How is the Blockchain going to help Insurance? Inmediate weighs in on the matter
“The Insurance Industry epitomises a blockchain use case. Adoption of blockchain as a standard system of industry transaction can improve collaboration between market participants and streamline market operations — freeing up billions of dollars in capital otherwise spent on auditing & administrative costs, lost in fraud, or frozen in collateral as a result of low risk visibility.” (by Kevin Doubleday on Medium.com- Insurance on the Blockchain)
Blockchain solves many existing problems of Insurance
We often get asked; is blockchain technology going to help insurance? The short answer is: yes.
In order for non-insiders to fully grasp this concept, there are a few blockchain features that we need to explore. The first is that — simply put — blockchain for insurance creates electronic contracts. The second thing to keep in mind is that blockchain records are stored in such a way that not the contract nor the execution thereof can be stopped or changed.
So, what we are really talking about here, are new and better types of insurance contracts. To get a full understanding of the benefits, let’s first take a look at the challenges with traditional contracts:
1. The terms and conditions of these traditional contracts need to be interpreted and different readers/parties may have different interpretations. This means that we need help when we buy policies and that disputes can arise in claim situations. This is the maligned policy vagueness and in-opagueness and lengthy claim procedures.
2. Usually different interpretations only come to light during disputes. That means that before problems arise no one can actually measure what the actual liability of parties to the contract is and whether this has been correctly accounted / provided for by the party that is liable to pay.
3. In order to claim under a traditional contract, one of the parties needs to start a process that can be tedious, expensive and cumbersome — particularly if there are complications around the reliability of the parties, the events or circumstances because of bad faith or incomplete, incorrect or even fraudulent information.
4. The negotiation of a contract, the offer and acceptance, the drafting, administration, financial settlement, the re-insurance, regulatory reporting and the assessment and settlement of claims all are very laborious and cost a lot of money. This creates wastage and renders contracts for small amounts uneconomical.
The damning conclusion should be that for the average user traditional insurance contracts are unclear, inconvenient, tedious, unreliable and expensive.
What needs to be done?
New generation blockchains have the possibility to create electronic contracts, also known as “smart contracts”. The smart contract is impartial and is basically an algorithm that is irrevocably programmed to pay an insured sum if certain conditions are met. Those conditions are coded and cannot be changed. This opens the door towards designing policies that are crystal clear and leave zero room for interpretation. The only thing we need is data that is correct and incorruptible. This can be any kind of data, but best is of course if it is automatically generated — for instance through linkage with reliable electronic sources of information (also known as oracles), like, for example the registry recording the passing away of a person in the official records. This information can be recorded by the smart contract algorithm that regularly checks the relevant records and triggers a payment under a life insurance without the beneficiaries ever even having to call the insurance company.
To turn this into a reality, the insurer is obliged to design smart contracts that are crystal clear and cater to every possible scenario. That is a lot of work initially, but it only has to be done once for it to be used forever. Inmediate will facilitate this.
What we can all look forward to
In the short run we will see a slow but steady retreat from the current comprehensive policies until such time that the flood of information required is readily available and the gates will be truly opened. Until that time smart contract insurances will be for relatively simple insurances — but as time, experience and the availability of data increases the possibility to build comprehensive policies will exponentially improve.
Key Blockchain features that enable all this to happen
Does blockchain technology have the potential to tackle these problems? Yes. Smart contracts operate seamlessly on these distributed ledgers and when sitting on their blockchain they cannot be changed without all the nodes agreeing. On public blockchains there are a huge number of nodes. On private blockchains that is different. Insurers will favour private or permissioned blockchains. They will however need to assure policy holders and regulators that the governance around access right is properly taken care of.
A second reason why blockchain is needed is that the smart contracts trigger payments. These payments don’t necessarily have to take place on the blockchain, but moving that part of the ecosystem there as well may — if the technology lives up to its promise — down the line make the process faster and cheaper than having to bridge back to conventional settlement systems and the admin with all the reconciliation effort and costs required.
This is not all. Blockchain technology can record and secure all kind of data that will offer important inputs for insurance smart contracts. To have this (historical) data available on the blockchain will make the pricing of insurance faster, more accurate and prevent fraud. This enables insurance to become cheaper. The human involvement in the application and administration of policies will significantly decrease, costs will drop even further, and speed will increase — essentially reverting to real time. Because the costs become lower smaller polices will become economical and the need to buy “big policies” that over-insure consumers becomes less. This will allow people who cannot afford bulky expensive policies to buy cover that meticulously meets their budget or circumstances.
Of course, there are privacy concerns. That is why it is important that truly personal data is controlled by its owners: customer. Again, blockchain can oblige and help to adequately define and govern who controls data. It brings it out into the open.
The regulator will have much more granular control by having real time insight in what the real exposures of insurers and underwriters are. Eventually the ability to trade risk exposures will arise based on a shared digital ledger without discrepancies in data formats, processes, and standards which can enhance global financial stability.
Where Inmediate stands
Inmediate is going to facilitate all of this. Together with a pioneering group of insurers we will build a network application that connects insurers and other stakeholders such as customers, distributors, oracles and regulators thus enhancing interoperability in these multi-party processes and keeping it efficient and transparent, which is in the interest of everyone. For all parties this offers a win-win: much cheaper, clearer, faster, fairer and more accessible insurance anywhere anytime.
Otbert de Jong