The global blockchain market was valued at US $3.67 in 2020 and is expected to expand at a CAGR of 82.4% between 2021 and 2028. As cryptocurrency becomes more widely accepted globally, it is becoming a driving force for blockchain development within several industry verticals. Banks are deploying blockchain to enhance payment processing, enable cross-border payments, and issue digital currencies faster and more efficiently than traditional systems.

Although blockchain technology is still in its infancy in the insurance industry, the transparency, immutability, security, and speed of blockchain solutions could transform the way the sector operates. While traditional insurance business models have been resilient for many years, they are beginning to feel the digital revolution’s effect and the changing way consumers interact with businesses and how products are delivered or serviced.

This article discusses what blockchain is and how it is disrupting insurance.

What is Blockchain?

Blockchain is a shared, immutable ledger that records transactions and tracks assets within a business network. For example, the asset could be a house, car, cash, or land as well as something intangible such as patents and copyrights. Anything representing a value can be tracked and traded on a blockchain network, mitigating risk, and reducing costs for all the incumbents. The image below shows how a typical blockchain transaction works. 

Source: https://www.wipro.com/insurance/adopting-a-new-approach-to-demystify-the-future-of-insurance-wit/

In the insurance industry, many processes are outdated. Policies are processed using paper contracts, and many interactions are completed via the phone or even face-to-face. With these older processes, there is a high propensity for human error, tampering and lost information. Blockchain technology solves these problems by digitizing transactions as part of the secure and immutable ledger. The top benefits of blockchain include the below.

1. Better transparency. Using blockchain technology, there is no centralized authority, improving the transparency of the system. Members of the network are responsible for carrying out and validating transactions.
2. Enhanced security. Every transaction on the blockchain needs to be agreed upon via a consensus of network members. They are always encrypted and link to the previous transaction with a method known as hashing.
3. Cost reduction. Without a centralized player, vendor and intermediaries’ costs can be removed. Less interaction is required on transactions reducing the time spent on them where it can all be authorized via the blockchain.
4. Transaction traceability. Blockchain transactions cannot be edited or deleted, bringing several advantages over typical supply chains prone to theft and fraud. d
5. Speed and efficiency. A single place to store transactions streamlines processes, making them faster and more efficient. It also helps to negate human errors.

Source: https://www.mantralabsglobal.com/blog/blockchain-use-cases-in-insurance-industry/

The insurance industry is going through a stage of disruption as we move towards Industry 4.0, and blockchain has all the features to play a pivotal role in the future. More intelligent policies and automation can enhance the customer experience while ensuring administration is efficient and secure.

Smart Contracts

A smart contract is insurance coverage that pays out when specific, predefined conditions are met. For example, if a policyholder is covered for flood and the terms of the contract validate that when a flood occurs, the pay-out can be instant. A basic example of the process is shown below.

Source: https://medium.com/acycliclabs/why-are-smart-contracts-so-important-81883d93a0cc

The smart contract is hosted in the decentralized blockchain ecosystem, where it cannot be changed or deleted. It is written as code and becomes part of the public blockchain. The parties involved in the contract are typically anonymous, and it automatically executes itself when conditions of the code are met. Regulators can use blockchain to review smart contracts as necessary.

Source: https://intellias.com/how-to-make-a-smart-contract-work-for-the-insurance-industry/

The absence of third parties mean pay-outs are quicker, costs lower and favourable customer premiums. Smart contracts can establish mutual trust between policyholders and insurance companies as they leave no room for manipulation for either party.

Fraud Detection

Fraud is one of the biggest challenges for the insurance industry. In the UK, the average fraudulent insurance claim costs £12,000, and detection rates continue to increase. Although digitization and technology such as artificial intelligence (AI) are helping some firms deal better with fraud, blockchain can take it to the next level of prevention.

Transactions on the blockchain are permanent and timestamped, meaning nobody, including the insurer, can modify the information. Straight away, that level of security prevents breaches and aids in understanding patterns for fraudulent transactions.

Start-up blockchain company Etherisc simplify the process of detecting and stopping insurance fraud. One of their products allows flight ticket purchases using cryptocurrency to ensure automatic pay-outs as part of the contract, such as a flight delay. Etherisc verifies claims using different sources of data to detect and prevent fraud. For example, the technology can analyse satellite images in crop insurance claims to ensure they are legitimate.  

Source: https://etherisc.com/

KYC Processes

Know Your Customer (KYC) is a regulatory requirement for all financial firms, but the processes are often manual, inefficient, and outdated. Distributed ledger technology such as blockchain has several benefits for the KYC process.

• Clients can complete a one-time setup of a digital profile. The profile will contain proof of their identity and all the required documentation for KYC regulations. Once uploaded, the data cannot be changed or removed and is accessible to all network members, speeding up future verification checks.
• When the client engages in transactions with the insurer, they already have access to the client profile and can verify the information via the blockchain rather than going through a new KYC process.
• Profiles are encrypted using the hash function of blockchain.

Source: https://www.dentons.com/en/insights/articles/2019/may/28/using-blockchain-for-kyc-aml-compliance

• If KYC data is altered, the hash function will immediately change
• Insurers can leverage smart contracts to update systems when a client provides new KYC documentation automatically

Although it sounds complex, blockchain can make the KYC process far more efficient for all stakeholders.

Claims Management

A BCG report says that when an insurance policy is placed in a smart contract, it can save insurers over $200B per year in operating costs and improve the Property and Casualty (P&C) insurance efficiency.

For example, in motor insurance, the most common type of claim is a car accident. Imagine submitting a claim that is the fault of the other driver so you can recover any losses. The insurance company will investigate the claim and try to recover money from the driver’s insurance company. However, both insurance companies have their own processes leading to delays and could mean you don’t get paid for some time.

Blockchain can automatically execute claim processing procedures between insurers and other parties, releasing payments seamlessly for an all-around better experience. Everyone has access to the same information via the shared ledger, which ensures disputes are unlikely, or at the very least easy to resolve. 

Reinsurance

Reinsurance protects insurers in the event of a large volume of claims. According to PwC, blockchain can enhance risk understanding and open the opportunity for $5 to $10 billion in cost savings. The two main reasons for this are the ability to keep unbreached records for accurate claims analysis and speeding up the process with automated data and information sharing.

The data flowing between clients, brokers, reinsurers, and outsourced providers requires multiple data entry points and reconciliation, which can be eliminated through blockchain.

Source: https://www.the-digital-insurer.com/dia/ruschlikon-an-industry-wide-effort-to-implement-acord-global-reinsurance-and-large-commercial-grlc-messaging-standards/

Summary

Blockchain technology is a potential game-changer for insurance with several compelling use cases that drive efficiency, security, and cost reduction. Although it is still in its formative years, blockchain is slowly making progress and will be part of the future of the industry. High levels of regulation do pose barriers for financial firms, but with the right level of investment and advancement, the benefits of blockchain technology far outweigh the cons.

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment.  Mr. Chalopin is Chairman of Deltec International Group, deltecbankstag.wpengine.com.

The co-author of this text, Robin Trehan, has a Bachelor’s degree in Economics, a Master’s in International Business and Finance, and an MBA in Electronic Business.  Mr. Trehan is a Senior VP at Deltec International Group, deltecbankstag.wpengine.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.