The traditional insurance business model has been remarkably resilient for years. As emerging technologies transform the way people interact with businesses, and the delivery of products and services, traditional insurance is starting to feel the digital effects. Blockchain is one of these emerging technologies. Companies such as Enterprise and IBM have implemented blockchain strategies that have helped push the boundaries in insurance. IBM’s Blockchain Network aims to automate underwriting and claims settlement. Enterprise developed smart contracts among blockchain accounts to speed up transactions.
Blockchain technology is a distributed, decentralized public ledger. It is the record-keeping technology behind Bitcoin. Blockchain transactions can be used for free and could revolutionize the way insurance contracts are made. Blockchain improves transparency, efficiency, security, and transparency in the insurance industry by using public ledgers with fortified cybersecurity protocols. Blockchain implementation in the insurance sector is still in its infancy. However, it has been adopted by many sectors, including those providing renters, homeowners, unemployment, and travel insurance.
What is blockchain technology?
Block Geeks are great at explaining the workings of blockchain technology. “Imagine a spreadsheet that has been duplicated thousands upon thousands across a network computers. Imagine that the network is designed to update this spreadsheet regularly and you will have a basic understanding about blockchain technology.
The blockchain blocks are made up of three digital pieces of information. First, it stores information about transactions such as date, time and dollar amount. The second is information about who participates in these transactions. The third block is the stored information that differentiates one block from other blocks.
is the process that occurs when a transaction takes place.
- To represent the transaction, create a new block
- Verifying each block through all participants of the network
- Attach cryptocurrency or other “proof of work” significators to the block
- Add the block to existing chain
- Finalize the transaction and update the network
Blockchain databases can be used as large storage areas for recorded information. This opens up the possibility of blockchain technology being applied to many industries such as entertainment and healthcare. One of the main uses is automating operations like document transfers, contract terms negotiations and cybersecurity. Insurtech company Ryskex provides an easy way for insurers to accurately assess and manage risks through its blockchain-based platform.
According to Gartner blockchain will be more widely adopted by 2023, and could lead to $3.1 trillion in new economic value by 2030, according to the company.
Insurance industry meets blockchain technology
Although the insurance industry has existed for centuries, many of its processes have become outdated. Many policies are still written on paper, and consumers can still call to buy new policies.
These processes are effective, but human error and misuse can lead to information being lost, altered, or misinterpreted. According to the Coalition Against Insurance Fraud, fraud accounts for 10% of all property- and casualty-insurance losses . This results in approximately $80 billion annually being stolen from American consumers. This leaves much to be desired when it comes to security, efficiency, and customer satisfaction. Blockchain could help address these issues.
Blockchain is a promising solution but it will still face many challenges. Before fully adopting blockchain technology, insurance companies will need to overcome legal and regulatory hurdles. Many blockchain features could conflict with existing insurance laws. Personal customer data, as well as their policy information, must be protected and kept private. Decentralization also strengthens information sharing, and decreases the benefits that information asymmetry offers. This creates new challenges for managers in product development, pricing, and claims services.
Blockchain technology for insurance applications
Insurance for property and casualty
Property and casualty insurance includes mainly auto and homeowner insurance. In 2019, 1.32 trillion dollars in net premiums were written for this sector. The manual entry of claims is complex and leaves little room for human error. The blockchain technology can make claims processing three times quicker and five times more affordable. To increase efficiency and accuracy, claims and payments can be automated by using smart contracts and shared ledgers (software that monitors transactions on the network and executes actions based upon pre-specified conditions). Smart contracts can transform paper contracts into programable code, which automates claims processing.
Fraud detection & risk prevention
The FBI estimates that insurance fraud costs the United States more than $40 billion annually. There is room for fraud and error due to the outdated processes in the insurance industry. Insurance companies could use a ledger to store claim information. This would allow them to communicate with each other and detect suspicious behavior.
Etherisc is an insurtech company using blockchain’s validation to streamline the claims process. Etherisc uses multiple time-stamped comparisons, such as weather reports, flight delays and satellite images, to help ensure fair payouts.
Blockchain technology’s impact
The insurance industry has historically been slow in adopting new, more efficient processes. Although blockchain can bring enormous benefits to customers and companies, there are certain limitations.
- Increases efficiency – Many processes are manual and time-consuming. Blockchain can simplify paperwork and reconcile insurance contracts.
- Trust increases – Blockchain cryptography ensures transactions are authenticated, secure, and verifiable, thus increasing customer privacy.
- Claims Processing – Blockchain allows real-time data analysis and collection, which could greatly speed up claims processing.
- Smart contracts – These programmable agreements contain logic that executes automatically when certain conditions are met. According to Jeff Stollman (Principal Consultant at Rocky Mountain Technical Marketing), “These if/then agreements reduce paperwork on the back-end, and they will become insurance equivalent to no-frills carriers.” They will be cheaper to administer than more expensive policies and can be paid immediately.
There are limitations
- Cyber attacks are a common problem – The global Blockchain market is expected to reach $20 Billion by 2024. Blockchain is more vulnerable to cyber attacks with so many users.
- Data integrity breach – Fraudulent insurance transactions can be questioned if data integrity is compromised. Blockchain must be used to protect data integrity from fraudulent activity.
- Cost of operations – As blockchain technology becomes more common, it will be more costly for insurance companies to incorporate this new technology into their everyday processes.
- Blockchain privacy – Cryptocurrency (like Bitcoin) is openly available. This means that every transaction can be traced back from its initial block. Criminals could potentially access this information in order to profit from it.
We are moving towards a blockchain-powered, insurance industry
Blockchain has the potential to improve the insurance industry in many ways, but it is still very young technology. It is still very early days for blockchain’s true potential. Blockchain is being explored by start-ups in the insurance sector. They are exploring how it could help improve customer satisfaction and business processes.
Fidentiax launched its digital ledger product in 2018 as a market for trading insurance policy. Fidentiax’s digital ledger product for insurance policies, ISLEY was launched in 2018. The ledger allows policyholders to share their portfolios with loved ones, allowing them to receive beneficiary payouts upon death.
Lemonade offers insurance at affordable prices by combining distributed ledger technology and artificial intelligence. Its renters insurance and term policies start at less than $10 per month. Lemonade claims that their business model involves taking a fixed fee out of each month and then allocating the remainder towards future claims. The blockchain’s smart contracts instantly verify a claim and pay the customer quickly.
Although there are some first-movers in blockchain, companies still have to overcome many hurdles before they can fully embrace this technology. To implement blockchain, insurance companies need to align themselves around processes and standards.
What’s next for insurance?
Blockchain can bring about significant improvements in the industry’s accuracy, efficiency, privacy, and other areas. However, every insurance company that adopts blockchain must adhere to ethical standards. To make blockchain more useful for insurers, standards and processes must be established. This will allow them to collaborate, share data and reduce the burden on customers.
Blockchain must be further developed to meet the requirements of insurance companies, as the industry is sensitive to security and privacy concerns. To safely use blockchain technology, insurance companies must have clear regulations. These needs will be met and blockchain can transform the insurance industry, both for customers and companies.