Blockchain and the insurance industry
The insurance industry seems to be uniquely positioned to benefit from blockchain technology. Blockchain can address the competitive challenges many incumbents face, including poor customer engagement, limited growth in mature markets, and the trends of digitization.
Not only does blockchain offer the promise of cost reduction and efficiency, but it could also enable revenue growth, as insurers attract new business through higher-quality service. Relationships with stakeholders, ranging from customers to regulators, will improve as errors are reduced and accuracy improved. It may even be possible to reduce capital requirements as insurers on opposite sides of a transaction proceed to agreement more quickly.
In the following, the main areas of its application and its potential impact are reviewed.
- Fraud detection and risk prevention
An estimated 5 to 10 percent of all claims are fraudulent. This costs US non-health insurers more than USD 40 billion per year. Blockchain has the potential to eliminate errors and detect fraudulent activity verifying the authenticity of customers, policies and transactions (such as claims) and being able to identify duplicate transactions or those involving suspicious parties. Similarly, the risk of fraud associated with payments across borders and transactions involving multiple currencies is reduced. In markets where insurers are often removed from the end clients, blockchain may better address inefficiencies, gaps and errors. Validation and verification, which can add value to many insurance processes, form the heart of the blockchain business case.
- Contract Documentation
Contract elaboration involve working with different versions, and there should be no doubt that progress is being made according with previous agreements. The blockchain provides legal certainty and allows access without error to all the documentation handled, reduce processing cost and time, favor instant availability of accurate current information, legal certainty and act as a catalyst to accelerate the use of structured electronic documents rather than scanned paper, thus reducing costs and leading to fewer errors
Brokers, insurers and reinsurers have to perform KYC/AML (Know Your Customer and Anti Money Laundering) on all of their counterparties, both legal entities and individuals. This multiplicity of repeated checks adds to cost and delays. The blockchain records customer personal documents and evidence of validation. All documents on the blockchain are encrypted, thus resolving a set of regulatory issues around privacy and data protection. The benefits associated with the use of the blockchain include: Reduced processing cost and time, make possible the insurance of time-critical transactions and reduce reputational risk from delayed payment of claims
- Claims management
When a claim is made, each underwriter involved want to be kept informed of progress. Their initiatives, carried out separately and inadequately coordinated, generate additional costs for themselves and the client. The blockchain may incorporate all documents created in the claims process and make them available to all underwriters, reducing the cost of administration for the claims, eliminating errors and duplication of communication, providing legal certainty, greater transparency and trust, and greater customer satisfaction.
- New product development
As more devices and objects are connected to the IoT, the amount of data that will be created and collected will increase significantly. This data will be hugely valuable to develop more accurate actuarial models that support the redefinition of the insurance policies. The blockchain can manage large and complex communication networks instead of building an expensive data center to handle the processing and storage load.
- New distribution and payment models
A number of global insurers are developing alliances and exploring new payment business models to achieve capital efficiencies through single global ledgers. Increased automation to capture risk data in contracts also offers new opportunities to build market knowledge, streamline payments and attract financing risk. Additional benefits of blockchain implementation include: asset management costs reduction, protection from currency fluctuations in international transactions, mobile wallets, greater customer engagement, with tailored functionalities and more integrated data, and their identities and insurance information available instantly.
- Customer engagement.
Customers fear about losing control of personal data as soon as it is handed over to a company and feel frustration with the need to repeat data entry processes. Blockchain implementation can facilitate the exchange and verification of personal data in all required transactions. It can also improve customer engagement by providing a greater degree of transparency and perceived fairness of tariffs and claims handling.
- Emerging markets.
Blockchain smart contracts could be applied to micro-insurances to offer them at low handling costs, if underwriting and claims handling can be automated based on defined rules and the availability of reliable data sources.
Some of these applications are already in the development line of BlockTac.