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Five of Europe's largest insurers have formed a group to test blockchain technology in order to determine whether it can make the insurance industry more efficient, the Financial Times reports.

The group's members are Allianz, Aegon, Zurich, Munich Re, and Swiss Re. Alessandro Spadoni, Zurich's representative in the group, said that they would begin by exploring the use of blockchain specifically within the reinsurance sector — reinsurers sell insurance to other insurance companies.

The group has said it will especially look into the use of smart contracts. These are blockchain-based contracts that execute immediately when certain conditions are met. Here's where smart contracts could be particularly beneficial in the insurance industry:

The selling of reinsurance. Reinsurance policies can involve huge sums of money, as well as large numbers of geographically disparate parties. And each party needs to hold the same version of the policy contract. At the moment, the distribution and updating of contracts can be a time-consuming process, and one open to human error. But a blockchain-based version of a contract would mean that each party held an identical copy of the contract, which could be updated centrally, simultaneously. This could save significant time, as well as reduce the possibility of human error.

Reinsurance policies can involve huge sums of money, as well as large numbers of geographically disparate parties. And each party needs to hold the same version of the policy contract. At the moment, the distribution and updating of contracts can be a time-consuming process, and one open to human error. But a blockchain-based version of a contract would mean that each party held an identical copy of the contract, which could be updated centrally, simultaneously. This could save significant time, as well as reduce the possibility of human error. Claims processing. Right now, when someone makes a claim, it has to be processed and corroborated manually by a human staffer. Smart contracts, however, can be triggered and executed automatically if specific conditions set out in the contract are met, which the contract can determine by plugging into feeds of publically available information. For example, if someone's travel insurance is arranged to be paid out if their flight is delayed by 8 hours or more, the contract can check travel information to detect whether this happens, and if it does, it will automatically verify and pay out the claim. This removes the need for manual corroboration and payouts.

Right now, when someone makes a claim, it has to be processed and corroborated manually by a human staffer. Smart contracts, however, can be triggered and executed automatically if specific conditions set out in the contract are met, which the contract can determine by plugging into feeds of publically available information. For example, if someone's travel insurance is arranged to be paid out if their flight is delayed by 8 hours or more, the contract can check travel information to detect whether this happens, and if it does, it will automatically verify and pay out the claim. This removes the need for manual corroboration and payouts. Improving customer experience. T he implementation of smart contracts in motor insurance alone could lead to annual savings of $21 billion, through automation and a decrease in processing overhead costs, a recent report by Capgemini found. Significantly, it said, these savings can be passed on to consumers in the form of lower premiums.

However, it will likely take a long time for the experiment's results to lead to any practical use. Spadoni emphasized that the group would proceed very cautiously with its experimentation, saying that the members are not yet convinced blockchain has a place in insurance, as they have not yet seen a viable use case in the industry. Moreover, he said, if blockchain is to make any change within the industry, there has to be an industry-wide network of users for it, meaning that more insurers will have to join the group. However, given the huge benefits the technology could potentially bring to the industry, and that insurers have lagged behind banks in blockchain experimentation, it is perhaps advisable to exercise caution, but not reluctance, toward this technology.

Blockchain technology, which is best known for powering Bitcoin and other cryptocurrencies, is gaining steam among finance firms because of its potential to streamline processes and increase efficiency. The technology could cut costs by up to $20 billion annually by 2022, according to Santander.

That's because blockchain, which operates as a distributed ledger, has the ability to allow multiple parties to transfer and store sensitive information in a space that’s secure, permanent, anonymous, and easily accessible. That could simplify paper-heavy, expensive, or logistically complicated financial systems, like remittances and cross-border transfer, shareholder management and ownership exchange, and securities trading, to name a few. And outside of finance, governments and the music industry are investigating the technology’s potential to simplify record-keeping.

As a result, venture capital firms and financial institutions alike are pouring investment into finding, developing, and testing blockchain use cases. Over 50 major financial institutions are involved with collaborative blockchain startups, have begun researching the technology in-house, or have helped fund startups with products rooted in blockchain.

Jaime Toplin, research associate for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on blockchain technology that explains how blockchain works, why it has the potential to provide a watershed moment for the financial industry, and the different ways it could be put into practice in the coming years.

Here are some key takeaways from the report:

Spending on capital markets applications of blockchain is expected to grow at a 52% compound annual growth rate (CAGR) through 2019, according to Aite Group, to reach $400 million that year.

Banks and major financial institutions are working both collaboratively and independently to develop blockchain tech. Over 50 major financial institutions are involved with collaborative blockchain startups, like R3 CEV or Chain. And many are investing in the technology on their own as well.

Putting blockchain to use for real-world transactions is likely not that far off. If working groups' tests are successful, firms could be using it to transact real value as early as the end of this year and we could see widespread industry application within the next few years.

In full, the report:

Examines the funding increases that are pouring into blockchain

Assesses why blockchain is becoming so popular and what factors are driving up increased research and development

Explains in full how blockchain technology work and what assets make it valuable and vulnerable

Identifies pain points in the financial industry and profiles how various firms are using blockchain to solve them

Demonstrates the challenges to mainstream adoption and their potential solutions

To get your copy of this invaluable guide, choose one of these options:

START A MEMBERSHIP Subscribe to an ALL-ACCESS Membership with BI Intelligence and gain immediate access to this report AND over 100 other expertly researched deep-dive reports, subscriptions to all of our daily newsletters, and much more. >> Purchase the report and download it immediately from our research store. >> BUY THE REPORT

The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of blockchain technology.