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Blockchain in Insurance

a hand holding a blockchain wrapped around earth

For years insurance has been the risk cautioner behind many businesses and industries. A practice that began as early as 4000 – 3000 BCE evolved into a multi-trillion-dollar industry blanketing other multiple industries in different forms.

While the insurance industry has witnessed its share of transformative technologies over the years, its size makes it unsurprisingly slow to adapt to modern, fast-paced technologies like blockchain that can simplify service delivery for insurance providers and enhance customers’ experience.

Blockchain is often centered around cryptocurrencies like Bitcoin. However, its application to industries that require the collaboration of several different entities like supply chain or insurance could disrupt how insurance services are designed, distributed, and consumed. However, significant obstacles lie in making such a feat a reality.

Recent State Of The Insurance Business

Insurance today is complex given the many outdated processes cogging the system. For one, policies are still processed on paper contracts, and customers still call by phone to buy new covers despite the rise of online insurance brokers. 

The different industry players – brokers, insurers, agents, reinsurers – maintain separate, non-interoperable records, eliminating data transparency. 

In such cases, the potential for human error is inevitable. Data can be misrepresented, tampered with, or lost, intentionally or otherwise, thereby endangering the customers’ funds. At least $80 billion are stolen from American customers by frauds in property and casualty insurance policies annually. 

There is a need to put in place a better system that guarantees security, service efficiency, and customer satisfaction.

How Blockchain Can Impact Insurance

Blockchain offers immense benefits to the insurance industry, whether on an intra-company, inter-company, or industry-wide scale. Let’s discuss a few;

Fraud Detection And Risk Prevention

The slow, paperwork-driven complexity of the current insurance industry creates loopholes that can be exploited for fraud. Insureds make multiple claims from different insurers on a single loss. This practice costs the US insurance market alone $40 billion annually.

With blockchain, insurers can store claim information on a shared ledger using public keys, enabling other insurers to collaborate and spot suspicious actions from a customer. By leveraging other blockchain-compactible technologies like AI and predictive analysis, insurers can better analyze data gathered from the public domain for fraudulent activities. 

Ease Claim Management 

Blockchain eases the insurance claim handling process by automatically generating information and data related to an insurance contract in the event of a loss through smart contracts. This eliminates the need for investigation or damage assessments that cost time and money to loss adjusters or damage inspectors.                            

Indemnity payments can equally be automated within a blockchain-powered claim management system. This is achieved by having the system check records of insured items immediately after a claim report, verify the loss, calculate premiums-to-date, deduct excesses, and transfer settlement to the insured. Blockchain reduces claim fraud by tracing and synchronizing data, rendering them tamper-proof, and eliminating data silos. 

Cost-Saving

A major benefit blockchain can provide insurers is saving costs. Since blockchain helps streamline insurance product development, administration, and underwriting, insurers can secure new businesses cheaper with current processes. 

The technology is estimated to generate $3.1 trillion in new business values for insurers by 2030.

Blockchain can lower the cost of handling claims by automating insurance coverage verification between companies and reinsurers and automating claim payments between parties. 

Streamline Compliance Processes

Insurance companies must strictly adhere to AML/KYC rules, and errors can be fatal for an insurer’s reputation. Blockchain reduces the risk of compliance error by establishing a tamper-proof repository of customer data and ensuring the safe sharing of such data across institutions.

Blockchain can reduce the time it takes underwriters to screen new customers’ KYC/AML information, especially if the customer data sources use the same blockchain network as the underwriters.

Since transparency is a core blockchain feature, regulators can easily check customer data handled by insurers, brokers, and reinsurers, improving oversight.

Enhance Peer-To-Peer Insurance

Peer-to-peer (P2P) insurance is a model where a group of insureds pools their capital to self-administer their insurance. Conventional P2P insurance groups can use blockchain to automate the collection and holding of funds in escrows on smart contracts, tracking participants’ data, and verifying eligibility to claim.

However, the biggest impact of blockchain on P2P insurance is the rise of decentralized insurance networks. These are community-backed, DeFi-powered P2P insurances built on blockchain networks and often available as alternatives to traditional insurance services.

Notable decentralized insurance networks are Nexus Mutual, CoinDcx, Opyn, and Etherisc.

Streamline Index-Based Insurance

In parametric insurance, payouts to a policyholder are made in bits when specific events that indicate the probability of a loss happens in predefined magnitudes. It doesn’t cover an actual loss.

Given the complexities of parametric insurance, blockchain can help streamline things, especially in auto triggering payout execution by letting digital feeds in a smart contract alert when predefined magnitudes of loss events occur. With blockchain, parametric insurance transactions can be settled without manual intervention.

Improves Reunderwriting

Blockchain can provide immense value to underwriters by easing the process of re-underwriting. Underwriters need not re-check or source a client’s static data during policy renewal. They simply retrieve it from a blockchain database for re-underwriting, making policy renewals faster.

Use Cases Of Blockchain In Insurance

Insurers are adopting blockchain for various uses in different kinds of covers. Here are notable applications of distributed ledger technology (DLT) in insurance.

Property and Casualty Insurance

Aside from helping P&C insurers onboard new clients quickly, blockchain helps them codify business rules and track and automate claim processes through smart contracts. 

P&C insurers can turn paper contracts into programmable code that helps automate claims processing and calculates liabilities. On the other hand, P&C policyholders can digitally track and manage physical assets and provide auditable evidence of a loss during a claim.

United Services Automobile Association (USAA), a US financial services group, and StateFarm, America’s largest auto insurer, used blockchain to create a solution that efficiently settles subrogation claims in auto insurance. 

Subrogation is simply a process where an insurer can reclaim the payout they made to their policyholder from the insurer of another policyholder who’s at fault in a loss.

Subrogation is usually done manually through the physical exchange of claim payout checks on a claim-to-claim basis. However, with blockchain, StateFarm and USAA exchange more than 70,000 subrogation checks annually – a number impossible to attain through manual subrogation.

Life Assurance

When a life assured dies, the beneficiaries can only access the claim through manual claim filing. Most times, the beneficiaries are unaware that the deceased had a life assurance in effect. Life insurance blockchain can help automate the claim filing process, easing such responsibility from a grieving beneficiary. 

To achieve this, all participants in a life contract – life assured, hospitals, and funeral homes must be involved in a blockchain network that is transparent to all. Smart contracts can be coded to trigger a claim process once information of dead life assured is entered into the database by any participant. The beneficiaries do not have to file claims at all.

Metlife, a global life assurance company, created a smart contract solution called LifeChain which they use to process life insurance claims in Singapore. The smart contract can investigate a potential claim and trigger a claim process based on an obituary printed in the media. To test this pilot, Metlife partnered with Singapore Press Holdings and NTUC Income, an insurance cooperative.

The smart contract works like this: 

When the obituary of a deceased person is posted in a Singapore local newspaper, the family members are asked permission to use LifeChain. Upon agreement, LifeChain encrypts the deceased’s National Registration Identity Card (NRIC) number and enters it into the portal. LifeChain then uses the placement of the encrypted NRIC number on the blockchain to search for a life insurance policy against that NRIC number. If such a life policy exists, LifeChain triggers an email to NTUC to begin the claims process.

Health Insurance

Patient confidentiality often prevents health insurance providers from accessing a proposed client’s medical history. This lack of data can prompt insurers to reject new businesses that may have been profitable.

Lack of data also costs hospitals nearly $300B yearly due to health insurance claim denials that cannot be challenged in court.

Through Blockchain encryption of patient information, medical information can be transferred to health insurers for better underwriting without damaging patient privacy.

Anthem, the US second-largest health insurer, is building a blockchain-powered mobile app that would make it easy for patients to control access to their medical data.

Anthem’s system stores healthcare data on a blockchain-based public ledger. From there, customers can grant insurers access to their medical records for a limited time, after which the access will lapse. This helps protect patient privacy while aiding health insurance underwriting. Anthem claims technology will help it process up to 300,000 transaction volumes weekly.

Reinsurance

Blockchain can reduce reinsurance risks by facilitating information-sharing among insurers and reinsurers. This is achieved by updating transaction data around premiums and losses on an insurer and reinsurer’s database.

The same process eliminates the need to reconcile books and helps automate claim processes, saving reinsurers billions of dollars in operating expenses annually.

A typical use case of blockchain in reinsurance is how B3i, a reinsurance company, launched a smart contract management system prototype for Property Cat XOL contracts – a type of reinsurance for catastrophe insurance that covers several insurance companies.

B3i stores each reinsurance contract on its platform as a smart contract with executable code on the same shared infrastructure. The smart contract evaluates data sources from participants of a catastrophic event (i.e., a loss) and automatically calculates payouts to affected parties. B3i’s prototype was the first of its kind in reinsurance and played a part in the company closing a Series B funding round in 2020.

These use-cases are only the start of massive adoptions, and the statistics agree. A 2020 research published on Accenture stated that 46% of insurers planned to integrate blockchain in the next couple of years, and 84% of insurers were confident that blockchain would revolutionize how they transact insurance business. 

Limitations To Distributed Ledger Application In Insurance 

While blockchain is a game-changer for insurance, industry-wide adoption will likely come with serious obstacles given the clash between blockchain features, fundamental insurance business practices, and industry regulations. 

System Scalability

Blockchain requires consensus validation from all parties involved in the network to store data. It also requires continuous replications and an ever-growing database as new immutable data is added. These combined factors make it challenging to scale blockchain systems easily.

High Future Cost

As blockchain popularity increases, the demand might shoot up the development cost, making it more expensive for insurance companies to adopt this new technology into everyday processes.

Privacy Issues

While blockchain’s famous cryptography keeps information stored on the network firmly secured from outsiders, they are still publicly available to parties of the network. If a criminal gains access to such information through a party, they could exploit them.  

New Security Threats

Blockchains hacks have drastically increased over the years as hackers found loopholes within weak systems. If an insurance network running on a blockchain gets hacked, all data belonging to players within the network are at risk. 

While blockchain hacks are far lesser than conventional database architectures, one hack can be devastating given the interoperability nature of blockchain. 

New Technology Risks

Blockchain is still new and undergoing changes year-on-year. The technology still lacks standardization in certain processes, and there is a little successful applied reference to work with. 

By integrating blockchain, insurers, brokers, and reinsurers know they are taking a risk (even with the potential to pay off). As such, they may hesitate to adopt the technology. 

Building A Blockchain-Powered Insurance Industry

The number of successful use-cases of blockchain in insurance makes it a strong industry disruptor likely to revolutionize how insurance is done. It’s not difficult to imagine a blockchain insurance industry in the future.

However, a lot of work still needs to be done before the insurance market can enjoy the full potential of blockchain.

The biggest challenge to industry-wide adoption is facilitating collaborations between insurance market players and technology leaders. Insurance companies need to align standards and processes related to blockchain for the technology to provide them with better tools for offering seamless insurance products to customers.

Insurers, brokers, and reinsurers must be willing to work together to create a market that offers highly secure, efficient, and affordable insurance services to end-users. The better the service offerings, the higher the revenue potential.

Blockchain needs further development to accommodate the insurance business’s high privacy and security concerns. We expect an evolution of insurance regulatory frameworks to guide blockchain adoption within the industry to protect customers’ funds and data.

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