It’s undeniable that blockchain is insanely paving its way in all business niches. Immutability, security, versatility, safety, and transparency are the main synonymous words behind its popularity. This technology is heralded as the most significant symbol and the next technology disrupter in different industries, including insurance.
Although it’s still in its infancy stage, blockchain cuts down business costs, saves time and streamlines paperwork. The technology has created massive opportunities for both minor insurance companies and Fintechs who are willing to embrace the change.
Why Blockchain Is Trending
Let’s start off with going over why blockchain is trending and will change the future. Multiple reasons have made blockchain technology a topic of discussion in every sector. Unlike in most traditional systems, all blockchain transactions are time- stamped thus making it easy for the users to trace its distinction and origin as well.
These features do not only make blockchain a trending topic, but also a hot selling technology. Blockchain forms the basis for applications meant for public benefits. The technology is growing each day, and this explains why many people are talking about it.
Now let’s get back to the blockchain adoption in the insurance sector.
How will its features benefit the insurance industry?
Databases are very significant in the insurance companies. The blockchain is not used as a substitute for the already existing databases, but it is an internet based smart database which guarantees safer and more secure transactions. The inherent blockchain features offer a series of benefits to insurance companies.
Benefits of Blockchain Technology in the Insurance Industry
Here are the significant blockchain impacts in the industry:
- Improves trust
Trust crisis has been a significant issue in the financial services sector. Although the larger financial institutions and insurance companies are the focal points, trust erosion impacts all companies. Inefficiency, high cost and lack of trust in insurance businesses contribute to the extraordinary underinsurance levels. For instance, only 17% of households in California have earthquake insurance despite the high likelihood of the earthquakes in the area. Blockchain builds the trust of the consumers since it enhances transparency.
- Lowers Know Your Customer (KYC) Costs
Anyone who has ever switched his/her healthcare providers or insurance companies understands some of the inefficiencies involved in the original data entry process. Customers fear losing control of their personal data, and this is something that the blockchain technology can efficiently solve. The current centralized model of data storage is prone to hacks. Blockchain provides a secure and efficient solution to user’s personal data. By pooling data and processes on a shared, distributed and encrypted database, the insurance industry would save billions.
Automation of tasks
Blockchain technology automates insurance processes and renders them more secure without the need for human input. Natural catastrophe insurance is a practical example of this automation. The group settlement systems require only two information items incorporated into the program.
- The location of the event must correspond to the place recorded to have suffered natural catastrophe.
- The event must be a natural catastrophe.
- Lower risks of frauds
Blockchain technology helps in fraud detection and prevention in the insurance industry. Most of the insurance companies which have implemented this technology have minimized their frauds by almost 50%. A research done by FBI shows that nearly 5-10% of all fraudulent insurance reported claims, cost more than $40 billion every year. Blockchain technology facilitates the validation process, and this means that its historical records verify policies, transactions, and customers for authenticity. If more manufacturers, customers, insurers and other parties work together and embrace blockchain technology; future cases of fraudulent activities would be reduced.
- Decentralized data repository
Data security has been a threat in all business niches. The current systems used in the banking industry, healthcare or insurance are all exposed to third parties. This exposure has resulted in data hacking and other malpractices which interfere with the user’s privacy. Blockchain technology can emerge as a perfect solution to this. Unlike the current systems, data is not kept at a central location, and this keeps it more safe and secure. Additionally, blockchain encrypts the information by maintaining anonymity.
- Reduces costs
Most insurance companies have been dogged with tons and tons of paperwork for decades now, but thanks to the new decentralized technology. Insurers can now operate at a higher speed while still maintaining accuracy in their operations. With blockchain implementation, insurance companies can now deploy their resources in many places with fewer reams of paper. This has substantially reduced the cost of operation.
Examples Of Blockchain Applications In Insurance
Most insurance companies have successfully used blockchain in:
- Smart contracts
Smart contracts, commonly known as self-executing contracts are written in computer codes and then linked to a blockchain. This makes it easy for an entity or an individual to get bound to the terms and conditions of the contract. Since the introduction of these self-executing contracts, insurance companies’ use them to evaluate the value of compensation that the insured should get. The range of smart deals is still under exploration. However, since they are associated with blockchain, activities that could rely or relies on the ledger can now be handled potentially through smart contracts.
- Peer to peer insurance
Blockchain ultimately changed the way insurance companies operate. We could also witness more changes if more companies adopt the technology. Rather than going to the insurers when they need a cover for their vehicles, drivers can now use the peer to peer style. The policy allows them to camp with other drivers on the blockchain, create an identity and provide insurance to each other. Reputable companies like Uber are increasingly using this method, and it could even become a reality sooner than expected.
- Index based insurance
This is a type of insurance linked to an underlying index like temperature, humidity, crop yield or rainfall. The approach is used to address the common traditional insurance limits in rural regions especially in relation to crop insurance. For instance, it has been used to reduce the management and settlement costs in the developing countries. However, despite its benefits, establishing index-based insurance remains costly and complicated. Index based products would be simpler, cheaper and automated if based on smart contract.
Most insurance groups have established internal insurance mechanisms over the past few years. Internal insurance reduces the capital requirements for the user entities since the risk involved are transferred to the receptive re-insurer. Since most reinsurers operate in separate entities, the insurance group gains more capital efficiency. The diversification is concentrated at the captive level. With a private blockchain, information flows will be more organized, making internal insurance more effective.
Blockchain in Different Insurance Verticals
Blockchain would be beneficial in various insurance sectors if more insurance companies adopt and implement it well. We all understand how cumbersome and messy the insurance claims affair is. To cut this down, we need interconnected and streamlined processes to catalyze the entire insurance activities. Here is a description of how it can happen:
- Blockchain in auto insurance– blockchain can be beneficial in the auto insurance industry in two main ways. First, it can connect different service providers and their users. This can provide readily available information and eventually reduce frauds and risks in auto insurance companies. Second, smart contracts would fasten up the claims
- Blockchain in health insurance-since blockchain is all about managing the users’ data; blockchain can enhance the level of care that the patients receive. This can be achieved by interconnecting physicians, patients, insurers and medical care practitioners. Moreover, blockchain would streamline the entire process with a distributed database.
- Blockchain in life insurance– while life insurance may sound as easy and a simplified process, getting claims from insurance companies has always been a daunting task. It involves innumerable paperwork, a series of questions and above all, takes your money, time and energy. With the help of blockchain, however, we can expect relief in some of these challenges. It would be easier to get all information by creating a consortium of government agencies, medical facilities and much more. Moreover, insurance companies can issue automatic payouts to beneficiaries and medical facilities using smart contracts.
The Bottom Line
Blockchain application potential in the insurance industry goes beyond the ones we’ve discussed here. While specific applications seem more straightforward to implement and provide results, others are riskier especially in regards to the rewards expected. We might still be looking at the decentralized ledger system with tinted glass, but we cannot ignore that it has many apprehensions surrounding it. Although blockchain technology still lacks enough government regulation and control, we are talking about a futuristic development. The blockchain is a promising technology whose applications would create an overhaul in the insurance mainstream. More insurance companies need to adopt it to increase the effectiveness of their operations.