Insurance, being one of the most conservative, centralized and walled industries, is awakening from its slumber and probing new technologies. Its shy yet solid interest in innovations, particularly in blockchain, is powered by customers’ increased distrust in centralized financial services, which has led to high rates of underinsurance.
Driven by both curiosity and fear, insurance companies seek to hire blockchain developers to help them out. Curiosity comes from blockchain promising to save time and lower transactional costs. At the same time, insurers fear this innovation as it can open up new approaches for cyber-attacks.
Let’s explore how insurance companies can adopt blockchain technologies safely and cease to lag behind other financial service sectors.
What is blockchain in insurance?
First things first, let’s define what blockchain is in the context of insurance.
The blockchain technology is based on the distributed ledger principle that eliminates the need for intermediaries. Copies of the shared ledger are stored across multiple users’ locations, providing any endorsed insurance company, agent, broker or underwriter with access to the same source of data updated in real time. All the transactions registered on a blockchain are verified and encrypted, while all the changes to the records are published as additions to the original data.
The practical application can look like this: With the help of blockchain, medical records can be encrypted and shared between hospitals and insurers (even across borders), thus cutting duplicated and erroneous records, lengthy claim processing, claim denials and excessive checkups.
How blockchain is implemented in insurance
According to the Accenture Technology Vision 2019 survey, more than 80% of insurance companies claimed they adopted or were planning to adopt the blockchain technology. It’s true: Many blockchain insurance projects are lingering at the proof of concept stage. However, to accelerate adoption, some companies choose to collaborate and form alliances, such as the Blockchain Insurance Industry Initiative (B3i) or the Institutes’ RiskStream Collaborative.
See also: Blockchain: Seizing the Opportunities
These trailblazing alliances develop blockchain-based platforms to make the following blockchain use cases possible.
Fraud and abuse prevention
Fraud costs the insurance industry monstrous amounts of money, mostly because it’s impossible to detect fraudulent activities with regular methods based on the use of publicly available data and private data sources. As a result, the accumulated data is usually fragmented due to legal constraints accompanying personally identifiable information.
Unfortunately, these gaps in visibility are being compromised by fraudsters. For example, multiple claims can be filed for a single case of care.
When data is stored on a blockchain-based ledger, it’s secured with cryptographic signatures and granular permission settings. It means that all the parties can share data and verify its authenticity without revealing sensitive information. A shared decentralized ledger facilitates historic data consolidation and helps companies spot suspicious patterns, such as:
- Multiple processing of the same claim
- An insurance policy’s ownership manipulation
- Insurance sold by unlicensed brokers
To attain even higher security, insurance companies can provide customers with encrypted digital ID cards that can’t be faked.
Boosted transparency and trust
Insurance companies are called walled gardens for a reason. Customers have little chance to see how their data is managed. For example, they will never know that their data is shared with third parties. It’s no wonder that customers grow distrustful of insurance companies, particularly when facing long claim processing times or receiving claim denials—while the cost of premiums is ever-increasing.
However, when multiple insurance companies choose to contribute data to the same decentralized and shared ledger, it can lead to three big advantages:
- Insurance companies can build more complete customer profiles and eliminate duplicate records. As the data in the blockchain ledger is immutable, the insurance companies won’t doubt its authenticity.
- Customers will get visibility into what data their insurers have on them, and how this data is processed. Plus, when blockchain is combined with machine learning and AI, claim processing can be automated, thus accelerating payouts.
- Blockchain helps automatically verify third-party claims or payments made through personal devices. Further on, the insurance company will be able to see all those transactions reflected on the blockchain.
Streamlined claim management
Selling and managing insurance policies is a labor-intensive process. In the context of high competition, insurance companies that stick to slow and paperwork-heavy traditional approaches lose to more digitally savvy competitors. The latter are able to offer lower premiums by automating claim management.
Some of the processes can be automated by means of smart contracts which are getting popular for property and casualty insurance. When used in combination with connected devices, a smart contract can trigger automatic claim processing when, for example, anti-theft sensors go off under certain pre-programmed conditions.
However, the truly streamlined insurance management requires increased trust from both insurers and consumers. The best way to reach this balance is to create a blockchain-based ecosystem with a considerable number of high-profile participants. A model illustration is the Bank of China, which has recently partnered with leading insurance companies and launched its own blockchain. Once new records are added to the blockchain, the distributed ledger technology helps update and validate the data against other records in the network, which significantly reduces operating costs, at the same time providing high security for transactions.
The distributed ledger technology also deals with one more factor that slows down claim management—the need for bank transfers. As a rule, customers don’t see payouts in their accounts for weeks. However, when banks and insurers have a single system they trust, the payouts can be processed without considerable delays.
See also: Blockchain, Privacy and Regulation
Blockchain is a decisive factor in transforming the insurance industry and helping it break free from outdated traditions. The need for innovation in insurance is critical—customers are craving transparency, speed and cost flexibility. Blockchain is designed to deliver on these desires and meet all the participants’ particular expectations.
When there’s little to no chance of fraud, people will trust their insurance agents more. When complex policy claims are processed 10x faster, there’s no room for friction. At the same time, when claim processing is automated, insurers have more possibilities to be flexible with pricing.
What’s more, the covered use cases are just the beginning. With more blockchain-based applications going live and more companies entering into collaborations, the insurance industry can grow its tech ecosystem to create better products for case management, audit and risk modeling.