Marine insurance is a supply chain-specific insurance aiming to reduce risks associated with freights
such as damages or shipment delays. It is an essential component of international trade that protects vessels and shipments throughout their journey. Its complex multinational ecosystem involves different stakeholders, multiple jurisdictions, and high amounts of transactions. Coordinating all processes and players while complying with differing jurisdictions is challenging for marine insurance industry. Moreover, human error is a threat due to the volume and the importance of the paperwork involved in the process.Delays implied by the administrative issues around marine insurance can impact the whole supply chain. Furthermore the impossibility to dynamically adapt insurance terms to changing conditions can generate additional costs on insurances and trade as a whole.
The implementation of blockchain technology in marine insurance industry aims to assure all
participants in a global ecosystem that they access the same information at the same time while connected in a secure and private network. A blockchain-based insurance system for maritime trade would digitalise all the steps of this process, from automating payments to sharing real-time shipment information among trade partners, brokers’ insurers and claim handlers through a distributed common ledger. In an ideal situation, blockchain solves the compliance and contractual issues with the use smart insurance contracts, which are non-paper based and self-executing contracts that would optimise the fulfilment process. In addition, smart contracts would solve inefficiencies related to fraud detection, inaccurate product pricing and other specific risks for marine insurance. On that account, blockchain can help shipping processes evolve towards a higher degree of automation by handling claims and pay-outs faster, cheaper and more accurately. Original marine insurance certificates, copies of bills of lading, claims bills, etc. will be shared in real time via blockchain between all contracting parties, improving thus the efficiency in trade conditions.
Development and Adoption
As the marine insurance industry is disposed for modernisation, it is also in the mire of blockchain based solutions. For instance, the current version of Insurwave, a platform establishing a digital
insurance value chain, is substituting traditional paperwork documentation and manual processes. Insurwave connects all participants in marine insurance processes in a secure, private network with
an accurate, immutable audit trail, and services to execute processes. Currently in partnership with
Maersk and several port authorities, Insurwave platform is providing insurance to several vessels while automating a large number of transactions.
About 90% of international trade is seaborne, giving marine insurance an important role in trade.
Global marine insurance premiums totalled USD 28.5bn in 2017. The industry grew, but mainly due
to cargo increases while hull premiums have deteriorated in line with ship values. Despite having
to process a lot of information, the marine insurance industry still relies heavily on manual processes
and paper documentation – creating inefficiencies in verification and making them prone to human error.
In economic terms, the application of blockchain technology could have various benefits in the area
of marine insurance. Foremost among these is the reduction of information asymmetries.
Currently, clients, brokers, insurance companies and third parties have asymmetric access to information, which leads to inefficient price setting on the market for insurance premiums. A common ledger in the form of a blockchain providing access to all parties equally could improve price setting. As data on ships and cargos is collected and shared at a higher rate, it becomes possible to use this big data to build a dynamic risk profile of routes, ships and items.
In addition, another benefit is the reduction of verification costs and administrative burden: automation of the claims payment process, facilitating claims handling and reducing clerical errors as well as streamlining risk assessment can greatly simplify transactions between the various parties. This benefit is also echoed by the World Trade Organization, which argues that blockchain and smart contracts could help reduce administrative costs and increase trust and transparency through automated verification of the identity of insurance policy holders, contract validity, and automated handling of claims.
With the majority of international trade being conducted through maritime means, any change in the maritime insurance industry is set to have rippling effects on international trade flows and the actors involved in it. Shipping is what allows the global economy to circulate, and is the most affordable way to transport materials and manufactured goods across countries. Overseas trade is however also a risky endeavor, not limited to the time spent at sea. Risks also exist in delays, theft, damage, and so forth. Maritime insurance is a necessary tool to provide protection to exporters engaged in overseas trade, allowing them to take the risks needed to transport high levels of capital. Even in the case that a trader would be willing to assume such a risk, banks insist on its coverage before emitting a letter of credit.
Covering this risk has increasingly allowed exporters to expand the scope of their operations. Costs saved on the exporters’ side are transferred through lower prices to consumers or translated into new ventures in the form of increased exported volume, increased product variety or risks being taken to venture into new markets. Overall, this could create new trade flows or deepen existing ones. Looking forward, it seems likely that blockchain-based systems will get increasingly involved in shipping logistics and thereby facilitate international trade not only through the reduction of costs for exporters but by affecting multiple stages of the value chain.
Smaller scale companies at times do not have access to marine insurance due to complicated insurance policies, long claims settlement procedures and inflexible premium payments that do not align with their cash flows. Small or new (entrepreneurial) ventures are also difficult for brokers to
insure, due to a lack of information about members and their activities, their economic status and risks profiles associated to how their goods are processed. However, with increased data availability transactions costs can be lowered and premiums dropped, making maritime insurance (and therefore international trade) more accessible for smaller scale operators. Furthermore, reducing the distance between the capital holders and the insurers can make premium payments more flexible and adjustable to those with limited cash flow.
Blockchain technology can be used to create a decentralised trust space that is needed in such a diverse and complex ecosystem with many different stakeholders as described in this case study. All
involved partners can verify the transactions and thus, are able to trust the underlying technology. Another benefit of applying blockchain technologies in the context of maritime insurance is the lack
of a single point of failure (i.e. in this context single point of failure stands for the reliance on one single entity for ensuring trust and functioning of the overall system) due to the decentralised
nature of blockchains. The peer-to-peer distributed nature of blockchain platforms ensures that even in the case that single nodes fail to deliver as expected, the functioning and the overall established trust is not hampered. A proper functioning of the system is crucial for information/data retrieval and informed decision making. In addition to creation of trust and improved availability of the system, it can be foreseen that in the context of this case study blockchain technology will be mainly used for storing data and giving timely access to data. However, response times can vary heavily between different blockchain technologies. Therefore, the aspect of usability and corresponding response times has to be evaluated and a blockchain that fulfills the requirements has to be chosen, thereby eliminating the possibility of applying some blockchain technologies (e.g. PoW or PoS based Bitcoin).
A third, crucial aspect is provided by the type of blockchain with respect to permissions, as often discussed in the paragraphs above. In the context of this case study a permissioned blockchain is beneficial because whenever a new technology is deployed in a fundamental domain such as trade it should be tested and evaluated with a known set of contributors. This aspect is additionally underpinned by the pseudonimity of users in blockchains – it is unwanted to have unknown participants that can potentially write claims or other information to the blockchain. However, it should be noted that a transition to a permissionless blockchain is not impossible but rather unlikely in the next few years -on one site a permissionless public blockchain would increase the transparency of the trade and supply processes but still bears some potential fraud and identity issues, which would require further research and concepts to handle.
It is of paramount importance to be able to trust the proposed solution for maritime insurance. This has implications on security considerations such as confidentiality, integrity and availability. Only known nodes should be able to see the information and participate in the network of insurance related stakeholders. This ensures a first degree of confidentiality. Integrity and availability of data are inherent properties of blockchain technology due to its distributed nature and replication of data on each node. Furthermore, a private, permissioned blockchain like Hyperledger should be used for managing maritime insurance of goods ensuring the privacy and data protection of the involved stakeholders, be it individuals or companies. Only authorised participants are able to see information and can act accordingly.
Another important aspect in the domain of maritime insurance is data provenance meaning that first and foremost insurers but also other participants need to have the possibility to access current as well as historic data, e.g. former claims and their status. This is very valid for the domain of maritime insurance in order to track back the damage of goods, vehicles etc. and to be able to assess the credibility and accountability of certain stakeholders and their potential claims. Indeed, the storage of historic transactions is another intrinsic characteristic of blockchain technologies because of the chain of blocks that consists of all transactions, thereby enabling the immutable storage of maritime insurance related historic data on the ledger. Thus, this critical aspect can be seen as fulfilled in all blockchain technologies and makes blockchains a useful alternative to traditional (closed) database solutions.
According to a recent WTO report, fraud is prevalent in insurance claims – it is estimated at 5 to 10 percent of all claims (McKinsey & Company, 2016a). Blockchain technology could help in two different ways: 1) it could ensure that all transactions, e.g. insurance claims, are valid and more importantly, 2)Blockchains could verify in an automated way that only one claim can be submitted for the same incident thereby making it harder to submit fraudulent claims multiple times and reducing the overall workload.
The main environmental and heavily discussed impact of blockchain technology is given by the increased need for computational power and correspondingly energy in the course of the mining process (when using Proof-of-Work as a consensus algorithm). The increased energy demand leads inevitably to CO2 emissions. However, a switch to other consensus algorithms such as Proof-of Stake would decrease the demand and would render this impact of blockchain technology negligible in the coming years. Additional countermeasures could be put in place to reduce the negative impact of blockchains on the environment: In the wider context of maritime insurance blockchain could be used to improve energy consumption tracking in the ports as well thereby indirectly enforcing the selection of environment friendly processes and energy consumption.
Data protection and Privacy Perspective
From a data protection and privacy perspective, the blockchain-based insurance system for maritime trade would allow the creation and upkeep of a reliable set of data from all parties in the insurance value chain. Data relevant to maritime insurance include data about identities, risks and exposures, which could be automatically linked to policy contracts. As a result, blockchain facilitates the sharing of standardised data, providing to clients, brokers, insurers and third parties the same risk data at the same time. It is hence paramount that the accuracy of the data is guaranteed by providing sound controls around what data participants register and have permission to use. Indeed, the extent to which blockchain can deliver data protection, facilitating the tracking and changes to the relevant data and contracts, rests on the ability of the system to feed ledgers with accurate and consistent data.
Compared to the traditional insurance market, weighed down by paper-heavy processes and burdensome procedures that prevent transparency, blockchain technology employed in the insurance sector, through the standardisation and the immutability of data, enhances the overall
transparency of the whole insurance process. As a result, it helps ensure contract certainty, eliminate
duplication of data and improve risk-handling capabilities. Additionally, a transparent blockchain solution allowing multiple companies to collaboratively assemble relevant records could significantly simplify the process of claims recovery. Its multi-level shared ledger system could help insurers and clients to agree on claims and compensation. The overall transparency of the process, given the accessibility of the data to all the parties involved, would enhance trust and improve the overall consumer experience.