Blockchain and Insurance

Published in

CRUCIBLEDAO

4 min readOct 3, 2022

This article is part of the series Use-Cases, brought to you by Crucible Insights, which provides perspectives on a range of topics related to blockchain use-cases and aims to stimulate constructive discussion within the CrucibleDAO community.

What is blockchain and what are smart contracts?

This article assumes that the reader has a basic understanding of blockchain and smart contracts. If not, we encourage you to check out the fundamentals online before reading this article.

Blockchain & Insurance

Blockchain delivers a potential for insurance companies to change how they conduct business. Blockchain can optimize the efficiency, security, and transparency of the insurance industry.

Attempts to integrate distributed ledger technology into various business models and processes are well underway. The banking industry, for example, is experimenting with customer-facing payment technology to trading and exchange services utilizing blockchain technology. The insurance industry is well known for its conservatism and is lagging behind in technological adoption. On top of this, the sector continues to face a myriad of challenges ranging from operational and cost inefficiencies. to fraud, human error, and cyber attacks.

Despite this, the industry is “uniquely positioned to benefit from blockchain technology”, which can deliver on a range of digital opportunities that reduce costs, increase efficiencies, improve data quality, collection, analytics, and security. Recent studies exhibit that 46% of insurers expect to implement blockchain in the next two years, and that 84% of insurers recognise that blockchain and smart contracts can revolutionize customer engagement . This is no surprise given blockchain can both enhance existing insurance processes, or be used to enable novel insurance practices. Blockchain is thus a highly attractive prospect for this competitive industry where the best value for money and a secure, seamless online experience are now table stakes for retail and corporate customers.

Smart Contracts — a game changer?

Smart contracts specify the ground principles between two parties as do physical contracts. Additionally, they have the ability to track insurance claims and make both parties responsible, unlike traditional contracts.

Using smart contracts and decentralized applications, such as those built on Ethereum, users can transparently transfer anything of value without a middleman’s participation. Insurance plans could be established as coded, decentralized smart contracts in which an individual agrees to pay the insurance fee in exchange for the guarantee of the company to help cover that person’s future medical expenditures. Based on an insurance policy owner’s records, blockchain smart contracts will generate immutable data that may instantaneously accept or reject any insurance claims made to the company.

If the policy owner makes any false or fraudulent claims (or if an insurance company no longer agrees to cover a previously agreed-upon condition), the smart contract will immediately dissolve and the premium funds will be transferred back to the individual. The method fosters mutual trust between the two parties for two reasons: all data is disclosed clearly, and even the smallest contractual deviation results in compensation to the affected party.

What then, are the Blockchain Use-cases in Insurance?

It can be applied in many areas of 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

Lets dive a little deeper into how blockchain impacts the below examples…

High-value item registries and warranties

To the advantage of all stakeholders, provide an immutable and trustworthy record of product provenance.
Monitor product ownership and claims in real time, even across borders.
Improve industry-wide efforts to reduce claims fraud through superior data and data exchange.

2. Know Your Customer (KYC) & Anti-Money-Laundering (AML) processes

Establish a tamper-proof store of consumer data that can be safely transferred between companies
This cooperative mechanism reduces the danger of error and duplication of effort while saving time and resources.
Improve compliance and regulatory monitoring by increasing visibility of client activities across institutions.

3. Parametric (index-based) Insurance

Automate most, if not all, aspects of parametric insurance.
Incorporate the logic of a policy into a smart contract and allow an oracle (digital feed) to trigger execution upon a preset “loss event”.
All transactions can be settled and cleared without the need for manual involvement.
Catastrophe bonds, flight delay, cancellation insurance, and other insurance-linked securities (ILS) can all be streamlined

4. Reinsurance

Allow primary insurers, reinsurers, brokers, and regulators to securely share real-time data.
Automate risk assessment, auditing, and compliance checks.
Bind risk and treaty towers on a single time-stamped smart contract.

5. Claims Handling

Create a reliable, tamper-proof, industry-wide claim record.
Eliminate data silos to reduce claims fraud.
Provide customers with more control over their data, including access rights.

6. Distribution of Insurance

On an online marketplace, you can easily coordinate the actions of several parties at a reasonable cost.
Allow consumers direct access to many carriers on the same site and the ability to manage multiple policies on the same platform.
Make transactions for paying premiums or claims quick, simple, and inexpensive.

7. Peer-to-Peer (P2P) Insurance

Improve traditional P2P models like reciprocals and mutuals by automating tasks and storing monies in escrow on smart contracts.
Support innovative P2P models in which policyholder decision-making is aligned and incentivized via tokens and token staking.

Conclusion

Insurance on and with blockchain has the potential to revolutionize the sector. The capacity to break down data silos and progress toward information and power decentralization will save money and time while proving data quality. Smart contracts can and will enable the development of new goods that better fulfill customers’ demands while also enabling the automation of many labor-intensive operations taking place today.