurance tries to keep pace, blockchain will be a critical part of the business and essential to the continued success of the industry.

...
References

[1] Robert O’Connor, Aon: Blockchain Can Spur ‘Re-Democratization of Data’, Best Wk. Global Ed., July 30, 2018, at 10.

[2] Id.

[3] Robert Cummings, How blockchain is disrupting the insurance industry for the better, CIO Mag., (Aug. 28, 2018, 8:31 AM), https://www.cio.com/article/3301163/blockchain/how-blockchain-is-disrupting-the-insurance-industry-for-the-better.html.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Avi Salzan, Blockchain Is Starting to Show Real Promise Amid the Hype, Barron’s (Aug. 17, 2018, 9:15 PM), https://www.barrons.com/articles/blockchain-is-starting-to-show-real-promise-amid-the-hype-1534554901.

[9] Blockchain Insurance Disruptor, Black Insurance Team and CEO of Fineqia International Inc. (CSE: FNQ.CN), (OTC: FNQQF) Discuss How They Plan to Change the Insurance Industry and Upcoming ICO , Fineqia (Jul. 23, 2018, 2:29PM), https://www.prnewswire.com/news-releases/blockchain-insurance-disruptor-black-insurance-team-and-ceo-of-fineqia-international-inc-cse-fnqcn-otc-fnqqf-discuss-how-they-plan-to-change-the-insurance-industry-and-upcoming-ico-300684959.html.

[10] See supra note 5.

[11] Dante Disparte, With Blockchain Insurers Opt For 'Coopetition', Forbes (May 23, 2018, 03:25 AM), https://www.forbes.com/sites/dantedisparte/2018/05/23/with-blockchain-insurers-opt-for-coopetition/#61f0739429a7.

[12] Id.

[13] Jim Siegel , Auditor’s use of blockchain technology touted as more than way to transfer records , The Columbus Dispatch (August 23, 2018), https://www.dispatch.com/news/20180823/auditors-use-of-blockchain-technology-touted-as-more-than-way-to-transfer-records.

[14] Id.

[15] Id.

[16] Emma Hinchliffe, SafeChain tests blockchain for real estate in an Ohio forfeiture auction , Inman (Aug. 27, 2018), https://www.inman.com/2018/08/27/safechain-tests-blockchain-for-real-estate-in-an-ohio-forfeiture-auction/.

[17] Id.

[18] Sub. S.B. 220, 132nd Gen. Assemb., (Oh. 2018).

[19] Blockchain State Legislation, NCSL (Jul. 10, 2018), http://www.ncsl.org/research/financial-services-and-commerce/the-fundamentals-of-risk-management-and-insurance-viewed-through-the-lens-of-emerging-technology-webinar.aspx.

[20] Id.

[21] Michelle Ann Gitlitz & Grant E. Buerstetta, An introduction to virtual currency money transmission regulation , GLI (Sept. 17, 2018), https://www.blankrome.com/sites/default/files/2018-09/gli-blankrome.pdf.

[22] Nathan Golia, Insurance advisory firm taps IBM blockchain for regulatory tool , Digital Ins. (Aug. 16, 2018, 5:30 AM), https://www.dig-in.com/news/insurance-advisory-firm-taps-ibm-blockchain-for-regulatory-tool.

[23] Id.

[24] See supra note 2.

[25] World’s first blockchain platform for marine insurance now in commercial use , EY (May 25, 2018), https://www.ey.com/en_gl/news/2018/05/world-s-first-blockchain-platform-for-marine-insurance-now-in-co.