With the help of Blockchain-Technology, transactions can be stored in a chain of data blocks. It is based on a decentralised register/ledger. The insurance industry can help Blockchain automate processes (such as claims payments). New insurance models such as risk pools can also be developed. It is unclear exactly what role insurers will take in the future with such concepts and how the competition rules will change.
When the crypto-currency Bitcoin was launched in 2009, nobody could have anticipated how much of a stir this phenomenon created. Aside from the question of future digital money, the technology behind this curreny has come into the spotlight in recent years: The Blockchain.
This technology has now found numerous applications in almost every major industry. In simple terms, it provides a way to digitally executye transactions and store their history in decentralised networks.
As a result of this, Blockchain can take on the traditional role of central authority, and establish trust between unknown and known parties.
Enhancing/Improving Data Exchange
Through the use of unique digital signatures digital ownership can be detected and transactions validated.
For this purpose, cryptographic algorithms provide each trasaction with a time stamp and store their order in a sequence. This prevents records from being illegally changed afterwards.
For the insurance industry, Blockchain can therefore improve the exchange of data between multiple parties incolved in an insurance transaction. This results in the elimination of many manual tasks, drastically increased efficiency or speed and reduced costs.
Five Key Advantages
The central advantages of Blockchain technology can be defined in five ways:
- Central Innovation: Blockchain is the first technology that can ensure that digital assets are not transmitted unrecognizd mulitple times – without a centralized administrator or clearing agent. It is therefore a fundamental technology that can lay the foundation for digital innovation.
- Decentralised solution: By solving this problem, it is possible to create a decentralised and unchangeable history of all data transactions that can subsequently edited.
- Process Integrity: An unchangeable history creates a high integrity of data files and trust between parties.
- Data Security: Through the application of the latest cryptographic methodologies and access protection by both public and private keys, the Blockchain can also securely protect information.
- Valuable Redundency: A decentralised architecture distributes numerous copies of the data across a large a network. This, in turn, increases resistance to malicious attacks.
Applications In The Insurance Industry
Also nowadays, processing payments for insurers still poses challenges in practice. In addition to high processing fees from banks, there are also high costs due to paper-intensive processes. Such processes are of course also a target for potential attemped fraud.
Blockchain can bring these processes into a digital network and connect all parties involved in a secure way with one another. The decentralised structure not only increases the structural integrity, but also the content integrity (i.e. reliability) of the data, which, for example, enables an improvement in claims payments.
Reduce/Minimize The Probability Of Errors
Further possible use cases arise in other types of transactions in which the parties involved have to rely on a multitude of different data sources.
An example here is underwriting, where the matching of different data sets, for example, the identity of a person, must be assured on the basis of appropriate metrics (control methods), and a risk assessment can be made.
Through the application of Blockchain, this process can be made more efficient and the likelihood of errors minimized. Also, the valuable redundancy would make the data safer if stored in a Blockchain newtork.
Automization Through Smart Contracts
Another important element of Blockchain technology is the so-called Smart Contract. These are computer protocol-based digital contracts that are automated when specific/certain conditions are fulfilled. No human interaction is neccessary.
Smart contracts may automatically query public and private data sources to determine if a key event has occurred, such as a storm in a specific area. Additionally, they can automate the processing of the occurred claim.
For example, after requesting data from the operator and weather information, a payment could be initiated automatically if a flight is cancelled due to a storm.
New Business Models
Although the blockchain technology can not only help to increase the efficiency of existing processes,in the long term, it can also lay the foundation for completely new business models.
A common example is peer-to-peer (P2P) insurance. This is an insurance policy that puts different users in a common or shared risk pool. These customers pay into the shared pool, whereby claims are then covered accordingly from this pool. What resembles the classic model of a mutual insurance association can reach a whole new level with its completely digital structure. What resembles the classic model of a mutual insurance association can reach a whole new level with its completely digital structure.
However, the P2P insurance models can only establish themselves very slowly. Insurers are not yet sure what role they will play in such a structure and what the costs of managing such risk pools will be.
Blockchain can solve this challenge with Smart Contracts, which manage these pools. This also provides the basis for insurers and reinsurers to integrate their services for additional risks that the risk pool cannot cover on its own.
The examples outlined above show that blockchain technology has the potential to change the way insurers work. It can thus rewrite the competition rules of the industry.
Even though the technology is still at a very early stage, insurers should consider where blockchain can be used. To do this, however, they must not blindly look for the fastest possible areas of application, but must better analyse which of their current challenges will benefit from the use of blockchain technology.
Based on this, they should start ‘pilot’ projects and gain experience using this technology. This will allow them to better understand the potential benefits and better understand the actions needed to implement such a solution.
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The German version of this article appeared first on VersicherungsJournal