Blockchain Technology: How Does It Affect Insurance and Policy Holders?
While many in the insurance industry have an optimistic outlook on the implementation of blockchain technology, they haven’t yet determined exactly how it will be used. Blockchain is a nascent technology, and at this point, its ultimate use cases are undefined.
Potential use cases for blockchain in the insurance industry
With all of the fervor around cryptocurrencies and blockchain, one might wonder if businesses are developing blockchains simply out of hysteria. In truth, some probably are.
Situations exist where a centralized database may still make the most sense, or the benefits of a blockchain-based system might not be worth the research and development involved. Businesses shouldn’t implement blockchains into their practices simply because the technology exists. Just to elaborate more, here are several criteria for identifying an eligible use case for blockchain technology:
- Multiple parties are involved.
- There is value in having shared data access on a tamper-proof platform.
- The process could benefit from increased automation.
- There is value in eliminating the need for a trusted intermediary.
- The benefits of a decentralized ledger outweigh the benefits of a central database, such as latency and scalability.
- A decentralized blockchain approach is feasible.
With these standards in mind, insurers have begun exploring the following use cases, in which blockchain technology could improve business processes.
Improved collaboration among multiple parties
Behind every insurance policy is a web of business relationships, including insurance agents, financial advisers, third-party service providers, government agencies, reinsurance companies, and customers. Data associated with an individual’s policy, or the dollars used to pay for it, can change hands several times. Managing each of these relationships is manually intensive, and having so many parties involved creates multiple opportunities for a data breach.
A decentralized blockchain could enhance security while giving each of these parties an efficient source for the information they need to audit, approve or participate in business deals on a daily basis.
Faster payment processing
Collectively, insurers receive and remit billions of payments globally each month. These payments vary in size, currency and parties involved, and they can be incredibly labor-intensive to execute and record.
With a blockchain-based system, claims reimbursements to customers, subrogation between insurers, commission checks to insurance brokers and payments to reinsurance companies could all be set up to occur automatically according to preset parameters. Doing so could save insurers significant time and money, plus reduce the possibility of payment fraud.
How will blockchain affect policyholders?
It’s too soon to say for sure which changes will obviously affect policyholders. However, anything that helps an entire industry operate more efficiently should ultimately benefit consumers. Here are three changes that policyholders may see in the coming years.
Faster claims reimbursements
If blockchain technology enables insurers to automate or efficiently process claims, it’s likely that individuals will receive reimbursements more quickly. An excellent example of this is the life insurance claims process.
Currently, when a policyholder dies, beneficiaries must actively complete a tedious death registration and claims process. Since this inefficient process takes place during what is already a stressful and traumatic moment in a beneficiary’s life, billions of dollars of life insurance benefits go unclaimed. In many cases, beneficiaries don’t even know they’re entitled to a payout.
However, if policyholders, beneficiaries, hospitals, funeral homes and life insurance companies all existed as nodes on a blockchain, that claims process could occur automatically, as soon as a hospital record that a person has died. Insurance companies could save time tracking unfiled claims, payouts would be remitted automatically and beneficiaries could focus on more pressing issues.
The security measures and smart contracts built into some blockchains allow geographically and economically dispersed people to trust each other. Because of this, some industry professionals expect peer-to-peer insurance to become more common.
Peer-to-peer insurance describes the collaborative agreement wherein a group of individuals agrees to pay for other individuals’ claims, spreading the risk across the group. Essentially, it’s insurance without a large central company taking a cut. Blockchain makes facilitating this type of agreement far more feasible.
Several crypto companies, including InsurePal and MediShares, are already working to leverage blockchain technologies for this purpose. However, it’s likely that major insurance companies are also researching how to facilitate this business model without being entirely cut out of the process.
Usage-based insurance already exists, but it’s likely to become more common under a blockchain-based system. Under usage-based insurance, your coverage or policy premiums are directly connected to your individual behavior.
Since blockchain enables companies to capture and track data on a more detailed level than was possible before, it will likely allow insurers to gain deeper insight into policyholders’ daily behavior. Because of this, policyholders may see their insurance rates based more heavily on their behavior, such as distance and speed they drive, the number of steps they take in a day or the number of hours they spend in their house each week.
Regardless of your views on cryptocurrencies themselves, blockchain is an emerging technology that could be transformational to a broad range of businesses. While still underdeveloped, blockchain looks especially promising for the insurance industry. Even if the ultimate use cases for the technology aren’t as disruptive as some have claimed, consumers should expect to see blockchains further implemented within the insurance industry in the coming years.