Is Blockchain Technology Taking The Insurance Industry To The Next Level?
There are certain problematic patterns recurring across industries that exist as a byproduct of the technologies used. Issues such as high counterparty risk, low interoperability between parties’ data and lack of transparency have time and time again resulted in disastrous consequences. The lack of transparency case has particularly severe ramifications in the insurance industry.
Critical to the functioning of this industry is the convergence of claims towards an objective truth of events that have transpired, but when companies or consumers alter these to further their own interests, it’s a) hard to spot this due to an absence of effective recording and b) hard to attribute it to a certain party if the alteration is spotted. This results in both time and money being squandered through elongated legal procedures — not only due to external fraud but to internal fraud, too (consider examples of collusion between fraudulent actors and employees of a company).
Of course, the wild inefficiencies in the industry are a double-edged sword that affects customers just as much as companies — individuals signed up to a service, too, are kept largely in the dark about what it is exactly what they’re paying for. If an incident occurs where an insurance company needs to be queried, from vehicle insurance to home coverage, a customer needs to first call an agent to understand whether they’re eligible for financial assistance. More often than not, even hours on the phone with an advisor still leaves individuals confused over what they’re entitled to, and what needs to be paid out of pocket. This makes insurance risky — customers are gambling on whether they will receive restitution, or suffer from a financial loss.
There has to be a way of eradicating this uncertainty on the end of both providers and customers. Alterable records and obscure processes seem antithetical to the very functioning of an industry that requires the unearthing of facts, and subsequently disbursing financial compensation to parties that have paid for such a service. I believe that, to these ends, distributed ledger tech may prove to be incredibly valuable.
Towards a More Open and Transparent Insurance Industry
Blockchain technology is something of a key in the proverbial kingdom of locked doors, a partial solution that allows for a huge scope of applications that can assist in circumventing traditional problems across a plethora of industries.
At its core, it’s a method of ensuring that participants in a network (so-called nodes) each hold an identical database that synchronizes the same data simultaneously. The databases are append-only, meaning that entries cannot be deleted or modified, only added. One can see the value proposition of these databases — they’re immutable and censorship-resistant. To shut down the network, you would need to shut down every node (technically infeasible, as these are scattered around the globe). What’s more is that, because of how these function, transparency is not only a feature but also a necessity. The result is a permanent record controlled by no one, but accessible to everyone.
For insurance purposes, it’s widely agreed that we need more transparency. Companies deploying a blockchain-based solution would be able to provide their customers with access to all of the information needed (how they are/are not covered), benefitting not only the customers but the companies, too: every year, insurance companies pay millions of dollars in litigation costs, and that’s only in cases pertaining to misunderstandings about their offerings (not explicitly stating what it is that they cover, customers disagreeing morally with the level of coverage they’re getting, etc.). A shared ledger would enable customers to compare their situation with those having transpired in the past and understand how companies have handled prior incidents.
Insurance agencies can settle on an easily-readable format for recording coverage transactions, and upload them to the blockchain network — this also provided a sort of paperless paper trail that would prevent fraud or money laundering internally and would allow for patterns of suspicious activity to be identified promptly, although many companies as of late have already implemented highly sophisticated algorithms to detect this sort of behavior. Additionally, the tech can be integrated into their supply chains, making exchanges of data more efficient (faster and circumventing the need for intermediaries and other third-party involvement).
Blockchain technology is a natural fit for the insurance industry and a valuable tool in a suite of technological advances. Already, existing companies (and new entrants) are hard at work researching and implementing solutions into their systems, so as to correctly track transactions and create immutable records of these. Together, the industry is iterating towards the integration of distributed ledgers for better security and efficiency. I anticipate that, in light of this, we’ll soon see a rise in the faith that customers have in their insurance coverage, alongside these entities’ confidence in their ability to provide policies tailored to the individuals they serve.