For most people, insurance is just something we pay monthly or yearly without a second thought. Yet it’s the very thing that financially protects some of our most valuable assets — like our homes, cars, and health.
And sure, you may have mulled over coverage amounts and discounts during the initial policy purchase, and maybe you even read the fine print (we said maybe). But what if you have too much coverage? Or not enough?
Enter blockchain technology. This relatively new concept is making waves across the tech scene and could revolutionize the way we buy and pay for insurance — with the amount of coverage that isn’t too high or too low for your situation. But to understand how blockchain technology works, let’s first explore its foundation: digital distributed ledgers.
Digital distributed ledger: Defined
Ledgers have been around since practically the beginning of time. They’re about as old as currency and writing — evolved from clay tablets to paper bookkeeping to digital spreadsheets — and are still used today to document records of transactions.
While paper forms still play a major role in our day-to-day activities (think cash, bills, signatures, certificates), developments in cryptography and advanced algorithms have allowed conception of distributed ledgers.
So, what makes these distributed ledgers significant? Simply put, they’re a part of a larger network with a unique distribution channel. It sounds complicated (and it is), but know that these ledgers enable for a new record-keeping system that goes beyond a simple database. Plus, unlike paper forms, distributed ledgers enable us to protect and formalize connections in the complex digital world.
Most importantly, these ledgers are changing the way we communicate and gather information. They allow us to move beyond old school data-entry and explore how we extract and manage data from a safe record.
What exactly is a Blockchain?
People spend more time online than ever before — browsing retailers, depositing checks, ordering sushi. All of these actions build our unique digital selves.
This information creates “chains” of data. This data is then formed into “blocks” to be disbursed across a worldwide network (here’s where our digital distributed ledgers come into play). These blocks contain timestamped records — down to the second — that can’t be hacked or corrupted, forming a sort of digital DNA.
Since there’s no centralized authority that can control this information, blockchain technology is considered incredibly powerful and secure.
Insurance and Blockchain Technology
So, how does this technology disrupt insurance? Well, let’s start by laying out how insurance works. Basically, there’s an established contract between two parties (insurer and policyholder). Yet there’s room for human error on both sides — like complex language (mumbo jumbo) on the insurer’s side and bogus claims on the policyholder’s side, for example. A smart contract works to alleviate trust issues (which are not possible through traditional contracts) and decrease transaction costs.
Transparency with Smart Contracts
In the simplest form, smart contracts are code that execute once specific conditions are met on a blockchain. Here’s how it works: first, contract terms are agreed upon, coded and placed in the blockchain. Once an event triggers, the contract goes into action.
Think of smart contracts like a vending machine: You put money into a machine (cannot be changed halfway through or undone). The machine keeps the money and gives you a candy bar. The contract has been executed.
Specific to the insurance industry, smart contracts can play a vital role in multiple ways. They enable policy documents to be stored on multiple digital ledgers so all are available for amendment and evaluation by different parties and can never be altered or lost without the parties’ agreement. Also, they streamline legal and contractual procedures in a simple and secure manner.
Smoother claims process
When a claim is entered, the smart contract on the blockchain can verify valid claims. It could detect any malicious activity, such as multiple claims for one accident. Plus, it makes the whole process quicker without the need for human intervention.
Switching insurance companies can be … tedious. Smart contracts on blockchain allow verified (and secured) data to be easily accessed and shared without time-consuming data entry or lengthy verification.
The greatest reason for insurance companies to get aboard the blockchain train? To prevent fraud. According to the FBI, each year a staggering 40 billion dollars is contributed to fraudulent activity — with the average American family taking on the burden of around $400 to $700 in increased premiums. Blockchain technology is known for authenticating police reports, purchases and more, which works to eliminate fraud.
Blockchain technology is helping rebuild trust that has long been broken between insurers and policyholders. As applied to pay-as-you-go insurance or usage-based insurance (UBI), this technology could help form a deeper connection.
UBI is a relatively new concept that interprets the number of miles you drive and adjusts your rate accordingly. In theory, this type of insurance encourages people to drive less and drive safer for, yep, you guessed it, lower rates. A win for both insurer and policyholder.
Blockchain could enhance UBI products by storing collected data from vehicle sensors in the blockchain, thus lowering costs for drivers and providing insurance companies with complex, protected consumer data. A study by Allied Market Research suggests the UBI market could explode from 15 million to 142 million consumers in the next five or so years. So, pay-as-you-go insurance could be the answer to discovering the right amount of coverage for your lifestyle, with secure blockchain technology helping to vastly improve the process.