Blockchain in Insurtech: How to Benefit from the InnovationWritten by Michael on April 19th, 2017
Get to know the key blockchain in insurance use cases outlined from the business perspective.
In game theory, there is a puzzle called The Byzantine General’s Problem. The scenario is simple: a military general has developed a strategy for an attack. But he is pretty certain that there are traitors in the midst of his rank and file. He does not know who to trust. So, how does he can get the plans disseminated to his troops without them being sabotaged by the traitors? Who can he trust and how can he figure out who to trust?
Trust is a big issue. That is why we have lawyers, use banks, and get our documents and contracts witnessed and notarized. But what if there was a way to eliminate the trust issues with a technology that is virtually infallible? This is the potential of blockchain technology applications for any sector that has traditionally relied upon some authority who can be trusted – the financial industry or the insurance market, for example.
Blockchain Technology Explained
Most people associate blockchain with Bitcoin, a cryptocurrency that is complex and difficult to understand. And because Bitcoin does not rely on an “authority” to record and validate every transaction, Satoshi Nakamoto (probably a pseudonym) developed blockchain technology to fuel it. Even he may not have understood the full reach of what he had developed. Here is how it works:
- Every transaction is digitally recorded.
- That recorded transaction is “public” and anyone can see it. It sits in what is called a “distributed ledger.”
- The integrity and the chronological order of transactions are enforced by cryptology, and the transactions are held on multiple nodes.
- No one can erase the transaction, and because it cannot be erased, no one has to trust an authority to keep it safe (or trust one another either). Everyone has the information so “cheating the system” is impossible.
Blockchain applications now have the potential to fully revolutionize such things as election processes. But even more, it can and is already disrupting large sectors of the economy. Consider just one of the simple blockchain uses in banking, for example. An individual makes a deposit into his/her account. That transaction becomes part of the distributed ledger – no bank clerk entering it into the bank’s computer system and providing a receipt. The deposit is permanently stored and cannot be deleted. The depositor is free to conduct other transactions (e.g. pay bills) with his/her funds, all of which can be stored on that distributed ledger as well. The bank clerk becomes obsolete, or redundant.
Now, how about the traditional insurance broker or agency? Are there practical applications of blockchain technology in Insurtech that may make these individuals/companies obsolete or redundant as well?
The answer is “yes.” Blockchain technology will eventually fuel the insurance industry as well. Those brokers, agencies, and even large insurers who fully understand the implications of blockchain technology will also take steps to incorporate it. They will develop new products; they will create smart contracts; they will use the technology to streamline the claims process. When they do all of this, they will be able to offer insurance consumers the lower costs and the efficiency they want and demand.
Ignoring the inevitable, by clinging to traditional practices, will mean the loss of customers and eventual obsolescence.
Blockchain Technology in Insurance
Technology is already changing the insurance industry, a $1.2 trillion sector of the global economy.
According to a J.D. Power insurance shopping study in 2016, 74% of consumers shop for insurance online. And consider these other trends:
- Consumers embrace IoT technology that allows devices to be placed on their cars, so that safe driving can lower their premiums;
- They incorporate “smart home” technology to reduce risk and lower insurance costs.
- And underwriters now have access to data that allows them to determine risk more accurately and assign premium costs accordingly. InsureTech, as it is termed, is modernizing the industry.
These are all innovations within the industry, not disruptions. The real disruption is already coming and will continue to come from blockchain in the insurance industry. And to remain competitive, insurers must get on board or go the way of the old milkmen – they will become irrelevant.
How Blockchain Technology Can Be Used in Insurance
The insurance industry has two major facets – products that are offered (and the contracts that go along with them) and the processing of claims by the insured. The traditional “authorities” in the industry are such people as underwriters and claims adjusters. Blockchain for insurance has the power to transform these two functions by creating innovations in niche coverage, lowering premiums, and simplifying/validating the claims process by providing transparency – resulting in immediate payments and the prevention of fraud.
Products and Contracts
Three product disruptions have hit the insurance industry, and blockchain technology is at the forefront of these disruptions – peer-to-peer insurance (P2P), parametric insurance, and microinsurance.
The concept is simple. It is based upon the new “sharing economy”. Policyholders pool themselves together. If there is a claim, they all contribute financially to that claim. If there are no claims, then premiums are reduced. Blockchain technology maintains the ledger of claims and premiums paid. This entire concept and technology take the traditional insurer out of the picture.
One such example of the use of P2P blockchain in insurance startups is Dynamis, a protocol that provides supplemental unemployment insurance to its policy holders. Software code automates the underwriting and validates claims – no large insurers or human underwriters needed. There are major implications of this insurance concept for health insurance as well, where policyholders can pool their premiums and cut out major insurers.
The smart insurer – agent, broker, company – will get on top of this and create peer-to-peer products that result in cost savings for the customer. The profit for the insurer, of course, comes from the increased customer volume and the lower overhead costs that blockchain provides.
Again, the concept is simple. This type of insurance does not indemnify the actual loss. Instead, through smart contracts, the insured agree that payments will be made when a “triggering event” occurs – usually a natural disaster. Blockchain technology validates the disaster and the policyholders and makes a set payment to those policyholders.
Rainvow is perhaps parametric insurance at its simplest, but it can demonstrate just how blockchain and insurance are very compatible “bedfellows”. The insured purchases short-term contracts against weather events and their transportation needs. So, if a torrential downpour requires the need for an Uber driver as opposed to exposure to the downpour, the insured’s cost is covered.
Now expand that simple weather-related coverage to a globally insured pool relative to earthquakes, for example. The insured would receive, through their smart contracts, a specific percentage of the claim. Blockchain allows this to happen quickly – no adjusters, no lengthy claim paperwork, etc.
The insurer has benefitted in a couple of ways:
- Overhead costs are at a minimum, resulting in big savings.
- Customers are satisfied that their contracts have been honored and payments were received quickly. Satisfied customers stay and refer others.
Now consider car insurance. We already have technology that monitors driver behaviors and assigns premiums based upon that data. Suppose that blockchain technology allowed immediate assessment of a fender-bender in real time, uploaded that information to a blockchain, and an immediate payout was made to the insured. Claims adjusters are now the “milkmen” of the industry.
The broker/agency/company that can offer this streamlined process will have the competitive edge and, because the entire process is so automated, can focus on marketing and new customer acquisition.
This is an area in which the “big boys” in the insurance industry have little interest. However, the benefits for low-income people in remote regions of the world are clear. They can pool their risk, with small premium amounts, and blockchain technology can receive their claims, validate them, and make a payout. This blockchain technology can also be used by philanthropists who wish to pool their donation funds, track how those funds are used, and prevent fraud. The Italian-based Helperbit uses blockchain technology in this sector.
In terms of how blockchain technology is transforming insurance, one need look no further than the implications for cheaper, consumer-oriented products that will begin to eat away at the policies and premiums of larger insurers. Ideally, there should be cooperation and collaboration among blockchain startups, brokers, reinsurance third-parties, carriers, etc. to embrace the new technology, so that both consumers and those in the profession can thrive. That likelihood is on the horizon, and those in the industry who resist may find themselves obsolete.
Claims Processing – More Blockchain in Insurance Use Cases
The traditional claims process, to which both the insurer and insured are currently subjected is complex (at least for the insured who must try to understand the legal jargon of their contracts), time-consuming, and seriously subject to dissatisfaction and fraud. Indeed, the potential for fraud and the losses involved are actually figured into premium costs for everyone. There is a smarter way, and blockchain technology can provide it. Here are a couple of use case examples.
Criminal Activity and Fraud in the Insuring of Valuables
Jewelry, works of art, classic cars – all of these things are traditionally insured by carrier policies and contracts. When a loss occurs there will be an investigation, of course, and a resultant payout to the insured for that loss. There are industry-wide problems here, and blockchain can provide opportunities to address them.
Everledger, a UK blockchain insurance startup, for example, has incorporated the technology to create a distributed ledger for precious stones, specifically diamonds, so that insurers and potential purchasers alike, can track the history of a stone, insurance claims on it, police reports, etc. So far, this is an attempt to mitigate the £2bn annual cost to insurance companies in the UK alone.
The wider implications are clear – what if blockchain technology could be used to track the history of any item of value being insured or sold?
Car Insurance Claims
If there was ever an opportunity for fraud, it is in the car insurance industry. In the UK alone, it is estimated that accident fraud costs insurers £400 million annually. Typical scams include criminals deliberately causing accidents to collect payouts, or “gangs” of fraudsters holding multiple policies and collecting on them all for the same accident.
This, of course, raises premiums for everyone, and honest consumers are looking for other options as a result, some turning to peer-to-peer InsureTech solutions.
Blockchain technology, implemented by current insurers, can mean that claims will be managed transparently, responsively, and quickly. Multiple claims for the same accident will be detected and denied; smart contracts will allow immediate payout for a valid and verified claim. Consumer demand for efficiency and lower premium costs are thus achieved. An insurance company that can perform in this manner will retain customers and acquire new ones.
It’s No Longer a Question of “If”. It’s a Question of “When”
The future of the insurance industry can be bright for those in the industry who understand the importance of the adoption of blockchain technology and are able to provide contracts, products, and claims processing that meet the evolving needs of consumers. It means that insurers will have to make some real paradigm shifts in their thinking; it also means that they will need to find the consulting resources to develop blockchain technology for their enterprises.
If you are ready to get the competitive edge, Romexsoft can be your “go to” outsource resource for blockchain development. Our portfolio includes exceptional solutions for the financial and insurance sectors.