Blockchain opportunities come with risks attached: Fitch

Blockchain has the potential to become a game-changing technology for the insurance industry over the long term, but there are also risks, according to Fitch Ratings.

Blockchain, also known as distributed ledger technology, is used in a decentralized fashion to digitally record and verify a wide range and volume of information relating to commercial transactions. The technology was initially created as part of the bitcoin cryptocurrency network. Blockchain's transparency, security and information storage capacity have recently attracted other industries to explore opportunities to leverage this technology.

Insurance is fertile ground for blockchain's capabilities, Fitch noted. With the industry's large number of complex transactions between multiple parties, blockchain could theoretically offer significant cost reductions, improved processing speed, and enhanced underwriting and pricing, while reducing fraud. Efficiencies and cost reductions could be achieved by reducing the need for reconciliation and audits, automating certain processes and improving access to data. Estimates of the potential savings for the global re/insurance industry from Pricewaterhouse Coopers and B3i, an insurance industry trade group focusing on blockchain, range from 15 percent to 30 percent of annual current expenses.

However, the technology remains unproven, and greater clarity around its advantages and risks will be revealed over the next three to five years, Fitch noted.

Part of the challenge is that investment costs relative to benefits are uncertain, and there are numerous legal, regulatory and security issues that need to be addressed to facilitate wide-scale adoption, according to the rating agency. There is also no particular urgent crisis that blockchain would address to necessitate immediate application. Fitch believes that the ultimate viability of the technology for the insurance industry will depend on a select group of industry leaders adopting blockchain to gain competitive advantages.

The insurance industry is taking tentative steps to explore the technology. The aforementioned B3i initiative has grown to 15 insurance industry firms, up from five when the technology first became available in 2016. The RiskBlock Alliance was also created as an insurance industry trade group to facilitate blockchain use in risk management.