Revolution That Can Be Made By Blockchain In The Insurance Landscape
The role of insurers as intermediaries
Processing a claim requires complex coordination among the participants based on well-defined business workflows. Since these participants may not trust or even know one another, we think of them as “counterparties” with possibly opposing financial incentives. Insurers offer valuable services as trusted intermediaries who can coordinate among these counterparties such as getting a car repaired and making sure everyone’s accounts are settled.
Unfortunately, intermediaries can also add friction and bottlenecks. The insurance claim on a car can take longer to process partly because of the inefficient use of intermediaries in insurance processing. Rather than scheduling the repair and rental of the car yourself, You have to get multiple, possibly redundant, authorizations first. Most of the time, you will have to call or email someone who will act as an intermediary. Although helpful, these types of intermediaries introduce inefficiencies and costs that bog down claims and other workflows.
Decentralized workflows using blockchain applications may just be the solution.
Blockchain as an alternative to intermediaries
Blockchain technology uses cryptographically secure protocols that let counterparties safely transact with one another without relying on trusted intermediaries. All required authorizations and instructions can, or could, be securely shared among counterparties in the claims process once they had access to a copy of the blockchain ledger. Relieved of redundant responsibilities, insurers could offer valued services as participants, rather than as bottlenecks in the workflow.
In practical terms, this means the body shop could start the repair earlier, and the car owner could go pick up the rental car without first calling for approvals.
Can a blockchain simplify trust? And how would that work? Let’s take a look.
- Decentralized trust. Bitcoin, the cryptocurrency that popularized the use of blockchain technology, has been in operation for years, is used by millions of consumers and is worth, all told, hundreds of billions of dollars. The parties involved in Bitcoin use secure blockchain applications to trust data and transactions recorded in an electronic ledger, which is then distributed so each person has access to a copy. Baked-in cryptographic techniques ensure that all copies of the blockchain ledger are in agreement and have never been tampered with, in a process called “consensus”.
- Asset tracking. The success of Bitcoin and other cryptocurrencies has popularized and validated blockchain technology, paving the way for broader use in the transaction of all kinds of assets, nearly all of which today require centralized authorities to act as intermediaries. Real estate assets, for example, require the involvement of local governments; stocks require brokerages, and health records require hospitals. These types of assets — and potentially anything of value — can be recorded, tracked and transacted in a blockchain ledger throughout the asset’s lifecycle. Instead of employing a central authority, the consensus process ensures that every transaction remains valid and tamper-free. This is particularly useful in complex workflows typical of insurance.
- Identity management. In the past, identity has been managed by centralized authorities such as governments and influential online service providers. This results in a fragmented representation of identity that does not interoperate between issuers. Blockchain platforms offer the option for individuals and organizations to retain control of their own identities and associated profile data. Self-Sovereign Identity Management or SSI promises to reduce liability for insurers, while also mitigating the risk of identity theft and fraudulent claims.
Blockchain insurance applications
Armed with a sense of how blockchain technology works, let’s consider some possible applications in the insurance industry.
Asset tracking and proof of ownership
Insurance companies must first establish ownership of the insured property and also be able to track the transfer of ownership.
Ownership records of property for, say, homes and automobiles, can be recorded in blockchain distributed ledgers.
In this way, insurers can reliably and inexpensively track details and the transaction history of just about any asset of value. These are often digital assets or, using a process called “tokenization,” digital representations of physical things.
Reinsurance and shared risk
Once physical assets are tracked as digital tokens, insurance companies can pool or distribute the risk much like securities are managed in financial applications.
Property ownership records tracked on blockchain ledgers are made trustworthy and virtually tamperproof. That reduces the need to replicate research efforts associated with title insurance and substantially reduces the likelihood of errors or fraud.
Smart contracts for insurance processing
Self-executing blockchain programs called “smart contracts” are being used for autonomous execution of underwriting, issuance, claims, verification and settlement processes. Smart contracts have the potential to dramatically increase efficiencies and reduce clerical errors.
Groups of participants not individually eligible for the suitable insurance coverage might use the decentralized trust and autonomous processing smart contract capability of blockchains to self-insure the group by sharing risk at a reduced cost.
Certain low-value or exotic products are often just too expensive for coverage by traditional insurance policy processing. Blockchain automation has emerged as a way to reach untapped markets and insure assets that would otherwise not be worth insuring.
Internet of things (IoT) self-insurance
Smart devices and property aware of their state can interact with smart contracts to buy their insurance or file claims as established by their sensors. Just like a modern refrigerator informs a homeowner when the water filter needs changing, smart devices and property may also issue alerts when their warranties expire and require renewal, or even renew them automatically.
What the future holds
In a compelling near-future scenario, purchasing a car could automatically trigger an insurance quote smart contract on a blockchain. If purchasers accept an offered quote, they could immediately deposit monetary assets into a new insurance policy smart contract. Another transaction might add documentation proving ownership and value of the insured property.
Subsequently, a collision detected by sensors in a connected car might trigger the first notice of loss (FNOL) transaction, initiating autonomous workflows for verification, repair, and rental authorizations, and payment via a smart contract. The policyholder would not need to file a claim, and the insurer would not have to manually administer it. This can reduce the potential for fraud, decrease administrative costs for the insurer and simplify the claims process for the customer.
It’s these kinds of automated blockchain processes that offer the most promise to insurers. While both blockchain and connected cars are evolving, look for more integration of these new technologies as test pilots are deployed in the next months or years.
Promising though it is, blockchain technology raises many good questions that insurers must address before moving forward.