For years, the traditional insurance business model has proven to be a surprisingly resilient one. However, traditional insurance is beginning to feel the digital effect as emerging technologies change the way consumers interact with businesses and how products and services are delivered. There’s a general perception that the global insurance industry lags behind other financial service sectors, leaving much to be desired in terms of cost-savings and efficiency. There are also major issues concerning fraud, human error and cyber attacks.
Enter blockchain technology: a distributed and decentralized public ledger that is the record-keeping technology behind bitcoin. Blockchain transactions are free to use and have the potential to completely change the way insurance is contracted. Blockchain optimizes efficiency, security and transparency for the entire insurance industry, using public ledgers and fortified cybersecurity protocol. In fact, many sectors already utilize this technology, including (but not limited to) companies providing and trading renters, homeowners, unemployment and travel insurance.
How does blockchain technology work?
We love the way Block Geeks explain how blockchain technology works – “Picture a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine that this network is designed to regularly update this spreadsheet and you have a basic understanding of the blockchain.”
Blocks on the blockchain are comprised of digital pieces of information that exist in three parts. The first is stored information about transactions like date, time and dollar amount of a purchase. The second is stored information about who is participating in those transactions. The third is stored information that distinguishes one block from all other blocks.
According to Investopedia, in order for a block to be added to the blockchain, four things must happen:
- A transaction must occur
- The transaction must be verified
- The transaction must be stored in a block
- That block must be given a hash, or a unique code
There are many advantages to using blockchain technology including improved accuracy by removing human involvement, greater user privacy and security, lower processing fees, and decentralization that makes it harder to tamper with the technology.
Blockchain is currently used by a variety of industries for many different reasons. Some real-world uses include connecting musical artists and licensing agreements (Spotify), keeping track of status and condition of every product in a supply chain via a shared record of ownership and location (IBM Blockchain), and even translating key insurance industry processes into blockchain-ready procedures (Accenture). However, the opportunities for blockchain are truly endless.
Blockchain technology meets the insurance industry
The insurance industry has been around for centuries, but unfortunately, its processes are still very much stuck in the past. Many policies are still processed on paper contracts, consumers still call by phone to purchase new policies, the list goes on.
All things that lead to risk-associated steps in which information can be lost, tempered with, and misinterpreted. In fact, almost half of the 143 U.S. insurers surveyed by the Property Casualty Insurers Association of America and FICO said that fraud accounts for five to 10 percent of their claims costs. There’s much left to be desired in terms of security, efficiency and customer satisfaction.
While blockchain is the hopeful solution, it won’t come without its obstacles. Insurance companies must overcome regulatory and legal hurdles before fully embracing blockchain technology. There are a number of blockchain features that could be inconsistent with current insurance laws. For example, personal customer data and their policy information residing on blockchain must comply with existing privacy and data protection regulations. In addition, decentralization strengthens information sharing and reduces advantages that information asymmetry provides. This provides new challenges for management in pricing, product development, claims services and more.
Insurance applications for blockchain technology
Property & casualty insurance
Property and casualty insurance consists primarily of auto, commercial and home insurance. Net premiums written for this sector totaled $558.2 billion in 2017. Processing claims requires significant manual entry, which leaves room for human error. Blockchain technology could make claims processes three times faster and five times cheaper using blockchain technology. By using shared ledgers and smart contracts (software that checks for certain transactions in the network and automatically executes actions based on pre-specified conditions being met) to issue insurance policies, the claims and payment processes can be automated to create more efficiency and accuracy. Smart contracts have the ability to turn paper contracts into programmable code that helps automate claims processing.
The health insurance industry is filled with inefficiencies in its processes, like duplicated medical records, manual claims processes and inaccurate record keeping. There’s much to be improved in terms of efficiency and accuracy. Because of this, interoperability of systems and devices is crucial to ensuring that medical professionals provide sufficient care to patients, but successfully achieving interoperability within a medical system isn’t easy.
With blockchain, medical records can be cryptographically secured and shared between health providers, promoting interoperability and increased security within the health insurance ecosystem. Patient medical records can be stored safely and return control of medical data to patients, giving the industry the opportunity to save money and increase patient satisfaction.
Fraud detection & risk prevention
According to the FBI, the cost of insurance fraud in the U.S. is more than $40 billion a year. The outdated nature of the insurance industry’s processes leaves room for error and potential fraud. To combat this, insurance companies could store claims information on a ledger that would help them communicate and identify suspicious behavior.
The impact of blockchain technology
The insurance industry is notoriously slow to embrace new, more efficient processes. Blockchain can introduce enormous benefits to both companies and their customers, but there are certainly limitations.
- Enhances efficiency – Because so many processes are manual and time-consuming, blockchain can streamline paperwork and reconciliation for insurance contracts.
- Increases trust – Cryptography in blockchain ensures that transactions are secure, authenticated and verifiable, ensuring customer privacy.
- Claims processing – Blockchain enables real-time data collection and analysis, which could make significantly speed up claims processing and payouts.
- Smart contracts – These programmable contracts contain logic that is automatically executed when predefined conditions are met. “Because these if/then contracts reduce paperwork on the back end, they will become the insurance equivalent of no-frills airlines,” said Jeff Stollman, Principal Consultant at Rocky Mountain Technical Marketing. “They will be cheap to administer and less costly than more robust policies, and payment can be immediate.”
- Prone to cyber attacks – The global blockchain market is expected to be worth $20 billion in the year 2024. With so many new users every day, blockchain is becoming more prone to cyber attacks.
- Loss of integrity of data – Integrity of data must consider the validity of every transaction, which brings fraudulent insurance transactions into question. Blockchain must protect against fraudulent activity to ensure integrity of data.
- Cost of operations – As blockchain becomes more and more popular, it will become more expensive for insurance companies to adopt this new technology into everyday processes.
- Blockchain privacy – In cryptocurrency (like bitcoin), blockchain is publicly available, with means every transaction can be traced back to its original block. That information can potentially be accessed by criminals looking to exploit that information.
Moving towards a blockchain-powered insurance industry
While blockchain shows promise in improving the insurance industry from every angle, the technology is still in its infancy. There is so much unknown about the true power of this technology. However, there are some start-up companies leading the way with blockchain, exploring the benefits to how this tech could improve business processes and customer satisfaction in the insurance industry.
Beenest is a decentralized home sharing platform (similar to Airbnb) that allows users to book homes using the company’s Bee Token. This company developed blockchain-based homeowners insurance for Beenest homeowners. Lemonade combines distributed ledger technology with artificial intelligence to offer insurance to renters and homeowners starting at $5 per month. According to Lemonade, their business model takes a fixed fee from each monthly payment, then allocates the rest towards future claims. When a claim is made, the blockchain’s smart contracts verify the loss immediately so the customer gets paid quickly.
While there are first-movers paving the way for blockchain in the insurance industry, there are still hurdles stopping companies from fully embracing this technology. Insurance companies must align around standards, processes, regulatory and legal frameworks to implement blockchain.
What’s next for the future of insurance?
While blockchain can improve the industry in accuracy, efficiency, privacy and more, it’s incredibly important to understand that every single insurance company that embraces blockchain must agree to operate under ethical standards. Standards and processes must be aligned in order for blockchain to provide insurers with better tools for collaborating, sharing data, and making insurance processes less of a headache for customers.
Because the industry has high privacy and security concerns, blockchain must be developed further to meet the standards of insurance companies before it’s really feasible. Also, insurance companies must provide clear regulations frameworks in order to safely utilize blockchain technology. Once these needs are met, blockchain has the ability to transform the insurance industry for companies and their customers.