Almost all major insurers are planning to integrate blockchain by 2021, according to PwC. At first glance, such a high level of commitment to new tech may seem surprising in an old and traditional industry such as insurance. However, enterprise blockchain adoption is poised to help insurers significantly cut costs, become more responsive to customers, and write more business.
Two recurring themes throughout this post are that:
- Blockchain can lower costs for insurers and lower insurance premiums for customers.
- Blockchain can help insurers understand & price risks better by allowing customer, risk and policy information to be shared more quickly and securely across parties the insurance ecosystem. This will increase revenue and growth prospects by allowing insurers to price insurance products more accurately.
Costs are becoming an issue for insurers. Life insurers in Asia and the US have seen cost ratios climb above 30% and 20% respectively over the past few years. This figure should ideally be below 20%. Part of this is due to increased compliance costs such as Know Your Customer (KYC) and Anti-Money Laundering (AML) laws. A bigger reason is that selling and servicing insurance policies is still a complex and labor intensive process.
A recent EY insurance market report showed low growth rates for Life insurance and Non-Life insurance outside Asia Pacific. Digging deeper, Life insurance premiums in the US declined by 0.4% from 2012–17.
Insurers find themselves needing to reduce operating costs and write business more effectively. While blockchain is not a magic elixir, proper adoption will help address these needs.
What is Blockchain?
In their book “Blockchain Revolution,” authors Don and Alex Tapscott describe blockchain as “an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
Organizations need secure ways to record transactions and manage information flows, making blockchain’s appeal easy to see. Blockchains ensures that:
- All participants have a copy of the digital ledger and that each copy is updated in real-time when transactions occur;
- There is no centralized server, making hacking next to impossible;
- A recorded transaction theoretically cannot be reversed, which makes the ledger an immutable source of truth no matter how many participants hold copies;
- Transaction data, records, and participant identities can be authenticated while remaining private.
Enterprise blockchains used by companies are different from public blockchains such as Bitcoin and Ethereum. Public blockchains are too clunky and slow for enterprise purposes. Enterprises require scale and speed — the ability to process hundreds of thousands of transactions very quickly. Public blockchains suffer from very low transaction speeds. Their verification process is cumbersome because participants are unknown and untrusted. Private enterprise blockchains don’t suffer from this limitation since all participants are known and trusted.
Enterprise blockchains have the following characteristics:
- Participation requires invitation: all participants in the blockchain network are trusted
- Data is private and secure: you don’t have access to transactions that you are not a party to, even though you’re on the same blockchain network
- Enterprise blockchains are fast and light: the network can handle thousands of transactions per second and numerous participants working in tandem
- ‘Smart contracts’ automate processes: transaction rules and process flows can be programmed to execute automatically, allowing payments and transfers to execute without human intervention, for example
The insurance industry will benefit from blockchain because most underwriting and claims activity requires cooperation among multiple parties. Some of these parties are from outside the firm, making data security important. Reconciling data from multiple sources during claims investigation, for example, is time and resource intensive and prone to manual error. Putting this data on a blockchain would streamline operations.
Blockchain Use Cases in Insurance
Industries have always adopted technology that has made it easier, faster and cheaper to conduct business. Blockchain tech promises to deliver on all three fronts, especially in the insurance industry, which is seen as slow and complex.
Let’s face it, insurance customers don’t enjoy interacting with insurance companies. Customers often deal with time-consuming paper forms when applying for a policy or submitting a claim. They may have to speak with people at insurance companies and hospitals, for example, to get medical insurance claims reimbursed.
On the flip side, insurance companies have to deal with the high costs of managing and servicing policies. Many of these costs are administrative — claims administration, verification and reconciliation of information, and paperwork. Insurance also requires coordination among many parties — consumers, brokers, insurers and reinsurers. This introduces overhead costs that translate to higher premiums paid by customers.
Blockchain can help make selling and servicing insurance better, faster and cheaper by improving fraud prevention, claims management, health insurance, and reinsurance. The end result could be lower prices and better experiences for customers.
According to the FBI, non-health insurance fraud in the US is estimated to be over $40 billion per year, which can cost families between $400–700 per year in extra premiums.
Common types of insurance fraud can be eliminated by moving insurance claims onto a blockchain-based ledger that is shared among insurance companies and cannot be modified. It can prevent criminals from collecting money from different insurers for the same claim, for example.
Blockchain will make coordination easier among insurers. If all insurers access a shared blockchain ledger, they would know if a claim has already been paid. Since all insurers use the same historical claims information, it would also be easier to identify suspicious behavior.
Insurers currently try to detect fraud by using publicly available data as well as data acquired from private companies. The problem is that these data sets are incomplete due to legal constraints around sharing personally identifiable information of individuals. Blockchain, by cryptographically securing data, would allow claims information to be shared across insurers without divulging personally identifiable information.
Putting insurance policies on a blockchain as smart contracts can radically improve the efficiency of Property & Casualty (P&C) insurance, saving insurers more than $200B a year in operating costs according to BCG.
Let’s use car insurance to illustrate this. If you get into a car accident and it was the other driver’s fault, you must submit a claim to your insurance company to recover your loss. Your insurance company investigates your claim and tries to recover money from the other driver’s insurance company. The other insurance company has its own claims processes, which leads to duplicated work, delays, and possible human error. The end result is that you get paid much later than you’d like, and insurers spend time and money on unprofitable activities.
Putting insurance policies and claims data on a blockchain that different insurers, reinsurers, brokers, and other parties can access reduces duplicate manual work by different parties.
Insurance policies as smart contracts on a blockchain automatically execute programmed claims processing actions, automating information transfers between insurers and other parties, and releasing payments to policyholders. Additional info such as claims forms and supporting evidence supplied by policyholders can later be added to the blockchain so that all parties have the same information, making disputes unlikely.
Blockchain enables fast, accurate, and secure sharing of medical data among healthcare providers and insurers. This will translate into faster health insurance claims processing and lower health insurance costs for customers.
Privacy laws around sharing patient data among hospitals and health insurance providers makes it time-consuming and expensive to process health insurance claims. Lack of data can even lead to insurance claim denials.
Patients deal with numerous doctors, hospitals and insurers over time and across borders. A patient’s medical history exists in fragments across healthcare providers and insurers. Worse, the way in which insurers and healthcare providers cooperate, share patient data, and process claims involves complex manual work & reconciliation. Even the technical infrastructure for medical records is outdated.
Putting encrypted patient records on a blockchain allows healthcare providers and insurers to access a patient’s medical data without sacrificing patient confidentiality. An industry-wide synchronized database of patient data can save the industry billions annually. Patient privacy is ensured because the blockchain stores cryptographic signatures for each medical record, which verifies the authenticity of the record without having to actually store any sensitive info on the blockchain. Changes to a patient’s medical records are also stored on the blockchain, which creates an audit trail.
Data sharing among insurers and reinsurance companies is complex, time consuming, and requires inefficient manual work. Blockchain can streamline information flows between insurers and reinsurers.
Reinsurers provide insurance to insurance companies. That way, insurance companies won’t get wiped out when many claims occur at once, such as during a hurricane or earthquake.
The problem is that reinsurance processes are lengthy, inefficient, manual and are based on one-off contracts. Insurance companies generally engage multiple reinsurers for the same risk, which means that data has to be shared among many companies to settle claims.
When reinsurers and insurers share a blockchain ledger, data related to policies, premiums and losses can exist on insurers’ and reinsurers’ systems simultaneously. This takes away the need for reconciliation, which saves everyone time and money. Reinsurers can also automate claims processing and settlement.
PricewaterhouseCoopers estimates that blockchain can save the reinsurance industry up to $10 billion, which can then lead to lower insurance premiums for customers.
Blockchain Implementation in Insurance
Saving the best for last, here are just some examples of how the insurance industry is using blockchain. Keep in mind that at this point, there are more prototypes and POCs than full-scale implementations.
R3 is an enterprise blockchain company. It maintains an ecosystem of over 300 firms across industries that build blockchain software apps on top of its Corda platform. These apps can be used across industries from insurance to banking to healthcare. R3 maintains 2 versions of Corda; an open source platform and an enterprise-specific version called Corda Enterprise. Both versions of Corda are compatible with each other.
Insurance-specific applications on Corda are designed to help insurers automate back office activities, streamline operational flows, and generally spend less time on things like claims admin and data processing. There are also apps being development to speed up underwriting and enable faster data sharing among insurers and reinsurers.
Basically, Corda wants to host a common set of insurance apps that the entire industry can use to cut costs and boost revenue. Corda currently boasts over 15 insurance-specific apps, with a few of these deployed into production such as:
- Blocksure OS: solves problems related to legacy systems, slow manual processes and high rates of error by automating policy admin and claims activities. Policyholders can access all policy and claims info in one app.
- MIDAS: is a motor insurance authentication platform designed to serve 80 motor insurance companies in Hong Kong. It provides real-time authentication of motor insurance policies, verification, and audit trails. This can help with fraud detection and reduce time required for certain verification activities when it comes to policy and claims management.
B3i was a blockchain consortium, now an independent software company, supported by leading insurers and reinsurers including Swiss Re, AXA, Zurich, Munich Re, and Allianz. They develop blockchain-based applications for insurers and reinsurers and aim to create industry-wide standards. B3i aims to use blockchain tech to streamline back office processes and claims management — basically lower costs and do things faster. In 2018, B3i switched from IBM’s Hyperledger Fabric to R3’s Corda platform.
In July 2019, they launched a Catastrophe Excess of Loss product on Corda. The product is designed for brokers, insurers and reinsurers to negotiate and place risks more efficiently by reducing manual activities related to placing, renewing and managing treaties.
In 2017, AXA launched Fizzy, a blockchain platform for flight delay insurance. Customers purchase flight delay insurance, which is recorded in a smart contract. The platform is connected to global air traffic databases and receives flight statuses. If a customer’s flight is delayed for more than two hours, the smart contract automatically triggers payment to the customer.
Customers don’t have to fill out claims forms or speak to service reps. The claim is deposited directly to their bank account. Customer satisfaction: maximized.
AXA does not have to spend time processing claims, verifying flight data, or enduring paperwork for payment authorizations. They save on time & cost and can deploy these resources to more profitable activities.
Update: Fizzy has since been discontinued after 2 years, possibly due to lack of appetite from the travel/airline industry. Regardless, Fizzy was a pioneer of sorts and has laid the groundwork for future blockchain insurance platforms.
Blue Cross’ blockchain platform validates claims data in real-time, which greatly reduces fraud potential from duplicate claims filing, for example. Claims are also processed faster for their 200,000+ customers. The platform also removes the need to reconcile claims data across parties such as insurers and medical service providers. Medical practitioners such as doctors and chiropractors who don’t employ many admin support staff could save time and money by partnering with Blue Cross.
Blue Cross’ blockchain platform is built on Hyperledger. Blue Cross is owned by Bank of East Asia.
Insurwave is a blockchain-based marine hull insurance platform launched in 2018. The platform was a collaboration among Ernst & Young, Guardtime, Maersk, Microsoft, and ACORD. It was built on R3’s Corda platform.
Insurwave provides real-time information on ships’ location, condition, and safety factors that both insurers and customers can access. If ships enter high-risk areas, Insurwave automatically factors this into underwriting and pricing calculations.
Premium calculations for this type of insurance are very complex. Having an immutable audit trail for ship-specific information substantially eases this calculation, enables accurate pricing, and speeds up underwriting. Insurers are also able to better account for ship-specific risks.
The Future of Blockchain in Insurance
These are still early days. Most of the work around blockchain in insurance is in the Proof of Concept stage and regulation is slowly catching up. However, we have already seen some applications that have gone live.
The ‘quickest win’ for blockchain in insurance is in the area of cost control. Rising costs are hitting insurers across most markets. Blockchain platforms and Dapps that allow firms to free up resources by automating claims management, fraud detection and data reconciliation, for example, will be heartily endorsed by executives.
The real win will be when blockchain platforms enable insurers to create better products and onboard customers faster — things that bring in revenue. For this to happen, we need a more robust ecosystem of insurers, reinsurers, tech companies and service providers working together on industry-standard blockchain platforms.
This has already started with software companies like R3 launching enterprise-grade blockchain platforms such as Corda Enterprise. We also have leading insurers involved in B3i that share common goals related to blockchain development. It remains to be seen if these natural competitors share enough long-term interests to sustain the initiative. If not, industry-wide blockchain adoption may take longer and become more fragmented.
However, the benefits are too obvious to ignore. We will probably see a few committed companies invest early in blockchain and enjoy a short period of above-normal performance, with early adoption coming from mature markets burdened with high costs as well as some parts of Southeast Asia (e.g. China, which proactively adopts tech). The rest of the industry will follow.