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A Vision for 2028, Powered by Telematics

It’s 2028. The world’s population stands at more than 8 billion. In the past decade, we’ve added a billion people, and we’re living in a hyper-connected world.

Our smart tools are diagnosing a growing number of conditions—taking your pulse and counting steps was just the beginning; the smart tools of 2028 detect all kinds of vitals to accurately diagnose a number of ailments and diseases.

Even our roads have changed. Today’s glass-topped highways are beautiful stretches of solar roadways embedded with a multitude of sensors aligned with the self-driving cars traveling on them, preventing accidents.

Insurers have figured out ways to underwrite and insure all that autonomy in all of its different modes. The same is true for transportation-as-a-service. And, we’re already discussing how to regulate and insure the next generation of vehicles – custom, 3D-printed, flying cars.

The pace at which all of this has happened is amazing. But the big question is, how did we get here?

In a word, telematics.

Telematics – aka the Internet of Things – changed everything since it started interacting with all of our lives years ago. For insurance, it started with underwriting and data monetization. And, although there were a lot of interesting early results, there wasn’t a lot of uptake or market success.

That all started to change in 2018.

Data exchanges started to come out. Telematics data (from OEMs, mobile devices or OBDII devices) started to funnel into one place, normalized and ready for insurance companies to use to make attractive offers to subscribers. Insurers could also use the data to innovate.

At the time, CCC was already working with its data exchange, CCC X. Our systems had already processed more than 50 billion driver miles. In retrospect, that time really was the turning point for telematics. As an industry, we saw the checkerboard get filled up—slowly at first—by forward-thinking companies that were making investments in telematics technology. 2018 was a turning point for the auto insurance industry.

The real tipping point started to come when we looked at other use cases for telematics data. Those cases vastly increased the adoption of the technology and made it much more mainstream. On top of that, telematics was combined with other technologies and innovations of that time, and that was what really sent us on a rocket ride.

When early use cases evolve, things get exciting

In 2006, cell phones were mainly used by people making phone calls. Remember how fast it all changed when the first smartphone came out? What really made cellular technology take off was when the smartphone became your calendar, your music collection, your newspaper. It became how you bought products. It was everything, and everyone had to have one. And remember the companies that were slow to adopt? They had a tough time.

In 2018, it was exactly the same with telematics. New use cases opened up the future and enabled innovation.

See also: It’s Rush Hour in Telematics Market  

In April of that year in Cypress, Texas, CCC began working with State Auto to ingest telematics that would enable connected claims. With a flip of a switch, a 100-year-old accident triage process was changed. Suddenly, State Auto knew about a crash seconds after it happened. And what did they do? They picked up the phone, called their customer and said, “We see you’ve been in a crash. How can we help?”

One hundred years of process was flipped on its head overnight. Customers were amazed. That was the beginning of when people started to ask themselves about how things were done.

The moment when change happens

Up until this point, the three fundamentals of the insurance process were set in stone: I own my car, I drive my car, I call my insurance company when I get into an accident. After telematics, people started to think differently.

  • I own my car. Do I? Remember, new modes for transportation as a service and driving subscriptions, among other innovations, started to become a more widespread conversation. People started to consider that maybe they didn’t need to own a car.
  • I drive my car? Do I? 2018 was also right around the time when self-driving cars and taxis started hitting the streets of Singapore, Tokyo and Las Vegas. Maybe I don’t have to drive my car?
  • I call my insurance company when I get into an accident. Should I? As mentioned, on April 26, 2018, we found that maybe that was no longer necessary or always true.

Another flashback. In 2018, we also introduced the capability to determine injuries from telematics-powered crash dynamics. We used the data to understand the principles of force and delta V and used that to detect what kinds of injuries the people in the car may have, the potential severity of those injuries and what the range of medical treatments would likely be. That came together to allow our customers to treat people with the same efficiency and process as we were able to repair the car.

Finally, around this time telematics was applied to the repair. Cars were getting a lot more complicated, and there were a lot more sensors, more diagnostic trouble codes (DTCs), etc. Cars were capable of sending data right from their computers straight to the repair shop to make repair faster and more accurate, helping to ensure those increasingly complex cars were getting fully repaired and safely returned to the road. The change greatly expanded the use of telematics.

But what really lit the match was when those telematics use cases started being combined with other innovations of that period.

See also: Advanced Telematics and AI  

Photo analytics in estimating? Check. Insurers were already using AI to instantly detect from one photograph the likelihood a car was repairable or a total loss. AI was used to build the estimates themselves, using photographs and the help of telematics data.

From there, mobile and smart technologies enabled the detection of an accident all the way through to the disposition of the vehicle. The experience was self-guided and highly efficient. The person in the car accident was interacting with shops and insurance companies to get the job done in a streamlined way.

All of these new possibilities were suddenly at our fingertips. That crash in Cypress, Texas, if it was serious enough, would have the tow truck quickly dispatched to pick the car up. Or, if the injuries were serious, an ambulance could get there more quickly, saving the customer’s life.

Continued acceleration

After 2018, the acceleration of technology innovation went through the roof. That’s how we got to the world we live in today. We were struck with this awareness of exactly how telematics and photo analytics are going to lead to a new world order. The future became clear.

Those that got in early with those data exchanges and started using telematics for UBI purposes started to gain an understanding of data and chip away at the learning curve. They improved their book of business. They added use cases, detected crashes and delivered better injury disposition for customers and better repairs.

Those experiences and that knowledge base got them to a point that, when the autonomous vehicles started coming in all different modes and configurations, they were ready to price the risk. When the transportation as a service option started coming up, they were ready to go.

Innovation is always the same. It doesn’t matter if it’s 2018 or 2028 or 2058. The timeless advice about innovation is this: You need to adopt as early as possible. You need to give yourself permission to fail, the opportunity to learn and the time to get it right. When that match gets lit, you are ready to take the rocket ride to the future. Stay brave and power forward.

UBI Is Not Usage-Based–Sorry!

Usage-based pricing is a fascinating topic for insurers. A technology that allows persistent monitoring of risk exposure during the coverage period could potentially enable insurers to price each risk at the best rate.

The potential, however, is not the reality.

In 2017, 14 million policies sent telematics data to insurers around the world, of which 4.4 million were in the U.S market, based on an estimate by the IoT Insurance Observatory, an insurance think tank that has aggregated almost 50 insurers, reinsurers and tech players between North America and Europe. (In the U.S., there were a further 3.6 million policies that are still active and commonly defined as telematics but that in the past had a dongle only and didn’t send any data to insurers last year.)

However, less than 9% of the global insurance telematics policies were characterized by usage-based pricing, which is a mechanism that charges the policyholders for the current period of coverage based on how they behave (mileage or driving behavior) during this period.

Instead, the vast majority of the telematics policies bought by customers around the world today have a defined up-front price for the current policy term. Moreover, the telematics data registered during the policy period does not affect this price in any way, and is used only for proposing a renewal price at the end of the policy. So, these policies are not usage-based because at the beginning of each policy term the customers are sure about the amount they are going to pay for the policy, regardless of their behavior during the months of coverage.

These existing implementations of telematics-based pricing are somewhat validated from consumer perceptions toward insurance. In a survey of 1,046 U.S. consumers, the Casualty Actuarial Society Insurance On-Demand Working Party has addressed and demystified some of the behavioral economics assumptions on the insurance products. The research showed that only 32% of consumers reviewed their personal lines (auto and home) coverage more than once per year. Furthermore, 89% of consumers said they would rather pay a single, stable price per year compared with paying per usage without a certainty of total price. Usage-based auto insurance, across the entire on-demand category studied by the working group, is attractive to people penalized by traditional insurance products, that is, consumers with low usage who would otherwise have to pay for more coverage than they need.

Potential and Success Stories

The usage-based approach persistently monitors the policyholders and charges (potentially) each customer a rate commensurate with actual exposure, minimizing the premium leakage in each coverage period. The resulting minimized earning volatility from usage-based pricing allows insurers to increase the leverage and through this to improve investment return and the return on equity of the company. This approach also allows for increased retention of good risks, at any pricing level, which are penalized by competitors with less accurate pricing mechanisms. The quality of the portfolio is improved (with more profitable customers) at each renewal.

The resulting lower volatility from usage-based pricing and better quality of the portfolio over time would also enable insurers to negotiate lower reinsurance costs.

But while usage-based insurance could theoretically be a profitable option for insurers, the problem seems to be the lack of customer demand for an insurance product where there isn’t a defined up-front price for all the entire coverage period..

See also: Rethinking the Case for UBI in Auto

Newcomers to the insurance market are bringing a different perspective to the problem, recognizing that small clusters of drivers who have been heavily penalized by the current insurance rates—such as extremely low-mileage drivers, or extremely safe drivers without a credit score—could be enough to start a niche business. There are a few success stories of insurtech startups, such as Insure The Box and Metromile, which have been able to build portfolios around 100,000 policies and relevant company evaluations within six to seven years.

Driving Scores at the Underwriting Stage

One way to combat the lack of market fit that has affected the usage-based adoption could be to use a driving score at the underwriting stage. This way, insurers will make an up-front quotation by using—together with traditional data—the driving data.

The value created through this approach is clear and similar to experiences the sector has had integrating new risk factors (e.g. credit scoring) in pre-existing risk models. This telematics-enhanced risk model enables more accurate pricing. This, in turn, allows insurers to generate favorable selection by attracting the best risks for each pricing level (leaving the worst to the competitors). Through the creation of smaller and more homogeneous clusters of clients, this approach even reduces premium leakage, reducing the volatility. And, if the driving score is used at each renewal, there is a chance of improving portfolio quality over time (at any pricing level), with insurers using driving scores for underwriting, benefiting from retention of the most profitable customers–those who are penalized by competitors with less accurate pricing mechanisms.

The ROI of this approach is extremely positive, but the current scenario for obtaining the customer driving score seems very different from the scenario we have known for the credit score. The credit score (or the granular data necessary to calculate it) is available on the entire customer base and certified by reliable third parties, so each insurer can gather this data any time a customer requests a quotation via an agent, a broker, a call center or even online. Moreover, anyone who doesn’t have a credit score is considered a nonstandard risk. So, the concretization of the driving score dream requires the availability and reliability of third-party data for the insurers and, most importantly, the creation of frictionless purchasing processes for the clients.

Data exchanges, which bring OEM data to insurers, have been present in the U.S. customer market for a few years, but because there are many points of friction throughout OEM funnels, they still represent only 2% of the U.S. telematics insurance portfolio. This customer fatigue is due to the need to opt in to request a quotation. Eligibility for the opt-in comes in a moment when he is not shopping around for insurance coverage (a few months after the purchase of the new car). The quotations, which are done with anonymized data, are only indicative, so the customer needs to add data later to receive the real proposal.

Try Before You Buy

A different way to concretize the wish to access a driving score any time an insurance price quotation is calculated is by using a try-before-you-buy app. Given the current level of smartphone penetration, such an app likely provides an easier way to address a large part of the market than with the data exchanges and may also reduce customer frictions. As insurtech carrier Root is currently doing, an insurer can ask a prospect to download an app on his smartphone, calculate the driving score through collected data and, after a while, calculate the quotation incorporating the customer’s driving score. Using this approach, this less-than-two-year-old auto carrier startup wrote 1.5 times more premium than the more-talked-about carrier Lemonade. (Both are insurtech carriers, although Lemonade is writing renters insurance, and Root is writing auto). Root even entered in the insurtech unicorn club in August, thanks to a $100 million round of funding raising the valuation to $1 billion.

Tailored renewal price

As mentioned, 90% of the current global telematics policies only use the driving data for tailoring the renewal price to the customers after having monitored them for a few months (rollover approach) or for the entire coverage period (leave-in approach).

Are insurers achieving any economic value through this pricing approach?

They can increase the retention of the most profitable risks at each pricing level by providing a discount at renewal. However, this additional discount reduces the profitability of these policyholders. So the chance to create some value through this “discounted retention” is linked to the presence of a high-level churn rate. If surcharges to the worst risks at each pricing level are added, insurers will have the opportunity at renewal to partially reduce the premium leakage they have identified on these risks, or push some of them toward competitors.

The accompanying chart (right side) summarizes these pricing thoughts: The expected ROI of the “discount at renewal” is definitely lower than the driving score scenario—it structurally misses the ability to have a positive up-front selection by attracting the better risks at each pricing level—but it is positive if surcharges are added.

The IoT Insurance Observatory has found that a large portion of the policies using driving data for tailoring renewal prices have not resulted in any bad driver penalties.

So, are these telematics portfolios destroying value instead of creating it?

The reality is that there is value created on these portfolios, but the value is not tied to pricing. And some of the pricing approaches are even reducing that value.

First, there are many examples of the risk self-selection impact of all the telematics-based products around the world. Even if two customers seem to be equal based on their characteristics, the one who accepts the telematics product has a lower probability of generating a loss. The stronger the monitoring message on the product storytelling, the higher the self-selection effect. The most statistically robust study is on the Italian auto insurance market, where this risk self-selection effect has accounted for 20% of the claim frequency. In this market, telematics products currently represent more than one-fifth of the personal lines auto insurance business, and the storytelling of the product is hugely focused on monitoring and customer support at the moment of a crash.

Other than risk self-selection, three other telematics-based use cases have been exploited by insurers.

Some international insurers have reinvented their claims processes through telematics data: Their new paradigm is fact-based, digital and real-time. Insurers such as UnipolSai have introduced tools for their claim handlers that allow a quicker and more precise crash responsibility identification and have been providing precious insights to support the activity of all the actors involved in the claim supply chain (both loss adjusters and doctors).

See also: Is Usage-Based Insurance a Bubble?  

A second well-demonstrated telematics use case is the change of driver behavior. VitalityDrive introduced by the South African insurance company Discovery Insure is the first insurance telematics product entirely focused on promoting safer behavior. All the product features—from gas cash-back (up to 50% of fuel spending per month) to active rewards through the app (including coffee, smoothies and car wash vouchers)—are contributing to the risk reduction of the book of business and to increased retention of the best risks.

Both the Italian and South African experiences have even been characterized by the insurers’ ability of enhancing the insurance value proposition by adding telematics-based services bundled to the auto insurance coverage. The fees paid by customers for these services almost offset all the costs of the telematics services on the insurers’ income statements

Based on the experience of the IoT Insurance Observatory, global insurance telematics best practices have generated more value through these four use cases than through pricing as of today. So, the sum of the self-selection effect, the claim cost reduction and the economic impact of changes of behavior allows an insurer to provide an important up-front discount at the same level for all the new telematics-based policyholders.

This relevant level of up-front discount — 20% or more — has been able to drive the adoption (overcoming any eventual customer privacy skepticism) because it fits with the customer desire to save money, contrasting the low adoption rates generated for more than a decade in the U.S. where up-front discount offers are typically only 5%.

The discount should be maintained, on average, at the same level at the renewal stage. Moreover, an additional economic value can be generated—at each pricing level—by providing additional discounts to the best policyholders and reducing the discount to the worst ones.

This is what the international best practices are doing today.

Keys to Loyalty for P&C Customers

In a rapidly changing industry, some P&C insurers are pulling ahead of their competitors by focusing on customer satisfaction and retention.

“The insurance industry as we know it is at the edge of a new business environment,” says  Michael Costonis , head of Accenture’s global insurance practice. “Breaking away from the pack and capturing new revenue opportunities requires a shift in business mindset – a shift from product-focused to customer-focused.”

Customers want extra benefits, and one way to provide them is to offer value-added services. Travel companies and other insurance branches are already exploring the benefits of value-added services for retaining customers, as  Jamie Biesiada  at Travel Weekly points out. Because P&C insurers have been slower to adopt this strategy, however, many opportunities for capitalizing on this strategy remain.

Here, we look at some of the most popular value-added services in P&C insurance, which of these services focus on building loyalty and how to create the right service offerings or packages to encourage your customers to stay with your company in the long term.

Value-Added Services: The State of the Industry

For many years, P&C insurers have struggled with the challenge of selling a product that is substantially similar to their competitors’ products. “Because customers don’t discern much difference between insurers, companies end up competing largely on price,” write Bain & Co. partners Henrik Naujoks, Harshveer Singh and Darci Darnell . A downward spiral occurs, in which costs and profits are cut and customers jump ship the moment they see the same coverage for a few dollars less.

See also: How to Build Customer Loyalty in Insurance  

When insurers compete on price, customers do what Brandon Carter at Access calls the services shuffle: quitting or threatening to quit their insurance providers to access the same price-lean deals that new customers receive. “My goal is to pay less in a system that actually punishes people for being loyal customers,” Carter explains. Focusing on cost decimates loyalty. Focusing on value can boost it.

Yet insurance companies aren’t making value-added services their first choice when it comes to customer retention  Tom Super, director of the P&C insurance practice at J.D. Power, adds that many P&C insurers are turning to digital tools to court customers, particularly in the auto insurance business.

But digital technology is only a tool. The insurers that will stay ahead of their competitors in the race for customer retention and loyalty are the ones that best leverage that tool to provide the value customers want, says Mikaela Parrick  at Brown & Joseph.

Which Value-Added Services Boost Customer Loyalty?

Value-added services provide an extra benefit that enhances the core product or service. This additional service may be offered at little or no cost for the customer, yet it may make both the customer’s and the insurer’s work easier.

Connecting experience-based services to the product and brand can be a powerful way to encourage loyalty, adds Roman Martynenko , the founder and global executive vice president at Astound Commerce. While this approach is most commonly seen in retail, P&C insurers can adapt it to their needs. A top-of-the-line mobile app or a personalized starter kit featuring smart tools for each customer’s home can make customers feel like they’re part of a family.

Unique, innovative or specially tailored value-added services can also help encourage loyalty and boost customer interest by becoming a cornerstone of an insurance company’s brand.

Value-added services don’t have to be expensive or complex, suggests Mike McGee of Investment Insurance Consultants. For instance, a disaster preparation email sent at the start of tornado or hurricane season can help customers take loss-prevention steps, address safety and feel supported by their insurer, at very little cost to the insurance company.

Partnering with other companies can boost loyalty for both organizations while providing value-added services that attract customers, digital transformation executive Fuad Butt says on the IBM insurance industry blog. For instance, working with telecommunications providers to offer reduced-rate packages can help both companies succeed.

A highly specific partnership that uses existing technology to add value for both customers and companies is the recently announced alliance between Hyundai Motor America and data analytics firm Verisk.

“Hyundai customers will have access to their portable Verisk driving score, which can lead to discount offers on UBI programs and support driver feedback that helps improve their driving,” says  Manish Mehrotra , director of digital business planning and connected operations for Hyundai Motor America. A similar arrangement through an auto insurer can help both insurers and drivers have access to more information to improve safety and make better choices.

Choosing and Implementing Value-Added Services in P&C Insurance

The changing landscape of insurance offers one significant advantage to companies seeking to improve their value-added services: access to data about why customers remain loyal.

“The connections that enable excellent customer experiences aren’t always easy to make,” says Chris Hall of Pitney-Bowes. Siloing fragments customer information, leaving staff without a complete picture of each customer. This fragmentation makes it difficult to determine which value-added services will actually pique customers’ interest.

If data access is an issue, start by de-siloing information to get a better sense of each customer. Then, find the services that best support your organization’s key differences from your competitors.

Kirk Ford , compliance and T&C manager at RWA Business, suggests first considering how you’d like your clients and customers to perceive your brand in relation to competitors. Balance your differences against your similarities so that customers see they’ll receive all the services they need, but with the value-added extras that make their relationship with this particular insurance company meaningful.

See also: The Future of P&C Distribution  

However your insurance organization chooses to add value, resist the urge to announce it to customers merely as being higher-quality. “It doesn’t matter whether or not a company can pull off quality or exceptional service because quality and customer service rarely are differentiating strategies,” adds  Mac McIntire , president of the Innovative Management Group.

Instead,  Ryan Hanley  formerly of Agency Nation, now at Bold Penguin, recommends finding ways your value-added services can improve customer lives. When customers feel a sense of shared values, they’re more likely to stick with their insurance company, rather than risk their luck with a company that may not share those values—even if the prices are lower.

One way to connect with customer values is to change your company’s language surrounding insurance. “If you can sell insurance and not talk about insurance, it’s a win-win,” says  Rusty Sproat , founder of Figo Pet Insurance. He notes that many customers find insurance language obscure and frustrating. That’s why Sproat’s company focuses on providing quality information on pet care and health, switching the conversation to insurance only when necessary to complete a transaction.

Finally, don’t shy away from technology—but use it as a tool rather than a cure-all. Smart home sensors, telemetrics for vehicles and other tech tools are increasingly common in U.S. households, plus they can greatly improve the customer experience, says  Ramaswamy Tanjore  at Mindtree. Consider the best ways to manage telemetric or other data, as well as how to position these tools to best showcase their value to loyal customers.

4 Ways Connectivity Is Revolutionary

The Internet of Things (IoT) is predicted to support more than 20 billion devices by 2020, according to Gartner. This is a market that covers 60% of consumers worldwide, creating huge opportunities for industries to connect and engage with their customers.

Connecting with consumers hasn’t always been easy. Contact typically took place at points of sale, during claims and during renewal periods. Now, with the use of wearables, smart homes and telematics, insurers are connecting with customers on a continual basis and providing valuable feedback – and prices – based on activity levels. The business of insurance is complex, with core factors such as risk evaluation, long-term contracts and unpredictable settlements. However, the benefits of insurtech and the unlimited availability of new sources of data that can be exploited in real time have fundamentally altered how consumers interact with their insurance providers.

IoT devices are helping consumers and insurers get smarter with each passing day as these technologies bring promising results in helping insurers reshape how they assess, price and limit risks and enhance customer experience.

See also: Industry 4.0: What It Means for Insurance  

Connectivity and Opportunities

Numerous technologies have shown how improved connectivity can generate opportunities in the insurance industry beyond personalized premium rates. If implemented properly, IoT applications could possibly boost the industry’s customarily low growth rates. It may help insurers break free from traditional product marketing and competition primarily based on price to shift toward customer service and differentiation in coverage.

Several technology trends that are increasing connectivity in insurance include:

Extended Reality (XR) — XR technologies are altering the way consumers connect with society, information and each other. Extended reality is achieved through virtual reality (VR) and augmented reality (AR), which aim to “relocate” people in time and space. Eighty-five percent of insurance executives in Accenture’s Technology Vision 2018 survey believe it is important to leverage XR solutions to close the gap of physical distance when engaging with employees and customers.

Wearable Sensors — Reports indicate that the average consumer now owns 3.6 wearable devices. These technologies can mitigate claims fraud and also transmit real-time data to warn the insured of possible dangers. For example, socks and shoes with IoT apps can alert diabetics on possible odd joint angles, foot ulcers and excessive pressure, thus helping in avoiding costly disability and medical claims and even worst-case scenarios such as life-changing amputations.

Commercial Infrastructure and Smart Home Sensors — These sensors can be embedded in commercial and private buildings to help in monitoring, detecting and preventing or mitigating safety breaches such as toxic fumes, pipe leakage, fire, smoke and mold. This increases the possibility of saving insurers from large claims and homeowners from substantial inconveniences such as lost property or valuables. Savings can be passed to insureds who use these sensors.

Usage-Based Insurance (UBI) Model — Cellular machine-to-machine (M2M) connectivity and telematics link drivers and automobiles in entirely new ways. Traditionally, auto insurance has relied on broad demographic features such as gender and the driver’s age, plus a credit score, to set premiums. Now, through IoT devices, insurers can not only offer reward-based premiums but can provide a connected car experience to customers with feedback on weather, traffic conditions or driving habits.

See also: 3 Ways to an Easier Digital Transformation  

Strategy will play an important role in connectivity as insurance carriers transform legacy core systems into digital platforms that support deeper connectivity with their customers. This strategy must address a carrier’s ability to handle, process and analyze the new types of data that will emerge from the use of these technologies. Artificial intelligence will also have a big impact.

According to a recent study, 80% of insurance customers are happier and more content when they can connect with their insurance providers through various channels such as phone, emails, smartphone apps and online. Through the use of the IoT and connected devices, insurers will improve customer experience by shifting from reaction after an event has occurred to preventing losses digitally.

Blockchain’s Future in Insurance

Blockchain is a revolutionary technology that is likely to have a far-reaching impact on business – on a par with the transformative effect of the internet. Not surprisingly, the huge potential promised by blockchain has prompted a flurry of research activity across different sectors as diverse organizations race to develop applications.

In this article, we’ll explore the many benefits that blockchain could bring to the insurance industry and the different challenges that will need to be overcome.

Overview

Blockchain has strong potential in the short and long term in several different areas, particularly where it links with emerging technologies such as the Internet of Things (IoT) and artificial intelligence (AI). But its potential for delivering new applications also depends on the development of blockchain technology itself. In the medium and short term, there are three categories where blockchain can be applied:

  • Data storage and exchange: Numerous data and files can be stored using blockchain. The technology provides for more secure, traceable records compared with current storage means.
  • Peer-to-peer electronic payment: Bitcoin (and other blockchain-based cash systems) is a cryptographic proof-based electronic payment system (instead of a trust-based one). This feature is highly efficient while ensuring transparent and traceable electronic transfer.
  • Smart contracts: Smart contracts are digital protocols whereby various parameters are set up in advance. When pre-set parameters are satisfied, smart contracts can execute various tasks without human intervention, greatly increasing efficiency.

Data storage and peer-to-peer electronic transfer are feasible blockchain applications for the short term. At this stage, the technical advantages of blockchain are mainly reflected in data exchange efficiencies, as well as larger-scale data acquisition.

See also: The Opportunities in Blockchain  

Smart contracts via blockchain will play a more important role in the medium to long term. By that time, blockchain-based technology will have a far-reaching impact on the business model of insurance companies, industrial management models and institutional regulation. Of course, there will be challenges to overcome, and further technological innovation will be needed as blockchain’s own deficiencies or risks emerge during its evolution. But just like internet technology decades ago, blockchain promises to be a transformative technology.

Scenarios for blockchain applications in insurance

Macro level

Proponents of blockchain technology believe it has the power to break the data acquisition barrier and revolutionize data sharing and data exchange in the industry. Small and medium-sized carriers could use blockchain-based technology to obtain higher-quality and more comprehensive data, giving them access to new opportunities and growth through more accurate pricing and product design in specific niche markets.

At the same time, blockchain-based insurance and reinsurance exchange platforms – that could include many parties – would also upgrade industry processes. For example, Zhong An Technology is currently working closely with reinsurers in Shanghai to try to establish a blockchain reinsurance exchange platform.

Scenario 1 – Mutual insurance

Blockchain is a peer-to-peer mechanism, via the DAO (decentralized autonomic organization) as a virtual decision-making center, and premiums paid by each and every insured are stored in the DAO. Each and every insured participant has the right to vote and therefore decide on final claim settlement when a claim is triggered. Blockchain makes the process transparent and highly efficient with secure premium collection, management and claim payment thanks to its decentralization.

In China, Trust Mutual Life has built a platform based on blockchain and biological identification technology. In August 2017, Trust Mutual Life launched a blockchain-based mutual life insurance product called a “Courtesy Help Account,” where every member can follow the fund. Plus, the platform reduces operational costs more than a traditional life insurance company of a similar size.

Scenario 2 – Microinsurance (short-term insurance products for certain specific scenarios)

An example of short-term insurance could be for car sharing or providers of booking and renting accommodation via the internet. Such products are mainly pre-purchased by the service provider and then purchased by end users. However, blockchain makes it possible for end users to purchase insurance coverage at any time based on their actual usage, inception and expiring time/date. In this way, records would be much more accurate and therefore avoid potential disputes.

Scenario 3 – Automatic financial settlement

The technical characteristics of blockchain have inherent advantages in financial settlement. Combined with smart contracts, blockchain can be applied efficiently and securely throughout the entire process of insurance underwriting, premium collection, indemnity payment and even reinsurance.

Micro level

Blockchain has the potential to change the pattern of product design, pricing and claim services.

Parametric insurance (e.g. for agricultural insurance, delay-in-flight insurance, etc.):

Parametric insurance requires real-time data interface and exchange among different parties. Although it is an efficient form of risk transfer, it still has room for further cost improvement. Taking parametric agricultural insurance and flight delay insurance as examples, a lot of human intervention is still required for claim settlement and payment.

With blockchain, the efficiency of data exchange can be significantly improved. Smart contracts can also further reduce human intervention in terms of claim settlement, indemnity payment, etc., which will significantly reduce the insurance companies’ operating costs. In addition, operating efficiency is increased, boosting customer satisfaction.

Some Chinese insurers are already working on blockchain-based agricultural insurance. In March 2018, for example, PICC launched a blockchain-based livestock insurance platform. Currently, the project is limited to cows. Each cow is identified and registered in the blockchain-based platform during its whole life cycle. All necessary information is uploaded and stored in real time in the platform. Claims are triggered and settled automatically via blockchain. The platform also serves as an efficient and reliable food safety tracing system.

Auto insurance, homeowners insurance: 

Blockchain has wider application scenarios in the field of auto insurance and homeowners insurance when combined with the IoT. There are applications from a single vehicle perspective as well as portfolios as a whole. From a standalone vehicle perspective, the complete history of each vehicle is stored in blocks. This feature allows insurers to have access to accurate information on each and every vehicle, plus maintenance, accidents, vehicle parts conditions, history and the owner’s driving habits. Such data facilitates more accurate pricing based on dedicated information for each and every single vehicle.

From the insured’s point of view, the combination of blockchain and IoT effectively simplifies the claims service process and claim settlement efficiency.

From the perspective of the overall vehicle, blockchain and IoT can drastically lower big data acquisition barriers, especially for small  and medium-sized carriers. This will have a positive impact on pricing accuracy and new product development in auto insurance.

Taking usage-based insurance (UBI) for autos as an example, it’s technically possible to record and share the exact time and route of an insured vehicle, meaning that UBI policies could be priced much more accurately. Of course, insurers will have to consider how to respond in situations where built-in sensors in the insured vehicle break or a connection fails. Furthermore, insurance companies also have to decide whether an umbrella policy is needed on top of the UBI policy, to control their exposure when such situations occur.

Cargo insurance:

Real-time information sharing of goods, cargo ships, vehicles, etc. is made possible with blockchain and the IoT. This will not only improve claims service efficiency but also help to reduce moral hazards.

In this regard, Maersk, EY Guardtime and XL Catlin recently launched a blockchain-based marine insurance platform cooperation project. Its aim is to facilitate data and information exchange, reduce operating costs among all stakeholders and improve the credibility and transparency of shared information.

International program placement and premium/claims management:

Blockchain-based technology allows insurance companies, brokers and corporate risk managers to improve the efficiency of international program settlement and daily management, at the same time reducing data errors from different countries and regions and avoiding currency exchange losses.

Coping with claim frauds:

Blockchain is already being applied to verify the validity of claims and the amount of adjustment. In Canada, the Quebec auto insurance regulator (Québec Auto Insurance) has implemented a blockchain-based information exchange platform. Driver information, vehicle registration information, the vehicle’s technical inspection result, auto insurance and claims information, etc. are all shared through the platform. The platform not only reduces insurance companies’ operating costs but also effectively helps to reduce fraud.

All insurance companies that have access to the platform receive a real-time notice when a vehicle is reported to be stolen. Insurance companies have full access to every vehicle’s technical information, which promotes more accurate pricing for individual policyholders.

Claims settlement:

Using a smart contract, the insured will automatically receive indemnity when conditions in the policy are met: Human intervention will not be needed to adjust the settlement. In the future, some insurance products will effectively be smart contracts whereby coverages, terms and conditions are actually the parameters of the smart contract. When the parameters are met, policies are triggered automatically by the smart contract and a record stored in the blockchain.

Business models like this will not only build higher trust in the insurance company but will also greatly increase its operational efficiency, reducing costs; it will also help to reduce moral hazard.

Internal management systems:

Internal management systems could be automated through use of blockchain and smart contracts, helping to improve management efficiency and reduce labor costs as well as the efficiency of compliance audit.

See also: How Insurance and Blockchain Fit  

Challenges and problems

Decentralization strengthens information sharing and reduces the monopoly advantages that information asymmetry provides. Under such circumstances, insurance companies have to pay more attention to pricing, product development, claims services and even reputation risk. All this adds up to new challenges for the company management.

At the same time, every aspect of the insurance industry must be more focused on ensuring the accuracy of original information at the initial stage of its business. Knowing how to respond to false declarations from insureds will be crucial.

From a more macro perspective, “localized blocks” of data will be inevitable in the early phase of development in line with the pace of technical development and regulatory constraints.

In theory, it is impossible to hack blockchain, but data protection will be an issue for localized blocks. Therefore, higher cyber security protection will be required to protect these localized blocks.

The interaction of blockchain with other technologies could mean that existing intermediary roles are replaced by new technologies in different sectors. If the insurance industry wants to ensure the continuous development of the intermediary, it should address the possible disruptive risks to existing distribution business models posed by blockchain.

The necessary investment (both tangible and intangible costs) associated with adopting blockchain technology is a big consideration for many companies at this stage. Insurance companies and reinsurance companies operate numerous systems, and the decision to integrate blockchain-based technology/platform shouldn’t be taken lightly. At the current stage of blockchain evolution, this could be one of the biggest obstacles facing insurers.

Overall, blockchain is an inspiring prospect, and there is every reason to believe that this technological breakthrough will bring positive effects to individual insurers everywhere. But at the same time, we need to understand the mutual challenges that lie ahead and work together to promote our industry’s development in what promises to be an exciting new era.

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