Blockchain in the Insurance Industry
Insurance companies face a number of challenges, such as complex compliance issues, limited growth in mature markets, fraudulent claims activity, third-party payment transactions, handling huge amounts of data, and overemphasis on purely financial-loss scales rather than a mode of physical-risk prevention will improve the competition efficiency in the space, which can be taken care off by the implementations of the blockchain.
Blockchain to the rescue
Though blockchain might not be the one solution to problems faced by insurers, it does provide the foundational technology that promotes trust, transparency and stability. There are a few ways that insurers have already begun to leverage the technology to mitigate the insurance industry 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.
Third-party transactions: Blockchain can handle the increase in third-party transactions and claims made through personal digital devices. Blockchain helps reduce administrative costs through automated verification of claims/payments 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 pre-defined contracts connecting real-time information from different systems across physical documents and activities which trigger processes such as claims, payments and reimbursements faster and with greater accuracy thereby saving the insurance company time and money while providing the customer with a better experience.
Reinsurance: Blockchain can provide accurate reserve calculations based on current contracts to help property and casualty insurers to know how much money is available as they pay claims and help them realize their exposures against specific risks.
Delving into the impact of blockchain on some important pillars of the insurance sector:
Fraud Detection And Risk Prevention: The complexity alone of the insurance industry creates gaps in visibility that can be exploited to perpetrate fraud. Shuffled claims from insurees to insurers and reinsurers in a slow, paperwork-driven process creates opportunities for misappropriation to make multiple claims across different insurers for a single loss or enables brokers to sell insurance policies and pocket the premiums.
Blockchain technology can enable better coordination between insurers to combat fraud. On a distributed ledger, insurers can record permanent transactions, with granular access controls to protect data security. Storing claims information on a shared ledger helps insurers collaborate and identify suspicious behaviour across the ecosystem. Insurance fraud is one of the biggest pain points of the industry, leading to higher premiums and worse coverage for consumers. Combating fraud is one of the most compelling use-cases of the blockchain, which can provide insurers and insurees with a permanent audit trail that can be used to evaluate claims. It can bring automation and efficiency to the claims processing system apart from combating fraud.
Property And Casualty Insurance: Gathering the necessary data to evaluate and process claims are the biggest issue with property and casualty insurance due to the lengthy manual process as well as a long supply chain. Blockchain technology can codify business rules and automate claims processing through smart contracts while providing a permanent audit trail thereby providing the policyholders and insurers to track and manage physical assets digitally. Insurance is by and large thought to be as a contract that stipulates the premium an insurer pays, as well as the conditions in which the insurer is liable for damages. The tricky bit is that the definition of “damages” can be pretty subjective, and insurance revolves around verifying that the conditions for each policy are met.
That’s why property and casualty insurance is such a compelling use-case for blockchain technology. It can transform the way that physical assets are managed, tracked, and insured digitally with the use of specifically tailored smart contracts which is enforceable by code between the agreed parties.
Healthcare: Health insurance is plagued by an inefficient ecosystem of providers, insurers, and patients. A single patient typically sees multiple doctors and specialists over the course of his life. Due to there being so many different parties involved in healthcare, it’s next to impossible to share and coordinate sensitive medical data between them. As a result, medical records get siloed within different healthcare providers and insurers, leading to duplicate and erroneous records across different organizations accompany by costly administrative overhead along with unnecessary procedures for patients. A secured or permissioned blockchain can maintain patient privacy, while creating an industry-wide, synchronized repository of healthcare data, delivering industry-wide savings.
Blockchain usage can return control to patients over their medical data and give them access to it on a case-by-case basis. Rather than forcing insurers and providers to reconcile patient data across separate databases, a blockchain system for medical records could store a cryptographic signature for each record on a distributed ledger. The signature indexes the content of each document cryptographically and timestamps it, without actually storing any sensitive information on the blockchain.
Reinsurance: Reinsurers provide insurance for insurers in different scenarios. Depending on the type of reinsurance purchased, it can cover a proportion of an insurer’s risk during the set time period, or cover specific risks. 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 three months of wrangling between parties before they’re 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.
The blockchain has the potential to upend current reinsurance processes by streamlining the flow of information between insurers and reinsurers on a shared ledger at the same time, eliminating the need to reconcile books between institutions for each individual claim. Rather than relying on primary insurers for data around losses, reinsurers can query the blockchain directly to provide coverage.
Towards a Blockchain- Powered Insurance Industry
While still in its infancy, there are already a number of promising use-cases and applications for the blockchain technology in the insurance industry.
Even though the enthusiasm and interest in blockchain technology is high, there’s a lot of ground to cover before it can make a significant impact on the insurance industry. From an industry perspective, the legal and regulatory frameworks for insurance needs to evolve for blockchain implementations to succeed. 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 has a long way to go with security, speed and scalability, all being worked upon. 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.
