In case you haven’t noticed, the insurance industry, more so than others, has a history of taking a cautious, steady and at times skeptical approach toward innovation. Fraught with time-consuming processes and heavy regulatory requirements, insurance companies can easily fall behind in today’s on-demand world. While the industry takes a hard look at how it must reinvent itself in the wake of demanding digital transformation, one emerging technology, in particular, holds great promise for helping insurers keep pace with the times: blockchain.
Blockchain, the technology base for verifying payments, is already disrupting the financial industry and we can expect to see it completely overhaul financial services in the near future. For example, blockchain is drastically reducing settlement periods by digitizing the cumbersome process, saving the industry $65-$80 billion a year. Global currency exchange and practices are also made more manageable, fast and secure.
Blockchain opens up new opportunities and benefits to hundreds of other industries that work with clients and depend on security and confidentiality in their transactions, including insurance.
Since confidentiality and security are non-negotiable requirements for insurers, blockchain provides the ideal platform for secure and efficient transactions. Despite security being top of mind for insurance companies, fraud is still an expensive problem that plagues our modern, digital world. Across all lines of insurance, $80 billion is lost to fraud every year.
Blockchain, which also serves as the backdrop for cryptocurrency and secure payment methods like bitcoin, is a stepping-stone on the path to greater visibility and security for the industry as a whole. As its name suggests, blockchain transactions are made up of a series of stored blocks linking to each following block, making it significantly challenging for hackers to steal data along the way as they would have to alter every block that followed. Each transaction is time-stamped and unalterable making identities far more secure and data more trustworthy.
No technology is perfect, however, and there are plenty of headlines about devastating blockchain attacks. What’s important to note, is that it is not the blockchain itself being hacked but the software that sits on the blockchain. Any insurance application would be open to similar vulnerabilities, so it is critical the industry take a cautious and careful step forward into the blockchain. As the technology cycle matures, exposed vulnerabilities will pave the way toward best practices while regulatory agencies and law enforcement will be better equipped to prevent attacks and prosecute those who are responsible. Industry experts anticipate these developments to evolve over the next few years.
For the insurance sector, blockchain serves a particularly useful function in cutting out the middleman and conducting transactions solely across relevant parties. Delivering data, invoices, contracts and more are made significantly more secure and instantaneous — catering to our need for on-demand, real-time responses.
As the world turns toward digital options ever more quickly, the ability of brands and companies to reach their customers directly also grows. In fact, it has never been easier to communicate directly to customers in the moments they are most likely to engage.
Not only are communication channels expanding in this digital age, the digitization and security offered by blockchain allow for greater efficiency in time-consuming, necessary processes like onboarding new customers, underwriting, claims handling and contract delivery.
Smart contracts are a noteworthy stride in keeping time with the digital world. Because they can carry out only the specific functions assigned to them, smart contracts behave with blockchain-like similarities, as each action within the contract is traceable and irreversible. Legal insurance contracts or death benefits can now be shared electronically, putting information right into the hands of the customer.
While this technology offers greater speed and accuracy, and the potential of saving hundreds of man-hours on time-consuming processes, the truth remains that regulation holds the key to further innovation and widespread adoption. For example, regulations in some jurisdictions still require paper contracts, and unless this change, innovations like smart contracts may take a backseat.
Aside from regulation, the question remains whether blockchain is scalable enough to operate at the level needed by insurance providers. Blockchain is still three to five years away from feasibility at scale. Any blockchain adoption and advances in this area would require technology capable of handling the high volume of claims, contracts and more. Ethereum, a cryptocurrency platform built on blockchain, manages around 14 transactions per second, and Bitcoin only seven. As it stands, these particular blockchain-based platforms couldn’t support the hundreds of thousands of transactions that would occur between insurers and their customers. However, the blockchain revolution marches on and the future looks promising.
Providing proof of insurance is often the first step in receiving other financial services. Yet the reality is many in the developing world don’t have access to coverage. Opportunity to serve these markets is critical and global economic growth is dependent on it.
In the Philippines, it is estimated insurance penetrates only four percent of the market — yet even that is a noticeable jump from Indonesia where penetration is just one percent. These markets are incredibly underserved making it significantly more difficult to climb the poverty ladder. Without the protection that insurance offers, the financial status, and needs of millions of people in these areas remain volatile.
Insurance companies have the ability to protect the assets and livelihood of those in developing countries. Natural disasters hit frequently, often without warning, sometimes leaving desolation in their wake. Sudden acts of nature aside, individuals also require insurance to protect against the ups and downs of life — everything from crop failure to home damage to loss of income due to illness or injury. Enabling individuals in these markets to access insurance through mobile phones, with blockchain as a foundation, could prove to be the break in the cycle of poverty.
In a new digital-first world, legacy IT systems cause inconsistencies and inefficiencies within the insurance industry. As they fade into a thing of the past, new doors open for digitization within the industry. Blockchain provides an unprecedented platform for the faster and more secure delivery of data, information, contracts and more. It provides the means to access new markets in need of the benefits insurance has to offer. Armed with the potential of blockchain, the insurance industry, like many other sectors, can continue to strive toward modernization as it faces digital transformation.