The insurance industry will have many obstacles to overcome, but blockchain’s ability to provide complete accountability, transparency, and superior security will help insurers save time and money, as well as improve customer satisfaction.
In particular, the insurance industry understands that it must evolve to stay competitive, which means streamlining processes and meeting the demands of digitally savvy customers. Blockchain technology can help insurance companies overcome today’s challenges and create transparent operations built on trust and stability.
Given its ambitious potential to drive simplicity and efficiency through the establishment of new financial services infrastructure and processes, blockchain technology is rapidly gathering momentum within the insurance industry.
We can say that insurance has been around for centuries. As early as a thousand years ago, Chinese merchant seafarers were pooling together their wares in collective funds that would help pay for the damages of any individual’s capsized ship.
In this article, let’s discuss blockchain technology in the insurance industry!
Challenges within the Insurance Industry
Insurance companies face a number of challenges as it relates to complex compliance issues, limited growth in mature markets, fraudulent claims activity, third party payment transactions, and handling huge amounts of data. With the onset of connected devices and the ever-growing amount of data generated by the Internet of Things (IoT), insurers have to sift through the data that matters in order to deliver tailored services and products. Insurers must also evolve from a focus on purely financial-loss compensation to a mode of physical-risk prevention in order to compete effectively with disruptors in the space. This can only be achieved if they have visibility into their data.
Additionally, the move to digital transactions has left many insurers wondering how to streamline processes and secure sensitive information. The sheer cost and security of moving money digitally is a growing concern. In fact, the report from McKinsey & Company, “Blockchain in Insurance – Opportunity or Threat?” states that 5 to 10 percent of all insurance claims are fraudulent, which makes securing data even more crucial for insurers.
Blockchain to the Rescue
Blockchain provides foundational technology that promotes trust, transparency, and stability. It is in the early stages of adoption, but there are already a handful of ways that insurers are leveraging the technology to mitigate the above-mentioned challenges:
- Security: Through its use of public ledger, blockchain can potentially eliminate suspicious and duplicate transactions by logging each transaction. Through its decentralized digital repository, it can verify the authenticity of customers, policies, and transactions by providing historical records. This makes it more difficult for hackers to corrupt and steal files.
- Big data: More connected devices are being used every day, which is causing a spike in the amount of data insurance companies to need to handle. Blockchain can properly manage, share, and monetize large amounts of data. The benefit is that the technology can store static records and/or data without central coordination and the data can be viewed by all parties. Data is registered on the blockchain by creating a digital fingerprint using a date and time stamp which provides both security and transparency. Streamlined data can also make risk assessment timelier and more accurate.
- Third-party transactions: Blockchain can handle the increase in third-party transactions and claims made through personal digital devices. It helps reduce administrative costs through automated verification of claims/payment data from third parties. Now, insurance companies can quickly view past claims transactions registered on blockchain for easy reference. This promotes higher degrees of trust and loyalty between the insurer and the customer.
- Smart contracts: Personalized contracts are beginning to emerge in the insurance industry. These contracts connect real-time information from multiple systems across physical documents and activities which trigger processes like claims, payments, and reimbursements faster and with greater accuracy. This saves the insurance company time and money while providing the customer with a better experience.
How Blockchain helps the Insurance Industry?
- Fraud Prevention: According to the FBI, non-health insurance fraud in the US is estimated to be over $40 billion per year, which can cost families between $400–700 per year in extra premiums. Common types of insurance fraud can be eliminated by moving insurance claims onto a blockchain-based ledger that is shared among insurance companies and cannot be modified. It can prevent criminals from collecting money from different insurers for the same claim, for example. Blockchain will make coordination easier among insurers. If all insurers access a shared blockchain ledger, they would know if a claim has already been paid. Since all insurers use the same historical claims information, it would also be easier to identify suspicious behavior. Insurers try to detect fraud by using publicly available data as well as data acquired from private companies. The problem is that these data sets are incomplete due to legal constraints around sharing personally identifiable information of individuals. Blockchain, by cryptographically securing data, would allow claims information to be shared across insurers without divulging personally identifiable information.
- Claims Management: Putting insurance policies on a blockchain as smart contracts can radically improve the efficiency of Property & Casualty (P&C) insurance, saving insurers more than $200 billion a year in operating costs. For example, if you get into a car accident and it was the other driver’s fault, you must submit a claim to your insurance company to recover your loss. Your insurance company investigates your claim and tries to recover money from the other driver’s insurance company. The other insurance company has its own claims processes, which lead to duplicated work, delays, and possible human error. The end result is that you get paid much later than you would like, and insurers spend time and money on unprofitable activities. Putting insurance policies and claims data on a blockchain that different insurers, reinsurers, brokers, and other parties can access reduces duplicate manual work by different parties. Insurance policies as smart contracts on a blockchain automatically execute programmed claims processing actions, automating information transfers between insurers and other parties, and releasing payments to policyholders. Additional info such as claims forms and supporting evidence supplied by policyholders can later be added to the blockchain so that all parties have the same information, making disputes unlikely.
- Health Insurance: Blockchain enables fast, accurate, and secure sharing of medical data among healthcare providers and insurers. This will translate into faster health insurance claims processing and lower health insurance costs for customers. Privacy laws around sharing patient data among hospitals and health insurance providers make it time-consuming and expensive to process health insurance claims. Lack of data can even lead to insurance claim denials. Patients deal with numerous doctors, hospitals, and insurers over time and across borders. A patient’s medical history exists in fragments across healthcare providers and insurers. It becomes worse, the way in which insurers and healthcare providers cooperate, share patient data, and process claims involve complex manual work and reconciliation. Even the technical infrastructure for medical records is outdated. Putting encrypted patient records on a blockchain allows healthcare providers and insurers to access a patient’s medical data without sacrificing patient confidentiality. An industry-wide synchronized database of patient data can save the industry billions annually. Patient privacy is ensured because of the blockchain stores cryptographic signatures for each medical record, which verifies the authenticity of the record without having to actually store any sensitive info on the blockchain. Changes to a patient’s medical records are also stored on the blockchain, which creates an audit trail.
- Reinsurance: Reinsurers provide insurance for insurers in an arcane and inefficient system determined by one-off contracts and manual processes. Depending on the type of reinsurance purchased, it can cover a proportion of an insurer’s risk during a set time period, or cover specific risks such as earthquakes or hurricanes. The current reinsurance process is extremely complex and notoriously inefficient. With facultative reinsurance, each risk in a contract needs to be individually underwritten, and contracts typically take up to 3 months of wrangling between parties before they are signed. Insurers will typically engage multiple reinsurers, which means that data has to be exchanged between various parties to process claims. Different data standards between institutions often lead to different interpretations of how a contract should be implemented. Blockchain technology has the potential to change current reinsurance processes by streamlining the flow of information between insurers and reinsurers on a shared ledger. Using blockchain technology, detailed transactions around premiums and losses can exist on an insurer and reinsurer’s computer systems at the same time, eliminating the need to reconcile books between institutions for each individual claim.
It’s positive to see insurance companies starting to embrace the benefits of blockchain. Organizations such as Swiss Re, Aegon, Allianz, Munich Re, and Zurich have launched the Blockchain Insurance Industry Initiative (B3i), which aims to explore the potential of distributed ledger technologies to better serve clients through faster, more convenient and secure services.
Benefits of Blockchain in Insurance
Blockchain technology will bring about significant efficiency gains, cost savings, transparency, faster payouts, and fraud mitigation while allowing for data to be shared in real-time between various parties in a trusted and traceable manner. Blockchain can also enable new insurance practices to build better products and markets.
Insurance companies operate in a highly competitive environment in which both retail and corporate customers expect the best value for money and a superior online experience. Blockchain technology represents an occasion for positive change and growth in the insurance industry.
With Ethereum’s smart contracts and decentralized applications, insurance can be conducted over blockchain accounts, introducing more automation and tamper-proof audit trails. Notably, the low cost of smart contracts and their transactions means that many products can be rendered more competitive for penetration of underinsured markets in the developing world.
Additionally, the emerging blockchain ecosystem will require insurance. Cyber insurance can be taken as a template for coverage, with extensions and endorsements for financial loss (hot wallets and exchanges), specie and crime (cold wallets and vaults), professional liability (developers), and surety bonds (technology and software projects). Insurers can cooperate with tech companies, such as ConsenSys Diligence, to assess risk and advise on best practices for loss control and mitigation.
Use-Cases in Insurance
Blockchain can be applied throughout the insurance industry and across many lines of business, including:
- Registries of high-value items and warranties
- Know-your-customer (KYC) and anti-money laundering (AML) procedures
- Parametric (index-based) products
- Reinsurance practices
- Claims handling
- Distribution methods
- Peer-to-peer (P2P) models
How will Blockchain impact Parametric (index-based) Insurance?
- Automate most or all parts of parametric insurance.
- Embed a policy’s logic in a smart contract and let an oracle (digital feed) trigger execution upon a predefined loss event.
- Settle and clear all transactions without manual intervention.
- Streamline catastrophe bonds and other insurance-linked securities (ILS), flight delay and cancellation insurance, and crop insurance.
How will Blockchain impact Reinsurance?
- Allow primary insurers, reinsurers, brokers, and regulators to share data securely in real-time.
- Automate risk modeling, audits, and compliance checks.
- Bind towers of risk and treaties on a single time-stamped smart contract.
How will Blockchain impact the Distribution of Insurance?
- Coordinate the actions of multiple parties at low cost on an online marketplace.
- Give consumers direct access to numerous carriers on the same platform and allow them to manage various policies on the same platform.
- Make transactions for paying premiums or claims fast, easy and cheap.
How will Blockchain impact Peer-to-Peer (P2P) Insurance?
- Enhance existing P2P models, such as reciprocals and mutuals, by automating tasks and holding funds in escrow on smart contracts.
- Underpin new P2P models in which policyholders’ decision-making is aligned and incentivized through tokens and staking of tokens.
Organizations need secure ways to record transactions and manage information flows, making blockchain’s appeal easy to see. Blockchains ensures that:
- All participants have a copy of the digital ledger and that each copy is updated in real-time when transactions occur;
- There is no centralized server, making hacking next to impossible;
- A recorded transaction theoretically cannot be reversed, which makes the ledger an immutable source of truth no matter how many participants hold copies;
- Transaction data, records, and participant identities can be authenticated while remaining private.
Because the insurance ecosystem contains millions of insurers, healthcare providers, and patients, it’s easy for the industry to get bogged down by money- and time-wasting inefficiency stemming from billions of forms, human error, and poor communication between parties.
Digital ledger systems like blockchain can help automate outdated processes, save billions of hours of paperwork each year, and reduce human error because all forms and data are safely stored along the chain.
Communication between important parties in an insurance claim can also be improved through distributed ledger technology. If stored on a blockchain, a patient’s medical history can be safely viewed by doctors and insurers to determine correct policies and procedures going forward.
Blockchain’s ability to safeguard sensitive information is especially enticing to an industry that heavily relies on data gleaned from being at the intersection of health, work, and personal life.
Blockchain’s ledgers are decentralized, so they can’t be corrupted or manipulated by one authority. Instead, all data is chronologically timestamped to ensure a clear recording of events.
And while blockchain data is encrypted, it’s also completely transparent to members (nodes) on a chain, meaning that all nodes can view the actions of an individual whose true identity remains hidden. This system enables blockchain to quickly suss out any unusual behavior and take care of problems before they become major issues.
Insurance Companies implementing Blockchain Technology
Here are the insurance companies that implementing blockchain technology:
- Etherisc: Etherisc is a Munich-based open-source development platform that focuses on decentralized insurance applications. The company uses blockchain technology to make the purchase and sale of insurance more efficient, enable lower operational costs, provide greater transparency into the industry.
- Beenest: Beenest is a decentralized home-sharing platform for crypto-enthusiasts. Similar to Airbnb, Beenest users can book homes using the company’s Bee Token. Starting in late 2017, Beenest is still in the early stages of homeowner insurance for property damage. Once, the company raised $15 million in a token sale to help fund the development of blockchain-backed insurance.
- Guardtime: Guardtime develops blockchain solutions across the cybersecurity, government, finance, defense, and logistics industries. Founded in 2007, the company developed a digital signature system based on blockchain technology. In 2015, the company partnered with Ericsson on a cloud computing project. Guardtime also teamed up with logistics giant Maersk to implement a blockchain-based maritime insurance platform that will manage risk, use smart contracts, and establish an immutable chain-of-shipping to help insurance companies thoroughly provide coverage. The company’s Insurwave platform is poised to manage the insurance processes for more than 1,000 vessels in the first year. The company also expects the platform to oversee more than 500,000 ledger transactions that deal with pertinent maritime insurance information.
- fidentiaX: fidentiaX is the world’s first marketplace for tradeable insurance policies. With fidentiaX, users are able to buy, sell, or store their insurance policies on the company’s blockchain. Using tokenization, the blockchain-powered marketplace takes existing policies and puts them into the encrypted database. In real-time, users are able to cash out on their policies, buy policies from others, or just find all their insurance information in one place. Their token FDX is currently listed on Qryptos, Ethbits, Etherdelta, Coss.io, and Raday Relay.
- B3i: The Blockchain Insurance Industry Initiative (B3i) is a Zurich-based insurance company, formed to explore the usefulness of blockchain and distributed ledger technology (DLT) in the insurance industry. Formed in October 2016, B3i is a global initiative supported by 20 major insurance industry investors and a diverse community currently comprising over 40 companies. The company’s mission is to use blockchain to improve the way data and payments are managed, reduce risk, and to make insurance more affordable. B3i’s first completed product is a blockchain prototype for property reinsurance contracts. With the participation of 38 insurers and brokers, the company was able to execute the entire reinsurance contract process on a secure blockchain.
- Dynamis: Dynamis is a smart contract for peer-to-peer insurance company built completely on the Ethereum blockchain. The company is focused on unemployment insurance. Policy applicants need only provide their LinkedIn profile to verify current employment status. For those who are unemployed, the company’s blockchain will verify through profile connections and issue insurance payments. The company’s social capital insurance combines smart contracts and a peer’s social network to double-verify the employment status of a policy applicant.
- Lemonade: Lemonade combines Artificial Intelligence (AI) and Distributed Ledger Technology to offer insurance to renters and homeowners starting at $5 and $25 a monthly, respectively. At Lemonade, blockchain comes into play through smart contracts. The company’s business model takes a fixed fee from each monthly payment and allocates the rest towards future claims. If a claim is made, the blockchain’s smart contracts will immediately attempt to verify the loss so a customer can get paid quickly. If a claim is approved, Lemonade’s AI and blockchain combination will pay you in three seconds. Also, Lemonade was voted #1 of 270 companies for customer satisfaction in renter’s insurance.
- Teambrella: Teambrella is an insurance platform and a peer-to-peer coverage service powered by blockchain technology. The company enforces the Golden Rule and aligns every teammate’s interests. Every decision in each team is made by discussion and voting. Members of a certain Teambrella group are locked into a smart contract and use these contracts to transparently vote and execute payment for each claim. The company has four insurance pilot groups that deal with bicycle damage and pets in Peru, The Netherlands, Argentina, and Germany. They are in the process of expanding their operations to pet insurance in the US and car insurance in Russia.
The Future of Blockchain in Insurance
The ‘quickest win’ for blockchain in insurance is in the area of cost control. Rising costs are hitting insurers across most markets. Blockchain platforms and DApps that allow firms to free up resources by automating claims management, fraud detection, and data reconciliation, for example, will be heartily endorsed by executives.
The real win will be when blockchain platforms enable insurers to create better products and onboard customers faster, things that bring in revenue. For this to happen, we need a more robust ecosystem of insurers, reinsurers, tech companies, and service providers working together on industry-standard blockchain platforms.
From an industry perspective, insurance companies need to align around standards and processes within blockchain technology. While blockchain technology can provide insurers with better tools for collaborating and sharing data, the insurers themselves must be willing to work with each other.
The technology itself must also be developed further. Public blockchains, where everyone has access to each transaction on the ledger, are unfeasible for the insurance industry due to privacy and security concerns. Private, permissioned blockchains are still under active development.
Moreover, the insurance industry is highly regulated to protect consumers from abuse and insurance companies from taking on too much risk and going bankrupt.
Thus, legal and regulatory frameworks for insurance need to evolve and provide clear guidance for blockchain technology to succeed.
Cover Image: Investopedia