How Can Blockchain Bring Transformation to Insurance Sector?
The advent of the technological revolution has completely revolutionized the standards of business models. With the beginning of technological growth, the traditional insurance ecosystem has started experiencing the digital effect with emerging technologies like blockchain. It has tremendously transformed the way consumers interact with business and the efficiency at rendering the services. The global insurance industry falls behind other financial sectors, especially in improving cost-savings and streamlining the business operations with the growing concerns of fraudulent activities, human errors and cybercrimes.
With such growing concerns and challenges in traditional insurance, blockchain technology has paved a way to evolve and stay competitive to meet digitally-savvy consumers’ demands. Adopting blockchain-powered solutions and services can help insurance companies to transform radically by overcoming traditional challenges with utmost efficiency, security and transparency with public ledgers and fortified cybersecurity protocol.
According to a report from McKinsey & Company, 5 to 10% of all insurance are fraudulent, and thus securing data is more crucial for insurers. To fully understand the current landscape of the insurance industry, here’s a general overview of some of the major challenges organizations face and how blockchain can mitigate them with efficient streamlining the operations.
What challenges are faced by Insurance Industry?
With the onset of connected devices and an ever-rising amount of copious information, there exhibits a need to sift the data for imparting tailored products and services. Insurers need to evolve from financial-loss compensation to a mode of physical-risk prevention. It is possible only when the issuers have access to data visibility. With the digital transformation in the financial sector, the sheer cost and security of moving money digitally is a significant concern.
Traditional insurance companies come across numerous challenges. Some of them include:
- Complicated compliance issues
- Limited growth in mature markets
- Fraudulent claims activities
- Third-party payment transactions
- Handling massive amount of data
All these challenges impose the need, importance and adoption of blockchain technology to streamline the processes and secure sensitive information in the insurance industry.
Why Blockchain?
While blockchain holds the right potential to end all the problems faced by insurers, it ensures trust, transparency and security. There are many ways that insurers are leveraging blockchain technology to overcome the abovementioned challenges. Here are some influential factors that show how the blockchain can disrupt and revolutionize the insurance industry.
- Security
Blockchain is a distributed ledger technology, which can substantially remove suspicious and duplicate transactions. The decentralized digital repository of blockchain verifies customers’ authenticity, policies and transactions by providing historical records. Therefore, it becomes highly impossible for hackers to corrupt and tamper the confidential data on the blockchain. - Huge data
The usage of numerous connected devices has resulted in a spike in the amount of data insurance companies need to handle. Blockchain can efficiently handle managing, sharing and monetizing large amounts of data. The most crucial benefit of blockchain is that it can store static records and data without central coordination and all participants in the network can view the data. Data gets registered on the blockchain with a digital fingerprint using a date and time stamp, thereby facilitating security and transparency. - Third-party transactions
The rise in third-party transactions and claims made through personal digital devices is easily handled with blockchain-based solutions. Blockchain helps to minimize administrative costs through automated verification of claims and payment data from third parties. Blockchain has made it feasible for insurance companies to quickly view past claims transactions registered on blockchain for easy reference. It promotes building trust and loyalty between the insurer and customer to a greater extent. - Smart contracts
These are the programmable contracts that execute the transactions when predefined conditions are met. Smart contracts connect real-time data from multiple systems across physical documents and details. They trigger processes like claims, payments and reimbursements faster and with greater accuracy. It reduces the paperwork of insurance companies with a savage of time and money while providing the customer with a better experience. - Providing interoperable health/life insurance records
The secured nature and capability to establish trust between multiple entities make this technology effective at solving interoperability problems of maintaining and sharing health records for better patient outcomes. - Strategic Functioning
Blockchain-enabled solutions collect the records of agreements, transactions and other valuable information sets. This overall information is linked and stored in blocks and further executes the functions using smart contracts. - Fraud Detection
On submission of any fraudulent information to a life or health insurer through false claims, smart contracts can help identify and detect if the submitted claim is valid and safeguards the information against tampering, cybercrimes, and fraud. - Establishes a dynamic insurer and client relationship
When the health or life insurance records are stored securely on the blockchain, smart contracts serve as a base to form and maintain the trustful nature of the client and insurer relationships. - Improving provider directory accuracy
The decentralized consensus protocols of blockchain technology allow the providers and insurers to update listings quickly with more flexibility. - Enhanced efficiency and Trust
Blockchain eliminates the need for manual processing by streamlining the paperwork and reconciliation for insurance contracts. The cryptography in blockchain maintains the secured, authenticated and verifiable nature of transactions, ensuring customer privacy.
What are the possible use-cases of blockchain in the insurance industry?
Blockchain technology has immense potential throughout the insurance value chain. Right from the underwriting and pricing of products, sales and distribution to the product management and claim processing. The applications of blockchain in insurance are exhaustive. The following are the significant use-cases where blockchain acts as a catalyst in accelerating digitization and shifting the mindset to foster innovation and transformation in the insurance industry.
1. Claim Processing and Settlement
In blockchain-enabled insurance, the terms are written in the smart contracts. On receiving the right parameters, smart contracts pay out the claims. It is usually applicable for parametric insurance products, where the claim trigger event is verified from reliable available data such has flight delay, natural calamity, or death cases. Blockchain allows recording the claims for auditability for preventing insurance fraud by removing multiple claims on the same event.
2. Re-insurance and Swaps
Reinsurance agreement and swaps terms are written into smart contracts for executing the payments, including claims and premiums. The overall data related to transactions remain tamper-free and auditable. Every participant in the network, like insurers, reinsurers, asset managers, third-party data providers, and consultants, can access the data recorded on the blockchain. All the transactions recorded in the blockchain remain visible for future transacting participants. In the case of bulk annuity deals, all the participants in the blockchain network can also see the changes that have been made.
3. Digital Identity Management
Compliance with KYC and data protection regulations is onerous and expensive. The private information is owned and stored locally, where the blockchain acts as a secure and trusted conduit of data from customers to insurers. Using blockchain, KYC credentials are codified into a smart contract and automated.
4. Shared Economy Insurance
Various platforms based on sharing economy are efficient at providing real-time insurance coverage to the renters who book on these platforms. When dynamic insurance is provided through blockchain technology, it can be efficiently utilized in real-time, reduces the operational costs and maintain the overall history of transactions for future reference.
5. Worker’s Compensation
Most insurers face a large number of claim frauds through worker’s compensation. Blockchain technology enables information sharing across multiple parties. The digitally maintained health and employment records are accessible to the insurer to determine the actual loss suffered by the insured persons. It minimizes the chance of fraudulent activities in worker’s compensation and settles the claim quickly.
6. Group Life Insurance
The employer acts as an owner and the employees work as beneficiaries in a group life insurance policy. Thus, the employer is responsible for facilitating and updating all the necessary changes. The current process is man-power-oriented but can be automated quickly in real-time by integrating third-party systems through smart contracts executed on the blockchain.
7. IoT — Blockchain-powered Connected Devices
Smart homes and connected devices are built using IoT with blockchain integration. The sensors detect the occurrence of accidents or any mishaps. The devices then use blockchain to trigger instructions, which transfers the cash from the insurers for repairs. Blockchain in IoT can solve the trust issues businesses face when building smart devices that can communicate and operate automatically.
It is obvious that blockchain can improve the insurance industry from every angle. The distributed ledger technology has an immense potential to deal with decentralized trust, claim processing, identity management, fraud prevention, considerable cost savings, consumer data privacy, and enhanced efficiency.
While blockchain can improve the industry’s accuracy, efficiency, privacy, and more, it’s essential to understand that every insurance company that embraces blockchain must adhere to function under ethical standards. Standards and processes should be aligned for blockchain to offer insurers better tools for collaborating, sharing data, and making insurance processes convenient. Once these standards are met, blockchain serves to uplift the future of the insurance industry with its adoption to harness long-term gains.
