Insurance involves a risk transfer mechanism that entails a company taking a potential risk from a customer in form of a loss or damage caused by events beyond the control of the customer and in return the customer pays a fee called premium. These premiums are typically then reinvested which subsequently generates better revenue return for the insurance company.
The insurance industry has been a key component of the global economy based on the amount of premiums it generates, the scale of its investment and the essential social and economic role it plays in covering personal and business risk. However, currently, there are over 400 million people globally with no insurance cover according to the World Health Organisation.
Current state of the market
To understand how blockchain applications work to improve the insurance industry, it’s important to understand the main actors that create, distribute, and hold policies. Insurance is protection against financial loss. It is a way to manage risk through a third-party and because of this blockchain can help insurers deliver on streamlined subrogation, a more transparent claims process, using shared loss histories to obtain data-driven insights on prospective customers for more sophisticated pricing, and supporting more efficient payments between insurers and third parties, especially during the claims process.
The future for blockchain in the insurance industry is still in the development stage and looking to scale and improve the current value chain and business model. With possibilities of lowering operational cost and automating redundant processes, it’s the fastest advanced technology set to be widely used in the coming years as reflected in the high growth rate topping 110%. By 2020, Accenture strategy estimates that the use of modern technology could bring about a more disruptive model and create a digital platform for about 20% of the Property and Casualty Insurance market.
The insurance industry is under threat from a constant shift towards risk prevention as against risk cover, more availability of data and the continued investment in Insurtech startups. Business automation is expected to reduce the cost of claims by over 30% which means that insurance businesses are looking for ways to retain customers and optimise profit.
New models utilising blockchain are expected to enable growth, increase effectiveness, and reduce cost by automating key processes. The potential advantage of this technology would be increased transparency and accountability and reduced transaction costs. Many believe blockchain will make an impact in major areas of the insurance value chain including product development and delivery, underwriting process, payments, claims process and asset management with the ability to remove intermediaries from the value chain and give greater control to the customer in areas like ownership and management of their personal data and identity management.
A survey of about 526 insurance professionals carried out by Cognizant shows that the percentage of insurance professionals who believe that blockchain implementation would mean faster claim settlement (43%), reduce fraud (40%), improve record keeping (40%), streamline processes (38%) and provide greater transparency (38%).
Some insurance companies that are already exploring ways to exploit this technology include Aegon, Allianz, Munich Re, and Swiss Re who have already set up a combined pilot project known as B3i to explore blockchain. More collaboration is needed among insurance and reinsurance companies to allow for the development of blockchain enabled products and adoption. Some industry insiders argue that public blockchains, where all parties have access to every transaction on the ledger, are not feasible for the insurance industry due to privacy and security concerns and that private, permissioned blockchains will be more favoured. The issue of regulation to protect consumers from abuse and insurance companies from taking on too much risk are also a concern. Thus, legal and regulatory frameworks for insurance need to evolve and provide clear guidance for blockchain technology to see wide adoption.
Advantages of Decentralizing the Insurance Industry
Decentralising the insurance industry will assist with streamlining underwriting, claims, payment, and the reinsurance processes. With fewer players involved in all transactions and processes from start to finish, processes will be made more efficient and faster. Another huge benefit is the enabling of automated payments via smart contracts.
Security is another main benefit of using blockchain for insurance. The industry continues to see a growing number of uninsured persons and valuables with fraudulent insurance cover.
In the UK, most insurance company have attributed the high cost of car insurance to the rising cost of claims inclusive of fraudulent claims thereby increasing the cost inclusive for honest motorist. In Nigeria, reports by the Nigerian Insurance Association says that over 12 million Nigerian motorists carry fake insurance papers and avoid buying insurance out of the estimated 180 million people despite the benefits from motor insurance cover. In South Africa, an estimated 35% of 4 wheelers and 70% of 2 wheelers drivers are uninsured due to the huge cost of premium and lack of transparency in the insurance process. Fraudulent claims payment cost the insurance sector about $80 billion a year across all lines of insurance which is roughly about 20% of the total claims payment annually.
Blockchain enabled processes and applications are expected to solve these challenges, reducing cost and building trust. An IBM Research in Australia demonstrates using a prototype, how the implementation of a pay-as-you-go car insurance application on blockchain would ensure that all the data pertaining to the customer’s actual trip and usage premium payment made are transparently recorded so that all parties involved in the insurance contract including the driver, the insurance company, and the financial institution were applicable are confident that the data is tamper-proof and traceable.
Blockchain provides quality security through decentralisation. 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. Peer-to-peer networks can also help to notarise documents and guarantee identity without the help of a third-party.
As things become error-free, trustless, and more efficient, the price of insurance premiums is likely to 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 due to insurance fraud which could save the industry over US$10 billion. It is hoped that those savings will trickle down from insurance companies to the average insurance customer.
Since blockchain increases transparency, data becomes immutable and reliable. Data stores will also be accessible 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 mistakes which means insurance companies can better meet the ever-evolving needs of policyholders.
How Different Insurance Verticals Can Use Blockchain
Health Insurance
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. Decentralised applications in healthcare can help match patients with providers in their area and automate the coverage process.
The need for patient confidentiality means that providers often don’t have access to patients’ full medical history, despite the $28B medical records market. Lack of data can lead to insurance claim denials, which costs hospitals $262B yearly and are cited as a significant factor in rising healthcare costs. Blockchain technology can encrypt patient information, facilitating the transfer of information while still protecting patient privacy. A single patient will typically see multiple doctors and specialists over the course of his life. Because there are so many different parties involved in healthcare, it’s difficult to share and coordinate sensitive medical data between them.
Sharing data and cooperating is currently difficult in the healthcare industry for 2 primary reasons: first, the back-end infrastructure for medical records is hopelessly outdated. The market for providers of electronic medical records management software is expected to hit almost $40B by the year 2022. Different providers and insurers rely on different standards and formats for how they store patient data. Medical data often has to be reconciled by hand across hospitals, insurance companies, clinics, and pharmacies.
Second, rigid privacy laws lead to data silos within organisations. In the US, the Health Insurance Portability and Accountability Act (HIPAA) exists to help secure private patient data, but the negative side effect is that it makes it hard to coordinate patient care across various providers and insurers. The cost implications for this are dire. In the US, total spending on healthcare administration is more than 1.5x that of countries like Switzerland, Canada, Germany and France. The US spends 8% of its total healthcare expenditure on administrative needs alone, due mostly to poor communication practices between healthcare institutions and doctors, redundant and inefficient tasks, and excessive paperwork.
The numbers around costs associated with billing and insurance are even more dramatic. A study in the Journal of the American Medical Association Study found that the cost of billing and insurance represents more than 14% of all doctor revenue on average, and that figure can get as high as 25% when emergency room visits are taken into account.
Insurance claim denials at US hospitals cost another $262B in 2016. Denials can occur as a result of anything from failure to obtain proper authorisation for a procedure, or improper data entry. While hospitals recoup roughly 63% of claims that were initially denied by insurers, securing payment itself is a costly process with a lot of administrative overhead.
The Impact of Blockchain on the Insurance Industry
A cryptographically secured blockchain can maintain patient privacy while creating an industry-wide, synchronised repository of healthcare data, saving the industry billions every year. Blockchain technology can return control of medical data to patients, and let them share access to data on a case-by-case basis.
Rather than forcing insurers and providers to reconcile patient data across separate databases, a blockchain system for medical records could store a cryptographic signature for each record on a distributed ledger. The signature indexes the content of each document cryptographically and timestamps it, without actually storing any sensitive information on the blockchain.
Any time a change is made to the document, it’s recorded on the shared ledger, allowing insurers and providers to audit medical information across organisations. Meanwhile, the blockchain could enable granular permissions settings to comply with regulations, while allowing data to be anonymised and shared for research.
Blockchain use case: MedRec
MedRec is a decentralised content management system for medical records from MIT. Rather than storing medical data directly on-chain, it indexes medical records on the blockchain, allowing records to be accessed by providers who have been granted permission. This is meant to help guarantee patient privacy, while creating an audit trail that makes it easy to find and verify patient information on the blockchain.
While MedRec remains an academic project in proof-of-concept stage, it presents a useful model for understanding how medical data can be secured through blockchain technology.
What’s important to remember is that blockchain technology is not a silver bullet for the health insurance industry. Blockchain companies today in the insurance industry need to deal with significant regulatory and compliance hurdles to have any chance of success.
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.
Property and Casualty insurance
P&C claims data is scattered across multiple locations controlled by different parties, making claims resolution a challenge. Blockchain technology enables automated real-time data collection and analysis, potentially making some types of P&C claims process up to 3x faster and 5x cheaper than at present. Automated “smart contracts” can greatly speed up claims processing and payouts, saving insurers over $200B a year. Property and casualty (P&C) insurance is big business, accounting for 48% of all US insurance premiums written in 2017, or a total of $576B.
Processing P&C claims is an error-prone procedure that requires significant manual data entry and coordination between different parties. By allowing policy holders and insurers to track and manage physical assets digitally, blockchain technology can codify business rules and automate claims processing through smart contracts, while providing a permanent audit trail.
Smart contracts using blockchain technology can turn paper contracts into programmable code that helps automate claims processing and calculates liabilities in insurance for all players involved. Smart contracts could save P&C insurers more than $200B a year in operating costs and lower their operating ratio by anywhere from 5 to 13 percentage points, according to BCG.
For auto insurance, a smart contract could be linked to sensors on a vehicle that automatically alert insurers when a crash occurs. The smart contract can then summon medical teams and towing services, launch the claims process, and inform the insured that help is on the way. As new information such as police reports and crash photos comes in, the smart contract can append them to the claim, facilitating a much faster payout process with minimal human intervention.
Blockchain use case: Insurwave
A collaboration of entities including EY, Guardtime, A.P. Møller-Maersk, Microsoft, and ACORD launched blockchain-powered marine hull insurance platform Insurwave in 2018. The platform is now in commercial use and was projected to handle risk for more than 1,000 commercial vessels and 500,000 automated transactions in its first twelve months of operation. The group plans to roll its platform out to other types of business insurance in the future, including cargo, aviation, and logistics.
The Insurwave platform provides real-time information on ship location, condition, and safety conditions for both insurers and insurees. When ships enter high-risk areas, such as war zones, the program detects this and factors it into underwriting and pricing calculations. Setting premiums for marine insurance is “notoriously complex,” as the enterprise blockchain firm R3 puts it. Products like Insurwave are designed to ease that complexity by building an impossible-to-change audit trail.
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.
Claims processing and management is one of the key business area for the insurance industry and the ability to promptly pay claim timely increases the reputation and trust by customers in purchasing insurance cover from such company. All claims processing undergoes three main process namely: submission of the claim by the insured, loss adjustment by the insurance company and other involved parties like the brokers and reinsurer and finally claims approval and payment.
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.
Reinsurance protects insurers when large numbers of claims come in at once, such as during a natural disaster. Blockchain technology can reduce risk by facilitating information-sharing and cut costs by automating processes, ultimately saving reinsurers up to $10B.
The current reinsurance process is extremely complex and notoriously inefficient. With facultative reinsurance, each risk in a contract needs to be individually underwritten, and contracts typically take up to 3 months of wrangling between parties before they’re signed. Insurers will typically engage multiple reinsurers, which means that data has to be exchanged between various parties to process claims. Different data standards between institutions often lead to different interpretations of how a contract should be implemented.
Blockchain technology has the potential to upend current reinsurance processes by streamlining the flow of information between insurers and reinsurers on a shared ledger. Using blockchain technology, detailed transactions around premiums and losses can exist on an insurer and reinsurer’s computer systems at the same time, eliminating the need to reconcile books between institutions for each individual claim.
With data shared on an immutable ledger, reinsurers can be better equipped to allocate capital for claims nearly in real-time, allowing them to both process and settle claims more quickly without relying on primary insurers for data around each claim.
PricewaterhouseCoopers estimates that the blockchain can deliver reinsurance industry-wide savings of up to $10B by increasing operational efficiencies. This could trickle down and lead to lower insurance premiums for consumers - it’s estimated that reinsurance accounts for 5% to 10% of existing insurance premiums.
Blockchain use case: B3i
B3i is a consortium formed in October 2016 by some of the biggest names in the insurance and reinsurance areas to explore the blockchain technology. Members include AIG, Allianz, Aegon, and Swiss Re.
In 2017, B3i launched a prototype of a smart contract management system for Property Cat XOL contracts, which is a type of reinsurance for catastrophe insurance. Each reinsurance contract on the platform is written as a smart contract with executable code on the same shared infrastructure. When an event - such as a hurricane or earthquake - occurs, the smart contract evaluates data sources from the participants and automatically calculates payouts to affected parties.
B3i’s pilot program concluded in September of 2018, after testing and receiving feedback from 40 companies, and its live launch is planned for the beginning of 2019.
Executing reinsurance policies using blockchain technology can help reinsurance companies allocate capital and underwrite insurance policies more efficiently, bringing greater stability to the insurance industry. Rather than relying on primary insurers for data around losses, reinsurers can query the blockchain directly to provide coverage.
Customisation
Advanced technology can help attract customers with lower costs and more customised, easy-to-use interfaces. It is difficult to receive truly personalised or customised 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 customisation and easy-to-transfer personal profiles.
Real-time Claims and Payment Automation
Personalised 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 customised 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 seamlessly.
Blockchain Startups Transforming the Insurance Industry:
Black – A digital insurance company on the blockchain, opening the centralized insurance market for crowdfunding.
B3i – A startup providing insurance solutions on a blockchain platform offering opportunities for efficiency, growth, and quality across the value chain.
ChainThat – Delivering business efficiency by coordinating and streamlining operational processes across business networks.
Inmediate – Make policies transparent and trustworthy by using smart contracts, powered by the Zilliqa blockchain solution.
Lemonade – A startup that offers homeowners and renters insurance powered by artificial intelligence, blockchain, and behavioural economics.
RiskBazaar – A peer-to-peer (P2P) risk contacts marketplace that lets consumers enter contracts with their friends within seconds.
Teambrella – A P2P insurance service app powered by blockchain.
Tierion – Turns the blockchain into a platform for verifying any data, files, or processes.
Sources: multiple