Why people use insurance? Everyone wants to feel secure. The most popular way to make sure any potential and/or preventable risk can be reduced is insurance. It can play an important role in helping you manage your financial risk if something goes wrong or behaves in an unpredictable way. There is a room for improvement in this area. Smart contracts provide transparency, autonomy, accuracy, and other important advantages that can improve insurance market.
Insurance is a very old industry. Nowadays, many entrepreneurs are looking for ways to optimize it, reduce administration and management costs. Problems in the insurance industry are being exploited through various angles. Some startups are offering customers to return part of their premium paid if they had no claims, some of them donate a part of the premium to charity and motivate policyholders to be honest in that way. However, in each of those cases, there is a human factor involved. Administration staff needs to perform a deep KYC, estimate risk, process claims, perform payments. Such overhead increases the policy price a lot.
The regular insurance policy is a contract between the insurer and the insured, known as the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known as the premium, the insurer promises to pay for loss caused by perils covered under the policy language. In other words, it is a piece of paper with a list of “if this then that” and signatures of both sides. Usually these conditions are defined not in a trivial way and as insurers’ goal is to pay policyholders as less as possible, usually, customers are dissatisfied and usually feels and are fooled due to lack of experience. On the other hand, customers perform fake claims, lie and cheat to get the payout. In the end, both sides are not happy with each other and some of those issues even lead to court.
Insured typically find insurance contracts long and confusing while the insurance companies are battling an extraordinary amount of fraud. Through smart contracts, both parties would benefit from managing claims in a responsive and transparent way. It would start by recording and verifying contracts on the blockchain. When a claim is submitted, the blockchain could ensure that only valid claims are paid. The network would know if there were multiple claims submitted for the same accident. When certain criteria are met, a blockchain could trigger payment of the claim without any human intervention, therefore improving the speed of resolution for claims. An estimated 5 to 10 percent of all claims are fraudulent which, according to the FBI, costs U.S. on-health insurers more than $40 billion per year. In order to work to its full potential, this would require extensive cooperation between insurers, manufacturers, customers and other parties who would use the blockchain to share info to prove policies, purchases of products, verify police reports and more. Data recorded on blockchain will allow users to check for stolen or counterfeit goods and fraudulent transactions by storing the history and supply chain.
Let’s take a look at an example. Peter owns a house equipped with IoT devices and his agreement with an insurance company is based on a smart contract. Yesterday he came back home just to find there was a fire in his kitchen luckily stopped in time by firefighters. What happens next? Due to smart contracts and special tools all the data from IoT devices is recorded on the blockchain and automatically analyzed by the insurer. It turns out that there was a gas leak in Peter’s house caused by repair works on his street. No additional analysis of the case is needed as it’s clear there’s no Peter’s fault in the accident. Owing to smart contracts, the insurer automatically transfers money to his account to cover the damage.
Perhaps, it’s a bit oversimplified case, but it perfectly illustrates the advantages brought by smart contracts:
- Instant KYC and precise risk evaluation due to detailed records on each client;
- Lower administration costs as there’s no need for an army of underwriters;
- Accurate pricing: when insurers know the risks, they know how to charge their clients;
- Automatic claims submission and processing;
- Accurate claims assessment and calculation of damage cost, owing to reliable external data: no more manual reviews are required;
- Quick fraud detection;
- Automatic payments in a case of an accident.
Let’s take at how it will work in the life insurance case. Life Insurance Smart Contract can be created between the insured and the insurer, which will pay death benefits to the beneficiary upon the death of the policyholder. A smart contract can be connected to the death registries. On receiving a notification of a person’s death, the smart contract can automatically verify the person is covered, then initiate and settle the claim payment to the beneficiary. Generally, dependents or beneficiaries are not aware, if the person who passed away had insurance and hence do not file a claim, or file late. In this scenario, a smart contract eliminates the need for claim submission request notification as the contract automatically process and settles payment on receiving notification from the death registry.
Blockchain technology could make sure beneficiaries get the life insurance payouts to which they are entitled. Currently, because people live longer, policies develop, and family members have no idea where the paperwork is. They may have forgotten there’s even a policy. A public ledger would enable the rightful claimants to these proceeds to receive their due, rather than having these unclaimed funds be sold in a secondary market or stagnate. There’s no need to depend on a grieving beneficiary to file the claim. A smart contract could simply rely on “oracles” to monitor sources of death data. Once the death is confirmed, the payment is made.
But despite this overwhelming interest in blockchain technology, there’s a lot of ground to cover before it can make a significant impact on the insurance industry.
From an industry perspective, insurance companies need to align around standards and processes within blockchain technology. 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 must also be developed further. 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. But it is still hard to judge how it will work in off-chain cases.
Finally, the insurance industry is highly regulated to protect consumers from abuse and insurance companies from taking on too much risk and going bankrupt. Legal and regulatory frameworks for insurance need to evolve and provide clear guidance for blockchain technology to succeed.
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