Blockchain: How This Technology Is Changing The Insurance Business
Mention the word blockchain and most people will think of cryptocurrencies, mining, and large power-hungry data centers. But a new generation of private blockchains is emerging that is helping to drive digital transformation in the insurance industry. A private blockchain is already being used to automate claims functions and payments more securely and transparently, for example, reducing costs, saving time, and ensuring compliance. Global analysts and research companies are predicting rapid adoption and urging the insurance industry to invest in the long-term benefits of blockchain technology. It was actually predicted that as soon as 2023, the annual global blockchain market in insurance will grow to more than $1billion.
Blockchain is essentially a digital system of recording impossible information, or at least extremely difficult, to alter, cheat or hack, and it is already changing digital world concepts such as ownership, privacy, uncertainty, and collaboration. It is disrupting sectors as differentiated as financial markets, content distribution, supply chain management, telecoms, distribution of humanitarian aid, and even the way we vote in elections.
As a business of detailed, confidential data collection, insurance is an industry of risk management, contract execution, and third-party payments. As with all fintech sectors, its main areas of potential weakness are error and exposure to compromise and fraud. Validated information is the cornerstone, while trust is the core of the credibility and functioning of the digital ecosystem. This is where private enterprise blockchain enters the frame, providing a platform for the insurance industry to deliver security, trust, transparency, and accuracy. Given that market analysts estimate that today anywhere between 5–10% of all insurance claims are fraudulent, there has never been a stronger case for ensuring that the storage and handling of data are more secure than ever.
Blockchain and the data security it brings with it creates an effective response for insurance companies facing ever-increasing compliance and mature markets with more competitors. The common factors in all these aspects are the huge amounts of data involved, coupled with a rapidly expanding number of connected devices capturing real-time information. Organizations must have visibility and trust in their data to compete effectively with market disruptors and deliver competitive products and services. This means that the path to digital transformation has left many insurers wondering how to streamline processes, improve the security of sensitive information and reduce costs.
Private blockchain platforms simplify the process, making it more secure, transparent, and efficient, eliminating suspicious and duplicate transactions by securely and chronologically logging each transaction. Once verified, using an advanced consensus algorithm, and then cryptographically sealed into data blocks, the transaction is set in stone or ‘immutable’. The user can then verify the authenticity of customers, policies, and transactions by providing accurate, secure, and transparent historical records.
Apart from the area of immutable data, early-adopter insurance companies are also using blockchain in other applications such as smart contracts and re-insurance. Enterprise blockchains can store business logic in dedicated smart contracts. They connect real-time information from multiple systems, physical documents, and activities, which can then trigger claims, payments, and reimbursements faster and with greater accuracy. Precise reserve calculations based on current contracts provide insight into how much money is available as claims are paid. Private enterprise blockchains provide a secure, decentralized database, while overall control remains with authorized personnel. This delivers highly accurate data to help re-insure and rebalance exposures against specific risks and in tandem with AI, can be used for predictive risk modeling to provide a far greater degree of surety.
Public vs Private Blockchain
Although the mechanics of blockchain are extremely complex, the concept is straightforward enough: to decentralize data storage so that a central actor cannot own, control, or manipulate data storage. Blockchains come in three flavors — private, public, and hybrid — but it is a private blockchain that is gaining traction in the commercial enterprise markets such as the insurance sector. This is because, unlike public blockchains where anyone can join, a private blockchain is a type of database where a single authority or organization ultimately retains control. And although this raises the question as to whether private blockchains are aligned to the original core concepts of the technology, this is of less importance than the fact that blockchain technology delivers a distributed database that provides a single time-stamped version of the truth.
Complex mathematical and cryptographical techniques provide trust and security — rather than through third parties, while an accessible and open user structure provides transparency and validation. While private blockchains adhere to the original principles of blockchain and offer all the distributed benefits, they retain some of the characteristics of more centralized, controlled networks. This provides a level of control to improve privacy and eliminate many of the illicit activities often associated with public blockchains and cryptocurrencies.
No one can enter this type of blockchain without proper authentication. Private blockchains are, by definition, ‘permissioned’ and are more suited to enterprises due to factors such as performance, accountability, and cost. The private blockchain platform can be run and operated by the enterprise or as a service called Blockchain as a Service (BaaS). They are usually set up for reasons of privacy, where it does not suit an enterprise to allow every participant full access to the entire contents of the database. Private blockchain platforms focus on organizations in which the blockchain empowers and supports the business rather than the individual users.
In contrast, public blockchains are fully decentralized where, in addition to the distributed database, there is also no single entity in overall control. They typically involve their own cryptocurrency to pay for the transactions and anyone can download the software, view the ledger, and interact with the blockchain. Public blockchains attempt to preserve an individual user’s anonymity and treat all users equally. As the name suggests, hybrid blockchains are a mixture of the two, with one foot in each of the public and private camps.
When it comes to safeguarding a company’s sensitive information, using private blockchains is the preferred option for many enterprises, especially as they will also need to demonstrate full accountability — often via external audits — on the running and operation of their systems. Private blockchains provide a higher degree of regulation, determined and set by the administrators in line with industry regulatory codes. Importantly, private blockchains do not need to use cryptocurrencies or native tokens to run the network, and any association with cryptocurrencies, good or bad, is not part of the private solution. All of this means that less energy, fewer resources, and fewer participants are required to run the private blockchain, resulting in a faster platform with less cost on a far more predictable scale.
Inmediate is an insurtech startup from Singapore that is using the latest technology such as Artificial intelligence, Distributed Ledger, and NLP, making insurance processing and underwriting fast, cheap, and flexible. That gives for better processes, lower costs, improved time to market, and new revenue opportunities.