I have been working in the insurance industry for over 15 years. Back then, my company Michaelhouse developed an innovative insurance ledgers system for the London Market. This system, SLIP, was sold to customers including Prudential and QBE.

SLIP was commissioned by run-off insurer Scottish Lion. Its design and production was influenced by the industry disaster of the preceding decade: the famous London Market Excess of Loss (LMX) spiral that led to the near-collapse of Lloyd’s of London.

In the years that followed I worked in the tech startup sector in Silicon Valley, including some years at Google UK. But I now find myself looping back to the insurance world, courtesy of SPARKL’s new smart policy solution, which leverages the disruptive technology known as blockchain.

Blockchain is the Magic Word

Now, the insurance industry is all about mitigating or minimising disruption in the outside world. So it’s particularly interesting to see how the sector responds to the same problem arising out of its own operations.

My immediate observation is that today’s noise around blockchain is just the same as when XML cropped up years ago. At that time, the insurance industry was wrestling with automation using data feeds and electronic data interchange.

At the time, the technology innovation represented by XML and EDI gave us new straight-through processing capabilities, thanks to efforts such as ACORD. The simple fact that insurers worked together to solve their shared problems has demonstrably reduced risks, saved costs and increased efficiency, enabling the introduction of more innovative insurance products.

Clearly, technology-led innovation is nothing new to the world of insurance. It’s happened before. Yet the same question persists - how can we make all our systems work together more efficiently?

At the time of the LMX spiral, insurance systems were completely opaque to each other. Liabilities whistled around the spiral and hit reinsurers on the back of the head before anyone noticed.

Today’s global banking industry suffers a similar problem. All the banks know there are large liabilities hidden away like monsters in the cupboard, invisible to balance sheets everywhere.

Making Stuff Work Together

So, when the magic word ‘blockchain’ is invoked - promising freely shared public ledgers of unimpeachable accuracy - bankers get nervous, instinctively sensing an existential threat.

The insurance industry is different, but the instinctive reaction is the same. Can we really do away with whole layers of operational cost? Can smart contracts and blockchain make all our ‘stuff’ just happen, automatically and correctly?

For insurers, this is mostly about opportunity. The practical benefits will come by repeating the cycle they’ve been through several times before: building new solutions to their shared problems, using all the available technology to help.

For brokers, there’s some risk to their role as intermediaries processing operational interactions - but again, this is not a new risk nor is it existential.

In short, the technology story for insurance is a familiar one. If we continue to increase transparency and automation through smart contracts, including blockchain where needed, then we will reduce risk, reduce cost and increase our own industry’s rate of product innovation.

Originally published at finance.knect365.com.

Image courtesy of Dan Page.