Introduction

Blockchain is still a buzzword in the digital business world. The Insurance industry is no exception. As the field is constantly changing, insurers need to rethink traditional practices and find new ways to take advantage of the latest technologies to stay competitive.

Some of the industry’s players are actively adopting Blockchain Technology to improve their operations and better serve their customers. At the same time, others are still exploring the potential benefits of implementing blockchain.

However, there is already a lot that can be done with this emerging technology. For example, it can streamline claims processing, prevent fraud, and help insurers build more trustful relationships with their customers.

In this article, we’ll discuss the benefits and limitations of blockchain in insurance, its applications, and the experiences of top companies already using it.

How does blockchain technology work?

At its core, blockchain is a distributed ledger technology that enables the secure and transparent recording of transactions and data across a network of computers. Unlike traditional centralized systems, where a central authority validates and maintains the ledger, blockchain operates on a decentralized network of nodes. Each node maintains a copy of the ledger, ensuring that all participants have access to the same information.

As the name suggests, blockchain groups transactions into blocks, which are digital containers for storing transaction data. Each block contains a unique identifier, called a cryptographic hash, that ensures data integrity. The chain links these blocks together in chronological order. Once a block is added to the chain, it becomes immutable, making it nearly impossible to alter the data or tamper with past transactions.

To add a new block, network participants must reach a consensus on its validity. Various consensus mechanisms are used to validate transactions and ensure the agreement of all nodes in the network. The most common consensus mechanisms are Proof of Work (PoW) and Proof of Stake (PoS). They also add an extra layer of security and trust to the system.

Blockchain technology meets the insurance industry

Many processes in the insurance industry are outdated. For example, many policies are still processed using paper contracts, and customers have to call in to purchase new policies. What’s more, these processes have a high potential for human error and misuse, which can result in information being lost or misinterpreted. This leaves a lot to be desired in terms of efficiency, security, and customer satisfaction.

Although blockchain is a promising solution, it still has its own challenges and obstacles. Insurance providers must overcome legal and regulatory issues before fully adopting blockchain technology. Many features of blockchain could conflict with current insurance laws. For example, personal data and customer policy information that exists on a blockchain must comply with existing privacy and data protection laws. In addition, decentralization enhances information sharing and reduces the benefits of information asymmetry. Therefore, it creates new challenges for management in pricing, product development, claims services, etc.

What should insurers be doing about blockchain?

Insurance providers are under increasing pressure to reduce the cost of managing paperwork and operations. Blockchain can modernize computer systems, making them more efficient and competitive.

The insurance industry has a lot of senior employees, so there is a need for more automation. Blockchain technology can make this possible.

Insurance companies need to meet rising customer expectations for personalized services, better data protection, innovative products, competitive prices, and additional benefits. Blockchain can help create and implement new business models, systems, security protocols, workflows, etc.

Existing IT departments may not have enough people or expertise to start using blockchain in real life. Therefore, insurers should identify, and perhaps even invest in, potential technology partners with a deep understanding of blockchain. Insurance providers should also consider working with third-party experts in blockchain development.

To make the most of blockchain and transform the business, insurers should leverage advanced analytics, artificial intelligence, and IoT, as well as collaborate with a wide range of stakeholders.

Individual insurers and the industry as a whole should actively collaborate with large healthcare providers to ensure that the creation of standards facilitating blockchain-based interoperable data repositories meets their own long-term commercial interests.

Finally, insurers should plan and develop proofs of concept to show how they can use blockchain. This will help them create better products and services and build more interactive relationships with policyholders.

Benefits of blockchain in insurance

Accelerates claims processing

Blockchain technology enables real-time data collection and analysis, which can potentially speed up claims processing and payouts.

Blocks false claims

Fraud is one of the insurance industry’s biggest pain points. Even though insurance providers use advanced analytics and other methods to block false claims, fraudsters continue to develop more sophisticated ways to defraud companies.

Blockchain has the inherent ability to record time-stamped transactions with full audit trails, making it extremely difficult for bad actors to commit fraud. For example, a blockchain-based ledger can be used to track data related to high-value items, such as jewelry or precious metals. As a result, blockchains can replace certificates of authenticity to avoid duplicate claims, fake insurance claims, and fake replacements.

Enhances customer experience

Customers expect insurance providers to offer lower premiums, as long-term loyalty to one company is no longer a given. What’s more, fierce competition from new entrants offering on-demand coverage and other innovative models has created new challenges for traditional insurance providers.

As a result, earning customer trust without compromising on price margins has become critical.

However, there is a way to overcome this challenge. Companies can use blockchain-based smart contracts to enable automated processing. In this model, business agreements are built into the blockchain, while payments are triggered automatically when predefined conditions are met.

Empowers more automation

Blockchain-based smart contracts streamline insurance processes and workflows, enabling transparent transactions. For example, the entire insurance claims process is smooth because the blockchain executes based on the conditions of the smart contract. Moreover, blockchain does this automatically, so automation is a significant advantage for insurance providers.

Therefore, blockchain reduces administrative costs for insurance companies, saving effort, time, and money.

Enhances efficiency

Many processes in the insurance industry are manual and time-consuming. Blockchain can streamline paperwork and reconciliation for insurance contracts.

Increases trust

Establishing trustworthy relationships between different entities is one of the key benefits of using blockchain technology in insurance. The essential feature of consensus algorithms built into blockchain enables verifiability and immutability.

Consensus algorithms streamline the process of creating smart contracts on the blockchain, which brings great benefits to the insurance industry. Moreover, since blockchain is an immutable ledger, its smart contracts enable timely, transparent, and robust transactions.

To reduce fraud, industry players can use a distributed claims ledger for auditing with no per-transaction fee. At the same time, regulators can monitor all insurance variables in real time on the ledger, making the audit process more consistent.

Helps collect and store useful data

Insurance providers rely heavily on data. Using artificial intelligence (AI) and the Internet of Things (IoT), blockchain can be used to collect a variety of applicable data. For example, data collected through IoT can be stored on a blockchain and then read by AI, allowing companies to make more informed decisions about insurance premiums.

What’s more, IoT devices can monitor a vehicle to qualify insureds for safe driver discounts, giving the customer’s insurance company more data on vehicle performance and driver habits to work with.

Smart contracts

Smart contracts are digital and programmable agreements that execute automatically when predetermined conditions are met. They automate claims processing, increase transparency, and reduce fraud. In addition, smart contracts enable timely payouts based on if/then conditions and eliminate intermediaries and unreliable paperwork. Smart contracts are cheap to administer and have lower costs than traditional policies.

Insurance applications for blockchain technology

Property & Casualty insurance

Property and casualty (P&C) insurance protects real estate, equipment, infrastructure, and other assets. It also includes liability insurance for accidents and injuries.

These types of insurance involve the collection of data to validate claims. Insurers must determine whether the terms of the policy have been met and the claim is due. This requires manual data entry, verification, and coordination between multiple parties.

Blockchain allows insurers to automate claims processing through smart contracts, digitally track and manage physical assets, provide a permanent audit trail, reduce operational costs, and speed up the payment process.

Smart contracts

Smart contracts are digital agreements that automatically execute when predefined conditions are met. In the insurance context, the terms of agreements between insurers and policyholders are written into the smart contract code. As a result, smart contracts eliminate the need for human intervention.

There is a high level of transparency, as all transactions related to smart contracts are recorded on a blockchain, meaning that each transaction is publicly available on the blockchain.

In addition, the risks of unauthorized manipulation and human error are significantly reduced. Claims investigation, coverage analysis, and processing are much faster because there is no need for manual assessment. This increases the efficiency of the insurance industry and builds more trustworthy relationships.

On-demand insurance

On-demand insurance is a flexible insurance model that allows policyholders to turn their policies on and off with a single click. The more stakeholders interact with policy documents, the greater the burden of managing records. On-demand insurance requires underwriting, buyer records, policy documents, claims, risks, and more.

With blockchain, maintaining records has become easier. Players in on-demand insurance can use blockchain technology to efficiently maintain records from the policy’s inception to its disposal.

Fraud detection and abuse prevention

Fraud is a pain point for the insurance industry. It is nearly impossible to detect fraudulent activity using traditional methods. According to the FBI report, non-health insurance fraud in the US is estimated at $40 billion per year.

Blockchain can help insurers eliminate common types of insurance fraud. When insurance claims are recorded in a blockchain-based ledger, all executed transactions are time-stamped and immutable. In other words, no one can change the data once it’s on a blockchain.

Furthermore, blockchain streamlines coordination among insurance companies. When all insurers access the same shared digital ledger, they know whether or not a particular claim has been paid. As a result, they can easily identify suspicious behavior.

Reinsurance

Reinsurance is insurance for insurance companies. It becomes necessary when an insurer writes a lot of policies and increases the risk of potential payouts. If an unforeseen event occurs, such as a hurricane or wildfire, the insurance company may have to pay out more than usual in a short time. Reinsuring the insurance premiums they have written can be an important protection.

Exchanging data between insurers and reinsurers is complex, inefficient, and time-consuming. Insurance companies tend to use multiple reinsurers, which means numerous parties must share data to settle claims.

Blockchain can streamline the flow of information by providing an immutable ledger that serves as a single source of truth for all parties. In addition, smart contracts can use this ledger to reconcile contacts between insurers.

Microinsurance

Microinsurance protects policyholders against specific risks in exchange for regular premium payments. It is only profitable if it is distributed in large volumes. However, microinsurance policies don’t get the traction they deserve due to high distribution costs and low-profit margins.

Blockchain technology can automate claims handling and underwriting based on defined rules in microinsurance schemes.

Health insurance

Sharing patient data between health insurers and hospitals can make the health insurance claims process expensive and time-consuming. That is where blockchain technology comes in. It enables accurate, fast, and secure sharing of medical data between insurers and healthcare providers.

When encrypted patient data is recorded on a blockchain, insurers, and healthcare providers can access it without compromising confidentiality. As a result, storing synchronized data on all patients in one place can save the industry a significant amount of money annually. What’s more, it would be impossible to change patient medical records stored on a blockchain without creating an audit trail.

Auto insurance

Blockchain can also streamline auto insurance claims processing. Let’s take an example. When a car accident occurs, insurers can store and share information, such as the accident report, photos of the damage, and police reports, on the blockchain. This can speed up the claims process, reducing the time it takes to settle a claim. Blockchain can also verify the authenticity of claim data, helping to prevent insurance fraud.

Life insurance

Today, the death claim process is tedious and time-consuming. Confirming the details of a death can be complex because there are multiple parties involved in the process when a person dies. These parties include hospitals, nursing homes, workplaces, commercial businesses, etc. As a result, the claim process can take anywhere from a few weeks to over two months.

However, death claims need to be filed as quickly as possible so that insurers can confirm the circumstances, access the government-issued death certificate, and validate the claim. Blockchain technology and smart contracts can automate and streamline the manual claims registration process when filing a life insurance claim. In addition, blockchain increases transparency by providing all parties with a single source of truth about the events that occurred.

Travel insurance

Blockchain can help insurers streamline claim validation processes by providing an immutable ledger where all parties can access and rely on information. Data related to a particular claim can be accessed through APIs, while smart contracts can speed up or completely automate payouts.

Fizzy is one of the most prominent blockchain-based travel insurance solutions. The solution is an automated and secure platform for parametric insurance against flight delays. It uses smart contracts to receive up-to-date flight information and automatically pay out when a flight is delayed for more than two hours.

Top 10 insurance companies using blockchain

B3i

B3i is a global insurance industry initiative supported by more than 40 companies. They leverage blockchain and Distributed Ledger Technology (DLT) to develop network infrastructures, protocols, and standards. This will help reduce bureaucracy and streamline market-wide processes.

The key benefits of the solution are accuracy and contract security. DLT helps companies eliminate data duplication and reduce reconciliation and other error-prone operations.

ClaimShare

ClaimShare is an application that leverages blockchain to overcome double dipping. This is a fraudulent scheme in which a claimant receives a payout from multiple insurers for the same incident. ClaimShare strives to prevent these multiple payouts by enabling numerous insurance companies to share data about claims filed.

Deloitte

Deloitte is a company that integrates new technologies into its clients’ workplaces. For example, the company implements blockchain technology for insurance providers. Deloitte researched health and life insurance and found potential use cases for blockchain in the industry. Blockchain can complete agreements through smart contracts, detect fraudulent claims, and protect health records. Therefore, insurers can adopt Deloitte’s blockchain strategies to build stronger relationships with customers and patients.

Etherisc

Etherisc is an open-source development platform focused on decentralized insurance applications. The company has a decentralized insurance protocol that enables the development of blockchain-based applications for various sectors of the insurance industry. In general, Etherisc uses blockchain to reduce inefficiencies such as long claims processing times and high processing fees.

The company also has crop insurance, social insurance, and flight delay insurance which includes hurricane protection, crypto wallet insurance, and collateral protection for crypto-backed loans.

Guardtime

Guardtime is a company that develops blockchain-based solutions for the cybersecurity, defense, finance, government, and logistics industries. The company has partnered with EY, Maersk, and Microsoft to implement Insurwave. As the name suggests, Insurwave is a blockchain-powered marine insurance platform that automates transactions, establishes an immutable chain of shipping, and helps insurers provide thorough coverage.

IBM

IBM is a company that launched the IBM Blockchain initiative to streamline various aspects of the insurance industry. This solution has helped insurance providers automate their claims processing and underwriting. As a result, these measures can reduce processing times and fraudulent claims, deliver more efficient and consistent service, and allow insurers to increase trust with their customers.

Kaleido

Kaleido is the company behind the Blockchain Business Cloud. This solution allows insurance companies to store insurance information and reports in an immutable and secure database. This technology helps companies detect identity fraud, track payments, and comply with security regulations. On the other hand, customer data is stored securely and remains completely private until their insurance policy changes or a new policy starts.

Lemonade

Lemonade is a startup that claims to be the first P2P property and casualty insurance company. The company offers affordable insurance for homeowners and renters. They take a fixed fee from each monthly payment made by policyholders and reserve the rest for future claims. When a claim is made, smart contracts immediately verify the claim so that the customer gets paid quickly.

Nationwide Insurance

Nationwide Insurance is a company that is using blockchain technology to innovate the entire industry. For example, the company joined the RiskBlock Alliance and was the first to adopt its blockchain platform. The platform supports safer and faster proof of insurance, allowing customers to quickly verify their information with law enforcement and start the claims process.

Tierion

Tierion is the company behind the Chainpoint and Proof products. These solutions allow insurance providers to build blockchain networks where they can record, track, and verify data. Tierion also focuses on claims processing and reducing the amount of time and money it takes to process each claim. What’s more, insurance companies can use blockchain to identify fake claims and comply with industry standards.

Limitations of using blockchain in insurance

Blockchain privacy

Blockchain is publicly available in Bitcoin and other cryptocurrencies, meaning that every transaction can be traced back to its original block. This information can be accessed and exploited by hackers.

Competition

As blockchain continues to evolve, so does the competition. For example, marketing rumors make it difficult for customers to trust. In addition, it increases the cost of adoption.

Cost of operations

As blockchain grows in popularity, it will become more expensive for insurance providers to integrate the technology into routine processes.

Cost

Blockchain technology offers great savings in transaction costs and time. However, the initial cost is high, which acts as a barrier.

Cultural adoption

Blockchain technology also calls for a new way of thinking. Fundamentally, a complete shift to a decentralized network requires the support of its users and operators.

Integration concerns

Blockchain technology offers reliable solutions that may require substantial changes or overhauls to existing applications and systems. As a result, organizations need to thoroughly prepare for integration.

Loss of data integrity

Data integrity needs to verify the validity of every transaction to cast doubt on fraudulent insurance transactions. Therefore, blockchain must prevent fraud to ensure data integrity.

Prone to cyber attacks

According to statistics, the global blockchain market is expected to be worth $17.57 billion by the end of 2023. With so many users every day, blockchain is becoming more susceptible to cyber attacks.

Operation time

Blockchain is a relatively new technology, so there are still some negative aftereffects to point out. Customer expectations are high, while the software on the market continues to evolve at a rapid pace. Because of the disparity in the pace of change between software and hardware, blockchain can affect and impact its performance.

Security and privacy

Despite the existence of private blockchains, strong encryption, and many other reliable solutions, insurance providers still have cybersecurity concerns.

Uncertain regulatory status

Insurance regulations tend to be dynamic and uncertain, so they have to be updated frequently. Due to the lack of clear regulations, blockchain has not been widely adopted by insurance providers yet.

What is next for the future of insurance?

To sum up, blockchain technology has the potential to improve the insurance industry and provide greater accuracy, efficiency, privacy, and more. However, it is highly important to understand that any insurance provider that accepts blockchain must agree to operate under ethical standards. Standards and processes must be aligned so that blockchain technology can provide insurance companies with better tools to share data and collaborate with each other. In general, blockchain can make insurance processes less of a headache for customers.

Since the insurance industry has high privacy and security concerns, blockchain technology must be developed further to meet the standards of insurance providers before it becomes feasible. In addition, insurance companies must have clear regulation frameworks to use blockchain safely. Once these requirements are met, blockchain will be able to transform the insurance industry for companies and their customers.

Closing thoughts

Although blockchain technology is still nascent, it will likely become a game-changer in the insurance industry. The technology offers accuracy, efficiency, privacy, and transparency, to name a few. However, insurance providers adopting blockchain must operate under ethical standards.

Standards and processes must be aligned so that blockchain can provide insurance companies with better tools to collaborate, share data, and make insurance processes less cumbersome for users. Moreover, insurers must provide a regulatory framework for the safe use of blockchain technology. Once these requirements are met, blockchain technology can transform the insurance industry for both insurers and their customers.

If you’re looking for reliable blockchain-based solutions for insurance, don’t hesitate to contact our team.

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