An unknown person back in 2008 published a white paper about cryptography mailing under the title Bitcoin. The world gasped and stood still for a moment!
Satoshi Nakamoto, a person or persons under the presumed pseudonymous authored the bitcoin, later developed and deployed the original reference implementation. Thereby implementing, Satoshi Nakamoto created the first Blockchain database. You might probably be confused and asking what is bitcoin? What is the difference between bitcoin and a blockchain? A Bitcoin is a digital currency that can be transacted from user to user without any central bank administration or intermediaries. On the other hand, blockchain is a technology behind bitcoin that exists as a distributed database system which keeps a record of every transaction and verifies it without any control of central administration.
Blockchain is a distributed ledger with copies of the ledger spread across many computers that verifies a transaction and records the time-stamped data in a place called Block. Each such individual block is linked together by including a cryptographic hash value from the prior block in the chain. So does the name Blockchain is coined. Since the blocks contain the hash value of the prior block it cannot be altered without changing the subsequent blocks too. To confirm the integrity of the previous block the iteration process can be continued all the way to the first block, the genesis block.
Adopting blockchain into the insurance industry
As you all know blockchain is implemented as part of developing the digital currency called bitcoin. But the possibilities of blockchain technology do not just stop with the implementation of digital currency. The applications of blockchain technology are immense in the modern world and a lot of them are yet to explore that can transform industries like Insurance.
The insurance field is the most centralized and conservative industry which is slow in adapting to the new technology. But yet being shy some promising companies like InsureAtOasis have successfully adopted the insurtech by not keeping a distance from innovations. Read more about insurtech and How leading online insurance aggregators in UAE work. Considering the increase in distrust among customers for centralized financial services, a high rate for underwriting are major hurdles for insurers to satisfy a customer. On the other side fraudulent claims, handling a huge amount of data, third-party payment transactions, and limited growth in a mature market are challenges insurance providers are facing from their end.
While blockchain being the single source of truth it promotes trust, stability, and transparency to the entire system. A lot of work insurance companies do are manual but implementing blockchain can streamline the paperwork process. Moreover, Insurance Broking through blockchain is a distributed database that eliminates any suspicious activities and duplication of the transaction to enable trust and security.
Smart contract to the rescue
Now we know how a blockchain works and how it ensures security and trust among the customer with the decentralized system. But still, we have one more question yet to answer, yes, how blockchain impact on claims handling and the issuance of a policy automatically without any manual input. It is by the method of the Smart Contract. Smart contracts are self-executing computer programs that are deployed in the blockchain to execute a set of predefined criteria for business logic. It can be used to autonomously execute an underwriting for an insurance policy and issues it on its own. It can be further extended to verification and settlement of the claims by the insurer. Even though we call it a contract, it may not be a contract from the legal point of view but it can be understood as an execution of a legal agreement in programming codes. The set of rules on which smart contract acts are fed into the blockchain as on-chain data. When on-chain data is not available the data from external sources called oracles are used to trigger the smart contract.
Challenges to overcome with blockchain
Detecting fraudulent claims: Every year fraudulent claims alone costs a monstrous amount of money for the insurance companies. It is almost an impossible task to detect transparency and Fraud claims with the available data and methods. When the data is stored in a blockchain-based ledger the shared data is verified for its authenticity that way multiple claims filed by a single entity are easily eliminated.
Lowering administrative cost: Reducing the cost of running the system is one of the notable features of implementing blockchain in the insurance industry. Since blockchain is an automated business logic it can considerably reduce the operational friction and the cost of the administration. In turn, it can have a direct effect on the premium rate of every insurance policies which is beneficial for the customer.
Protecting Privacy: In these days and times, our identities are mostly managed by government or private service providers. As in the case of insurance, identities are not interoperated between other issuers or organizations. Blockchain gives a self-sovereignty identity to manage our identification and allows us to interoperate between individuals and organizations.
Managing enormous data: Handling a bulk of data every day is a tiresome job for insurers which can create silos of data to manage over years. Blockchain can handle a large amount of data with ease to manage, share and monetize bulk information. Capture Data – Customer Specific approach can make the risk assessment and verification easier and accurate at the time of need. Also, the static records are stored in the blockchain with a digital fingerprint stamped by date and time so it brings more trust and transparency.
Applications of Blockchain in Insurance
The future of the blockchain doesn’t just stop with a limited scope, the application of the technology lies beyond our thinking and our generation. Some of the immediate changes that we will witness in our lifetime are sorted below.
Through an on-demand insurance model, the policyholder can easily switch on and off their insurance policy with a single click. Usually, these on-demand policy issuance requires underwriting, maintaining customer records, policy documents, cost details, risk, and claims management, which is more hassle to keep a record of these documents on paper. With the advent of blockchain, the record-keeping system has become easy as fluid from the inception to the disposal of the insurance policy.
Casualty and property insurance
As we say property and casualty insurance encloses primarily home, motor, and commercial insurance with a total net premium of trillions of dollars. To process these insurance policies everything has to be done manually with no room for human errors to happen. By using a shared ledger of the blockchain the issuance, claims and the payment of the insurance can be automated with more efficiency making the process five-time cheaper and three times faster.
Reinsurance is a method to insure the insurers when a large number of claims come all at once in the case of an earthquake and other such natural disasters. Usually, typical reinsurance takes up to two to three months to settle a claim from the time an insurer raises a claim to the recovery from a reinsurer.
The current reinsurance system is highly inefficient that costs up to 10 million dollars for the operational services. The lengthy process with time and money loss happens due to the reason, gathering claim data, calculating reinsurance premium and settlement disputes everything needs to be done manually.
This notoriously inefficient and complex process of underwriting each contract individually and exchanging it between various parties in the system to process the claim is tiresome. Using blockchain technology calculated premiums and loss transactions details will be available in the shared ledger accessible to both insure and reinsurer. It eliminates the process of reconciling paperwork between each party and also helps the reinsure to allocate capital in real time effectively.
Instead of an insurance policy encompassing all covers, Micro insurances provide covers and security against specific perils at a low premium rate, far less than a regular insurance policy. Due to micro-insurance policies having low-profit margins and high distribution costs, they generally don’t get enough traction. They tend to make a profit only when they are distributed in huge numbers.
Because of the low handling cost in blockchain, underwriting and claim settlement are done easily for the parametric insurances. Insurers will only need a few agents and payments are triggered immediately with the use of oracles when conditions like drought and other climatic conditions are identified. Unlike regular methods, traction of blockchain technology is high and it can perform well in the future.
While providing health reports and documents for the health care policies patients are more concerned about their privacy. So this leaves insurance providers no medical reports of the patients and it further takes to the denial of the insurance claims in the future due to lack of documents.
To solve these privacy issues, a cryptographically secured Blockchain has a solution of protecting the privacy of the customer while making an industry-wide repository for the health care data. It can encrypt a patient's medical record and send it via the system to the other end without revealing the actual information in the document. Also, it enables the customer to control their medical data and with whom to share it.
Internet of things (IoT)
The ever-growing amount of data produced by the onset of many connected devices and the Internet of things compels insurers to shift towards the blockchain and smart contracts. These smart devices and things are aware of themselves with the established sensors to detect any damages. The cars, home appliances, or any electronic devices can directly connect with the smart contract in the blockchain to have their insurance policies issued, renewed, or claimed on their own.
Whilst we are talking about insurance, blockchain technology itself is in its infancy. But the Disruption with blockchain technology is undeniable for a matter of fact. One thing is for sure, blockchain would be a decisive factor in transforming the whole insurance industry from the depth of outdated methods.
In the compelling near future, once a car is brought, it can automatically trigger an insurance quote with the help of a smart contract. The purchasing of the policy is completed they can right away transact money and required documents to the insurer on its own.
Again if the car is met with an accident, it can immediately detect the damage and communicate it with the insurer and decide on the necessary repair and claim processes. It is a win-win situation for both the insurer and the customer to move the process without any manual direction. The combination of artificial intelligence and the internet of things (IoT) will leverage the insurance industry with more transparency, trust, and security for everyone.