Cryptocurrency & Blockchain Business

Blockchain technology has potential to be applied in insurance

Blockchain is now one of the hottest technologies in the world, including in China. Ongoing market mania over blockchain-oriented cryptocurrencies such as Bitcoin provides the evidence. But in addition to cryptocurrencies, where else in the financial industry can blockchain technology be applied by taking advantage of its decentralized nature and low-risk functions? And what are the difficulties in wider application in terms of its infrastructure technology and regulatory hurdles? The Global Times recently attended a comprehensive discussion on blockchain technology at the China Wealth Forum, where some industry insiders shared their points of view regarding such concerns.

Blockchain technology, with its signature features of decentralization and security, has the potential to be applied in other financial scenarios such as insurance settlements and financial supplier chain loans in addition to widely applied cryptocurrencies, industry observers said.

One of the main sectors which blockchain has the capacity to transform in is the insurance industry, especially in terms of automatically evaluating claims and executing insurance payments, experts said at the China Wealth Forum held in Qingdao, East China’s Shandong Province from July 6-7.

Blockchain is a decentralized technology where data is processed point-to-point in a closed network, enabling users to make an exchange without the involvement of third parties, drastically reducing risks.

“The smart contract based on blockchain is more efficient and error-free compared with traditional time-consuming processes whereby data has to be inputted manually and exchanged between different parties to process claims,” said Li Xiaolin, dean of the Insurance Institute at the Central University of Finance and Economics.

Take the smart healthcare insurance contract that is made up of eight indicators as an example. Traditionally, data entry for patients has been quite complicated as they would be seen by a number of doctors in different surgeries and hospitals. As such, this has resulted in coordination difficulties and confusion over medical records, experts said.

If data was shared on an immutable ledger and a universal standard for medical records was phased in, the blockchain system could automatically reimburse insurance capital to insurers and even allocate medical resources in real-time when indicators reach critical points, according to Li.

A report released by consulting firm PWC also showed that “blockchain solutions could remove 15 percent to 25 percent of expenses for more efficient data processing.” That translates to a reinsurance industry-wide saving of $5-10 billion.

Li’s opinion is also echoed by Yang Dong, a professor at the Renmin University of China. Yang further pointed out that the application of blockchain technology in the insurance sector could reshape its traditional risk-based pricing model, but could cost the jobs of insurance actuaries.

As the financial risks involved in the insurance industry are not as large as in the banking and capital markets, Yang suggested at the forum that the country’s regulators could allow insurance companies to try out reforms with blockchain technology.

Further application

Another promising way in which blockchain could be applied is in loans for small- and medium-sized enterprises (SMEs), Yang Tao, a research fellow at the Chinese Academy of Social Sciences, said at the forum.

“In the supply-chain financing world, the biggest issues for downstream small-sized suppliers are barriers to accessing funding. This is because SMEs are too far from core upstream producers. And the lack of credit information among those SMEs has made banks reluctant to issue loans to them due to uncertainties causing financial risks,” Yang explained, noting that within a blockchain system, private SME credit records could be uploaded and only accessed by financial institutions, streamlining the flow of information.

However, industry insiders raised concerns about the market mania over Bitcoin – the world’s most widely used application of blockchain technology at the moment – and iterated at the forum that the value of the cryptocurrency, along with other ones, is not because it is a plausible and credible alternative currency.

Wang Liyong, former deputy head of the Bank of China, noted that the reason behind this is because of Bitcoin’s volatile value and slow transaction process whereby exchanges can only be completed using blockchain. “Bitcoin is an asset similar to gold, rather than a currency,” he added.

As such, Chinese regulators have banned the exchange of Bitcoin to prevent speculative activities, according to media reports.

Hurdles

Still, blockchain technology is in its infancy and there are some difficulties in both its basic infrastructure and regulatory framework that hinder its wider application in the financial sector, Wang pointed out.

Industry insiders at the form also noted that blockchain technology has yet to mature and applicators now have to decide which features are most important to them out of decentralization, efficiency and security.

“Decentralization allows a network of users to agree on how things should be carried out, rather than a single unit controlling everything in the centralized system. But centralization ensures things are processed more swiftly. In such a case, speed and efficiency is traded for decentralization,” Li Ming, director of the Blockchain Research Department at the China Electronics Standardization Institute, told the Global Times on Wednesday.

However, decentralization can prevent fraud and ensure security. Therefore, users should look for a solution that achieves a balance between security and efficiency.

Meanwhile, as blockchain is a closed network, another pressing issue during the application process is industrialization, or expanding the numbers of users who are willing to share and upload data to the network. Li suggested that combining centralized and decentralized systems could help speed up the technology’s wider application.

Industry insiders also pointed out that the technology’s development is also a test for financial regulators’ ability to prevent underground trading and money laundering.

For example, because of blockchain’s decentralized nature, users can easily bypass financial institutions’ cross-border capital transfer mechanisms and move large sums of money abroad. Criminals could also wash dirty money into Bitcoins, move them to a new address and then convert them into cash in another country. 

As such, experts have urged Chinese authorities to adopt big data and other innovative measures to monitor blockchain transactions in real-time.

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