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Blockchain In The Insurance Industry

Insurance is a vital part of our lives. Whether it is life, health, auto or any other kind of insurance, it is our safety net from the unexpected.

However, our trust in trust can waver when the claims process gets delayed. We all need to be able to rely on our insurance companies to handle claims quickly and efficiently.

The application of blockchain solutions for insurance stands to bring massive benefits to the industry.

In this article, I aim to examine how blockchain technology will help revolutionize the insurance industry.

Contents

The Insurance Sector over the Years
The Shortcomings of Present Day Insurance System
Blockchain And Insurance
Blockchain Use Cases for Insurance Industry
The Future: An Insurance Industry Powered with Blockchain

The Insurance Sector over the Years

The system of insurance dates back over a thousand years. However, the insurance industry as we know it today really started in China back in the 1300‘s.

In a nutshell, this system involved third parties guaranteeing goods and property for a fee.

One of the prime attributes of the insurance sector is its ability to adapt its various processes in line with the advancements in society and technology. From local small-scale local insurance companies to the advent of big data, the industry has dramatically evolved over the years.

Blockchain for insurance is predicted to be a game changer, transforming the way insurance companies operate. It is expected to give new life to an industry mired with stilted growth and ever decreasing customer satisfaction.

The Shortcomings of Present Day Insurance System

While development in technology has brought about remarkable changes in industry, the global insurance sector, a multi-trillion dollar industry has yet to unlock the true potential of IT development.

One such example is the way we buy insurance. Even though online brokers are now available in just about every country in the world, the vast majority of consumers still call insurance brokers to set up new policies. These policies are still often processed with paper contracts and require constant human attention to ensure that they are free from errors regarding claims and payments.

This adds to the inherent complexities of the insurance system which involves transactions between insurers and reinsurers, consumers and brokers, all the time while trying to evaluate that all important component of any insurance package – risk!

This type of collaborative system is at the mercy of lost information, lengthened settlement times and misinterpreted policies, to name but a few.

Blockchain And Insurance

Blockchain technology is being heralded by some as the catalyst for the 4th industrial revolution. Many claim that it will become the biggest disruptor of established industries like insurance.

Although the technology is still in its infancy, it promises to save businesses huge amounts of money by providing increased data security and streamlining paperwork and procedures.

Before going into what blockchain will mean to the insurance industry, let‘s take a brief look at what blockchain technology is and what its various attributes are.

Understanding Blockchain Technology

Imagine an immutable sales ledger or record that doesn‘t need to be controlled by one single entity. It is stored and maintained on a decentralized network.

Every node on this network is responsible for maintaining the database. Any attempt to alter information on the blockchain will result in the network resisting such a change.

Every transaction is grouped into cryptographically protected blocks and transmitted over the network. Members of the network can verify the transaction depending on their role in the network. After verification, the blocks are time-stamped and attached to the chains, in a chronological and linear order.

Each new block created is therefore linked to the previous blocks. This makes up a long chain that contains every single transaction conducted from the beginning of blockchain application.

The blockchain allows for immutable accountability as whenever it is updated, each and every member can see who initiated the change and when.

Blockchains are databases that can record anything from electronic cash to physical assets.

            How will blockchain disrupt the insurance industry?

With the advent of blockchain technology, insurance has found itself a powerful tool that has the power to transform many of the core processes the sector has come to rely on.

The main areas that this technology is likely to improve are as follows:

Improving trust

We face a crisis of trust in the financial sector today. Although the primary focus is on large banks, a lack of trust is going to have a negative impact on all associated sectors including insurance. Inefficiencies and high costs coupled with a lack of trust has led to more and more people failing to take out insurance.

Take the average California household, for instance. Only 17% of the total population of the state are insured for earthquake insurance, despite there being a high risk of earthquake and related losses. With the transparency offered by Blockchain technology, the trust factor can be regained.

Enhancing efficiency

If you have ever tried to change your healthcare provider or insurance company, you would know the vast amount of paperwork that you are required to deal with. Also, this method of data storage is widely inefficient. Added to this, people are often reluctant to share data, fearing a loss or theft of personal data.

Implementing blockchain technology would create added security and efficiency in data handling procedures. Since data cannot be altered once written, it can be trusted as being completely accurate.

Improving the procedures of claim processing

The insurance claims process itself is very drawn-out. It involves many separate stages that must be completed in order to fulfil a claim.  Many of the underlying advantages of blockchain, including smart contracts, will help to streamline these processes.

Let‘s look at how this will happen.

Smart Contracts

Everything from creating new insurance contracts to notifying police of fraudulent claims can be handled by smart contracts.

A smart contract can be programmed to enact a whole range of actions based on certain criteria being fulfilled. One such example would be in reporting fraud.

If a person initiated a claim for a stolen TV, for example, a claim would automatically start. During this process, if one or more sets predetermined conditions were to be detected, such as a part history for fraud or an identical past claim, for example, the smart contract would automatically initiate a deeper investigation or report the information to the police.

Smart contracts would have oversight of the entire process so could be used to automate insurance payouts and close claims.

Detecting and Preventing Fraud

According to the statistics collected by the Coalition Against Insurance Fraud, insurance fraud costs about $80 billion a year. Not only does this bump up insurance premiums but it also increases processing times and the amount of industry oversight that is required.

This is one of the most compelling reasons for the incorporation of Blockchain in insurance.

Blockchain Use Cases for Insurance Industry

 

Some of the blockchain insurance use cases are as follows:-

Client onboarding

In order to satisfy the requirements of Know Your Customer (KYC), insurance providers are required to collect, verify, and validate a number of key documents that help to prove identification.

Each one of these documents needs to be reviewed by internal departments to complete the processes. This means time, money, and longer processing times. Companies will also have to spend even more resources to fix any errors that might have occurred during the process.

Since a blockchain network is distributed, it is possible to make all the necessary documentation available to anyone with permission to access the network.

Records cannot be altered retroactively, making them 100% trustworthy. This helps to facilitate the secure sharing of data and information to approved third parties and across the organisation.

There is no way they could alter the data unless they happen to have a quantum computer that has not been even invented yet.

Securing customer identities on blockchain have other benefits as well. The most important is that persons will easily be able to verify their identity without the need to go to other parties to double check.

Underwriting

The process of underwriting involves the evaluation of various parameters including the risk associated with furnishing a policy for a client, calculation of the coverage that a client is liable to receive, and the premium that should be paid by the client for the coverage.

Insurance is often said to be a gamble. However, no good insurance company will take chances without knowing their data is correct. Accessing the real risk that a person or company poses is a huge challenge. In some cases, this can be a lengthy procedure, which required many people to undertake an evaluation of the full scope of risk vs. reward.

With blockchain solutions, risk liability can be decreased and semi-automatic pricing models can be refined in real time. If the system detects a large number of smart contract based policies being paid out for one particular risk, e.g. car theft within the same area, it can adjust the price of new policies in that area.

This fact will help shorten and automate the underwriting process, effectively reducing operational costs.

IBM, Standard Chartered, and AIG have already successfully piloted smart contracts on a dedicated blockchain. While it is still early days, the fact that such powerhouses of industry are already exploring blockchain is a sign of the enormous potential it has to offer.

Blockchain Insurance App Development

Blockchain brings with it bountiful opportunities for the insurance industry. With its underlying attributes such as smart contracts, proof of concept, distributed ledger and non-repudiation capabilities, it can also be used to create insurance apps.

These apps could be one of the most game-changing applications of blockchain technology. As part of an IoT network, a blockchain insurance app could offer the first ever pay as you go insurance plans.

Such plans would allow people to only pay for insurance when they need it. So in the example of car insurance, accident insurance would only be activated when the car was being used. The rest of the time a fire and theft policy could cover the vehicle.

Not only would this save money, but factors such as driving style could help target higher risk people and charge them accordingly.

The Future: An Insurance Industry Powered with Blockchain

As I have highlighted, there is a number of advantages that blockchain has over existing solutions. Giant players in the insurance sector such as Swiss Re and Allianz are already in the process of developing blockchain based solutions.

However, transforming the whole insurance sector with blockchain technology is no easy task. Realistically, it requires a great deal of effort for the companies to align around the processes and standards within the technology before it can even be implemented.

Along with this, governments will need to design and issue new guidelines on how the technology can be used, just think of the potential errors a more automated system could create, and the policyholder themselves would have to be satisfied with the change too.

Despite this, it seems certain that the insurance industry is going to be one of the major beneficiaries of blockchain based solutions.