Blockchain in Insurance – New Trends in the Industry
For the last few years, blockchain has been a buzzword in the world of finance. But is it only that? Apart from succeeding in the banking industry, blockchain has grabbed the attention of insurers too. How blockchain brings so many long-term horizons to advanced solutions in finance? What a digital ledger of transactions has to do with the insurance industry? Finally, are there any defects that could prevent blockchain from becoming the technology of tomorrow? Read more to learn about the basics of blockchain in insurance.
Insurance market overview
It is no surprise that the insurance industry, the same as many others, had to face a challenge of upheavals caused by the COVID-19 pandemic. Due to the crisis, most companies were forced to alter their business strategies as the economic fallout verified radically new customer and employee needs, habits, and expectations. While the majority of insurers adapted quickly, some of them still struggle with overcoming the obstacles of the ‘new normal’ and heading towards profitability.
Even without the pandemic on the horizon, insurance marketers had to outplay some roadblocks such as poor customer engagement, limited growth in mature markets, or digitalization trends. As for the last one, blockchain has the potential to revolutionize the insurance industry. Even though usually we connote this solution only with Bitcoin, it could answer many issues related to insurance too. Moreover, as some have already tried to implement this technology in their services, they noticed that blockchain in insurance can improve efficiency, increase revenues, and lower costs.
What is Blockchain and how does it work?
If you are interested in technological novelties in the economic market, then you must have heard about blockchain. It is a database. And, to be more specific, it is a decentralized and distributed database or ledger of transactions or events, functioning as an ascending one-way list of records nominated as blocks. Each block has a link to previous blocks created using cryptographic functions and timestamps. The main goal of this technology is to store and send information about transactions concluded on the Internet in a safe and secure manner.
How Blockchain is used in InsurTech?
InsurTech is one of the departments of the fintech industry, devoted entirely to new technological solutions such as blockchain in insurance. Blockchain has the ability to help automate claims management, optimize effectiveness, and reduce risks.
First and foremost, with blockchain technology, the submission, and processing of claims can be as safe, convenient, and consumer-friendly as possible. It enables a seamless connection of multiple data points from different sources, so the number of false claims is minimized. Some companies, like AXA, implemented blockchain to offer claim-free services. In this case, an aviation insurance called Fizzy can instantly trigger a payment to the holder’s bank whenever there is a flight delay of at least 2 hours.
Moreover, blockchain is a distributed ledger; thus, it’s responsible for spreading multiple information streams and documents such as third-party reports, on-scene evidence, or police statements. For instance, it could quickly trigger a new claim initiation in the event of a car failure and send signals to medical and technical support simultaneously.
Usually, insurance companies hire multiple reinsurers for the same contract, which implies exchanging data readings. By keeping and processing the data in a distributed ledger, reinsurers can obtain verified information in real-time directly from the initial source. Thus, there is no need to involve any counterparties, and faster capital allocation to satisfy upcoming claims is ensured.
Moreover, when using a shared ledger, there is no need to reconcile premium and loss transactions between the insurer and reinsurers as it will update automatically.
Statistics show that businesses such as Allianz, Swiss Re, AIG, or Aegon eagerly embrace blockchain technology to lower the operating costs of the insurance sector by approximately 5 to 10 billion dollars.
Fraud and risk prevention
With blockchain technology, insurers can speed up the onboarding process of new customers. Blockchain allows them to verify the identity documents presented by the potential clients and then grant access rights to authorized parties. Additionally, it replaces the centralized databases for data and document management. Thus, procedures such as know your customer (KYC) or due diligence get improved too.
What is the best use case for Smart Contracts in insurance?
Blockchain is a type of infrastructure system that is used to validate, store and transmit data in a secure, reliable manner. Based on this technology, smart contracts are software programs created to automatically enforce the agreement terms if particular and predefined conditions are met. Therefore, we can define it as a virtual intermediary that executes transactions between two parties and, thus, highly improves the transparency and fairness of insurance terms and conditions. They operate on the logic of action-reaction. Therefore, if event A occurs, reaction B happens. Knowing that, we can say that the best use case for smart contracts in insurance are P2P contracts.
Even though it isn’t a new concept in the insurance industry, smart contracts can significantly improve P2P insurance services’ work. For example, in the event of e.g. damage caused by bad weather conditions or a car breakdown, a claim submission could be fully automated as sensors based on IoT technology send the data to the system instantly. Thus, claim management is not only faster but also more credible.
Not so long ago, smart contacts could not connect to the data outside of the blockchain, making it impossible to provide reliable and secure agreement realization. As a result, they were also unable to initiate insurance transactions responding to events. In recent years, however, thanks to technologies such as API and IoT, it began to be possible to obtain data from outside the blockchain and use it to run the implementation of parametric smart insurance contracts without the concern about data manipulation and unavailability of premium data sources.
In the new system, the contract is hosted and executed in a decentralized environment that is “tamper-resilient”, meaning that neither party can unfairly control or manipulate the contract for its benefit. Furthermore, contract execution is only triggered once it receives verifiable data about an insurable event. In most cases, the contract is settled immediately by transferring the assets to the blockchain, and no human interference is needed. So, even though P2P insurance is not a novelty on the market, it became the best use case for smart contracts.
Which insurers are using Blockchain?
For many insurance companies, implementing technologies like blockchain is a priority to stay relevant on the market. Take a look at some examples:
- Teambrella – a P2P insurance application powered by blockchain and smart contacts where users submit and share their claims. Then, their teammates vote whether the claim should be honored or not. There is no central entity involved in the process.
- Lemonade – insurance based on AI, blockchain, and behavioral economics. It protects you and your household by providing coverage offers designed by an Artificial Intelligence bot.
- Tierion – a platform powered by blockchain used for data, files, and process verification. It allows you e.g. to keep an immutable history of your business processes or prove the existence and accuracy of accounting records.
- B3i – a startup application built on top of the B3i Fluidity platform. It helps in structuring the majority of Cat XoL contracts transacted in the market, providing customers with the ability to negotiate and place treaties.
- Etherisc – an open-source development platform to make insurance fair and accessible. It provides services such as flight delay insurance, hurricane protection, crop insurance, and more.
- Fizzy – a flight delay insurance service belonging to AXA. Based on self-executing smart contract technology and Ethereum blockchain.
Benefits of Blockchain in insurance
We have already mentioned some of the benefits that blockchain technology can bring to the insurance industry. Let’s review them briefly.
- Simplified claim management – many applications and platforms based on blockchain enable quick and robust insurance services such as P2P insurance where no central authority is involved.
- Improved customer experience and customer engagement – when it comes to personal data, it always is a delicate matter. Customers fear that their private information could be compromised. Blockchain technology enables the storage of verification data instead. Also, it allows companies to collect and keep more useful data on end-users and provide them with better-suited offers based on it.
- Greater transparency – blockchain can improve customer engagement also by providing a higher degree of transparency. Thanks to P2P and smart contracts, verified data sources can share real-life information. As no central authority is involved, customers tend to find a service more trustworthy.
- Seamless customer onboarding – blockchain solutions for KYC allow customers to share identity data with companies while concluding a deal. Verified identity data can then be passed to different entrepreneurs for other contacts with the same tool, which speeds up the process.
- Reduced fraud loss -it is estimated that 5 to 10 percent of claims are faked. Fraudulent actions cost insurance companies billions of dollars every year. Blockchain allows detecting false claims much more effectively than traditional solutions.
- Minimized administrative costs – blockchain enables automated identity verification and another process that results in reduced operational costs.
What are the disadvantages of blockchain in insurance?
There is no doubt that blockchain technology brings many benefits to insurers who know how to implement it in their businesses. However, it is not without a flaw. Let’s see what the cons are:
- Limited number of parties – of there is a limited number of parties involved in a transaction, and no intermediary is needed (or a trusted one is already there), it might be unnecessary to adopt blockchain. If not estimated carefully, it could bring red ink instead of benefits.
- Scalability – ‘blocks’ are limited in size and frequency; thus, blockchain has a limited capacity of a network to handle large amounts of transaction data on the platform in the short term.
- Security – even though blockchain is a secure solution for the known risks, new types of attacks come to play.
- Standardization – a distributed and shared system requires a high level of standardization. Its lack may result in poor investment decisions.
How to implement Blockchain in insurance
We already know that blockchain is a technology that can bring plenty of benefits to insurance companies; however, this will only happen if the company properly assesses customer needs as well as its own pain points and pitfalls. When introducing this digital ledger rashly, you must be aware of the challenges that lie ahead. Blockchain’s scalability, security and compliance matters, or resources required may stand in the way of your success.
If you are unsure how to settle down to blockchain technology or have any doubts about it, our experienced team will help you estimate your project the best way possible. Thanks to our support, you do not have to worry about investing in solutions that could bring any red ink to your company. Together we will create a project that brings results.
Future of Blockchain in insurance
Blockchain is a digitalization technology that has great potential to improve the insurance industry. No wonder the far-reaching impact and the wide possibilities that this solution brings are a great incentive for entrepreneurs. However, you have to remember that implementing this technology in the insurance industry is still at an early stage, and we will have to wait a bit longer for the real results. Nevertheless, even at the estimation level, we are able to state that a properly scaled blockchain can help you become a technology leader among other insurers in the next few years.