Blockchain Applications in Insurance

Blockchain Technology Based Insurance

Blockchain Technology (also called Distributed Ledger Technology (DLT)) allows for the entire insurance industry to dramatically optimize business processes by sharing data in an efficient, secure, and transparent manner. Using blockchain to revolutionize insurance policies shifts systems onto smart contracts operating automatedly on peer-to-peer networks, helping to phase out antiquated pen and paper processes and eliminate red tape the insurance industry is notoriously riddled with.

As the key mechanism for automated event-based transactions and immutable data storage, blockchain technologies are reshaping the insurance landscape completely. Existing inefficient insurance models are beginning to erode thanks to competing, highly efficient blockchain-based insurance tools and platforms. There are substantial benefits insurance companies and those seeking insurance policies can gain from using blockchain technologies. DLT works to reshape back-office operations as the blockchain technology dramatically improves transparency and security in favor of all involved parties. This is notably favorable from an auditing and regulatory perspective. Those insurance companies implementing web 3.0 solutions early on are set to have key competitive advantages in the insurance sector for years to come.

The existing insurance infrastructure we love to hate is slow, expensive, and often requires several intermediaries. The bureaucratic and costly nature of the business makes having and administering comprehensive insurance plans challenging. Many new blockchain innovations are entering the insurance market across all categories, from cars to health care and improving workflow and helping to cut overhead dramatically while allowing entities to deliver better, more secure insurance plans to businesses and individuals.

Now insurance companies and fintech startups are starting to use blockchain platforms to prevent fraud, track records, and automate processes. This is just a preview of what is to come in the next decade for blockchain applications in insurance.

What is Insurance?

To understand how blockchain applications work to improve the insurance industry, first, we need to understand the primary actors that create, distribute, and hold policies. Insurance is protection against financial loss. It is a way to manage risk through a third-party. Historians can date the existence of insurance coverage back to the Babylonians circa 1750 BC as outlined in the infamous legal Code of Hammurabi.

Any insurance policy exists as a contract between the insurance company (the insurer) and the policyholder (the party covered by the policy). Policyholders purchase a liability policy to protect their property, assets, and self.

If the policyholder gets in a car crash, for example, the insurance company will pay the amount detailed in the policy after the person insured makes a claim. The insurance premium is paid on a monthly basis, and the policy will cover a pre-determined amount in the event of an accident or legal action taken against the insured party. After the “policy term” is up, the holder will need to renew or get a different policy to make sure they are continually insured.

Companies “underwrite” to evaluate the risk they take on when specifically insuring you, or your car, house, or business. The higher the risk calculation, the higher your premium or the company might not want to insure you or your assets at all in some cases. Policies all have deductibles which you will have to pay out of your own pocket before the policy begins coverage. Say your car accident cost $8,000 and your deductible is $2000, the insurance company will only cover $6000 in damages.

There is insurance for nearly everything nowadays, and insurance companies are notoriously bureaucratic. Making a claim or finding the right policy can be a frustrating and challenging experience. Outdated technology permeates every aspect from administrative to operational and trickles down making for an unpleasant customer experience. The pen and paper operations of the modern insurance company also contribute to skyrocketing premiums.

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The Benefits of Decentralizing the Insurance Industry

So now that we understand how the insurance industry functions without blockchain technology integration let’s discuss the benefits distributed ledger technology could bring to the table for both insurers and policyholders.

• Streamlined

Decentralizing the insurance industry will help streamline underwriting, claims, payment, and the reinsurance processes. There will be fewer players involved in all transactions and processes from start to finish making the process quicker. One of the main benefits of blockchain technology is that it is ultimately faster than any Web 2.0 solution. With the automating power of smart contracts, you may not even need a representative to make a claim. Smart-contracts can trigger actions automatically upon a specific event. This eliminates the need for several third-party intermediaries. Another big benefit is automated payment via smart contract.

• Higher Security

Blockchain provides quality security through decentralization. Instead of storing all data on central server or having a single entity control all information, insurance can operate on a peer-to-peer distributed network that provides advanced protection. It not only helps insurance companies avoid getting hacked or suffering through a costly server crash, it gives customers peace of mind that their information cannot be so easily bought or sold.

Blockchain also has excellent potential for identity verification and document authentication to help prevent fraud. The peer-to-peer network can also help to notarize documents and guarantee identity without the help of a third-party.

• Lower Overhead

With all the automation that smart contract technology has to offer and the added layer of security and transparency thanks to distributed ledger innovations, blockchain integration inevitably lowers costs. As things become error-free, trustless, and faster the price of insurance premiums will drop. Blockchain is projected to be able to reduce fraud by 15%-25%. Additionally it will work to reduce all of the expenses that are incurred along with insurance fraud saving up to $10 billion industry-wide as a result. Those savings will trickle down from insurance companies to the average insurance customer. Secure and transparent data helps to lower overall costs through decentralization.

• Better Data Storage

Blockchain acts as a “single point of truth” for all involved parties. Data becomes immutable and therefore more reliable. Data stores will be more accessible and in a more secure way, opening the doors for real-time statistics and analyses to improve operations and further cut costs. The more reliable the data, the less room for error and the better insurance companies can meet the ever-changing needs of policyholders.

How Different Insurance Verticals Can Use Blockchain

We live in an increasingly insured society. There are so many different kinds of insurance from pet insurance to accidental death insurance; if it exists, there is a way to insure it. Here are some of the main insurance verticals that could benefits from adopting blockchain technology.

• Health Insurance

Health Insurance is the largest insurance vertical in America as it is illegal to go without insurance and we do not operate on a single-payer national healthcare delivery system nor do we have universal coverage. Most personal bankruptcy happens due to health care related costs.

Blockchain can improve not only health insurance, but how health care providers operate. Health insurance helps to connect medical institutions with patients through advanced data analysis. It can also help those without coverage get covered faster, more comprehensively, and more affordably. All major healthcare players have something to gain from distributed ledger technology. Decentralized applications in healthcare can help match patients with providers in their area and automate the coverage process.

• Car Insurance

Blockchain can improve the auto insurance industry by assisting drivers in getting more affordable quotes and resolve their accident claims faster. There will be less associated paperwork, and this will make underwriting easier as all data related to previous damages and repairs to any vehicle can be stored in a decentralized public ledger making estimating the ‘Actual Cash Value’ of any automobile an automated task.

• Life Insurance

The life insurance industry has a lot of very involved paperwork, and the payout system is often subject to snafus making it difficult for beneficiaries to receive funds. Distributed ledger technology can combine the death claims and death registration processes by connecting insurance companies, funeral homes, the government, and beneficiaries. Event-based smart contracts could automate processing to benefit all of these players saving them time and money.

• Travel Insurance

Travel insurance is the least involved perhaps of all these examples and could benefit from a decentralized mobile application to allow for micro-insurance on short international trips without the hassle. It would encourage more global coverage as we live in an increasingly borderless world. Bringing blockchain technology to the travel insurance industry can help protect travelers in the event of a flight delay without having to make multiple phone calls.

Use Cases for Blockchain Applications in Insurance

• Claims Opportunity

Claims make up a large percentage of operations at insurance companies. Custom smart contract code can accommodate the parameters of a policy and execute action automatically through trustless identity verification. The smart contract can act as a purse for funds that are not controlled exclusively by either the policyholder or insurance company. The funds can then be automatically directed to the correct party when a verified event (a claim) triggers the digital contract on the blockchain. Settling a claim can take days or weeks, and smart contracts can settle claims instantly without the need for paper documents, photocopying, and complex web portals.

• Reinsurance

Reinsurance is when multiple insurance companies share the risk by purchasing insurance policies to offset the potential loss in case of significant incident or disaster. Blockchain could be a real asset within this space working to help automate calculations and rebalance. It can track funds available for claims and help companies assess financial risk and improve overall reinsurance strategy, saving both time and money.

• Customization

Advanced technology can help attract customers with lower costs and more customized, easy-to-use interfaces. It is difficult to receive truly personalized or customized insurance policies at a reasonable rate. With increased transparency thanks to the public ledger, customers can onboard their data more securely and if they wish to share that data with other entities to onboard quickly for other insurance purposes. With public-private key technology, their data does not have to be linked to their identity, protecting them while still allowing them to benefit from automated policy customization and easy-to-transfer personal profiles.

• Real-time Claims and Payment Automation

Personalized payment plans and policies can now operate seamlessly for both insurance companies and policyholders using event-triggered smart contract technology. As events occur in real-time information from different systems work together to process the claims automatically and payout policyholders or have policyholders pay their premium or deductible. This makes for an improved customer experience and prevents loss for insurance companies while decreasing personnel related overhead.

• Parametric Insurance

Filing claims is an incredibly involved process without a reliable or calculable outcome in certain circumstances. Parametric insurance functions to provide more exacting terms and conditions in the event of an accident. Parametric insurance decreases administrative workload in a claim settlement process as it is event-based policy, not dissimilar to how a smart contract works. The smart contract is the ideal piece of technology for an already event-triggered insurance policy, now rather than a person verifying the claim it can all be automated via smart contract. While parametric insurance is not as frequently used as other policies and insurance plans, parametric insurance could become an industry norm thanks to blockchain technology stepping in as the perfect vehicle to manage these more customized policies.

• Underwriting

 The underwriting process takes a highly skilled and qualified individual to determine how much coverage a policyholder will get and how much it will cost. It takes high-level data analysis to underwrite, and it is currently a very time intensive process. Using blockchain data storage management and analysis tools, underwriters can decrease risk liability and automated the policy pricing process, leading to a more cost-efficient insurance model and customer-friendly experience. It can also bring an element of transparency to the underwriting process to help build trust between customers and insurance companies that is a present pain point.

• Big Data

Data management and more efficient storage might be one of the most significant use cases for insurance companies. It can improve not only data storage and security but how data is transferred and shared to streamline processes that involve multiple parties and are authentication-heavy. Blockchain can help insurance companies plan for a better future and improve how they distributed policies and settle claims daily. Using timestamp and digital fingerprinting, a more transparent, private, and secure repository for shared data is created. This helps to facilitate more affordable coverage delivered trustless-ly and seamlessly.

Conclusion

As the insurance industry exists to help manage risk, why not use the best technology available to help improve how we use policies. From the underwriting process to claims to monthly premium payments, all aspects of the insurance sector can become faster, more transparent, and more secure savings billions from company to customer. Blockchain technology adoption is the key to accessible insurance for all.

Blockchain will slowly integrate working to eradicate the old ways that cause fraud, general inefficiency, and cost inflation. More personalized insurance to meet individual needs will become more accessible as the data collected can be updated in real-time and distributed with customer permission separate from one’s identity. Parametric insurance as the norm is the next frontier coupled with automated underwriting and claims. Data attached to personally identity will no longer be a commodity bought and sold, infringing on customer’s privacy. Instead, that data will be used to can be used to guide insurance companies so they can improve how their policies function. They can begin to provide better services to individual customers and businesses.

Additionally, immutable, tamper-proof records bring more reliability and eliminate the need for third-party verification, which helps make things like settling claims faster. As we live in an increasingly global world, insurance will need to span across borders more frequently and eliminating pen and paper from that service aids in its ability to insure across time zones.

Any document and personnel heavy industry can benefit from the wonders of distributed ledger technology as a means to streamline bulky processes. Savings on the industry end, however, might not automatically translate to the average customer; initially integration might absorb the costs needed to make the switch. While blockchain technology will certainly disrupt the insurance industry as we know it today, it might just serve those insurance companies helping them to make money while improving the customer experience; it might not help the customer wallet. While the peer-to-peer network is decentralized, insurance companies are centralized risk management corporations that operate for-profit.

Still, everyone has something to gain from using web 3.0 solutions to improve the currently bureaucratic, error-filled, and time-consuming policy underwriting and claims settlement procedures.