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BLOCKCHAIN MEETS THE INSURANCE INDUSTRY

By Sailesh Kandimalla, Visista Insurance Brokers 23 July 2021

What is Blockchain?

Blockchain a peer-to-peer network that sits on the top of the internet was introduced in October 2008 as a part of proposal for Bitcoin, a virtual currency system that eschewed central authority for issuing currency, transferring ownership and conforming transactions. In a digital world the way we regulate and maintain administrative control has to change. Contracts, transactions, and the records of them are among the defining structures in our economic, legal and political systems. They protect assets, set organizational boundaries, establish various identities and chronical events, govern interactions between nations, organizations, communities and individuals. Yet these critical tools and bureaucracies formed to manage them have not kept up with the economy’s digital transformation.

Blockchain promises to solve this problem. Blockchain is a distributed database system in which transactions and records can be signed, exchanged and verified without the control of a central party. This secure, open means of conducting business transactions creates a level of transparency, security and trust not previously possible. This technology is poised to revolutionize operations across a multitude of sectors, enabling additional stakeholders such as brokers, vendors, reinsurers and ecosystem partners to interact with each other. The result is a more connected ecosystem that ensures confidence in the security and accuracy of the data.

How does Blockchain work?

Unlike a traditional centralized computer database system, Blockchain is decentralized and its records are distributed and maintained on many different computers at once. These records are called a “disturbed ledger” and users have controlled access to one shared copy of the ledger.  As information is added each new “block” of information is “chained” to the previous one in a permanent, unbreakable sequence using advanced cryptography. 

Before new blocks can be added to the ledger, they must be confirmed by different computers in the system and unique keys are required to access the individual blocks. If someone tries to access a block of information without a proper key, the system rejects the attempt and leaves the evidence of attempt of tampering. Picture a spreadsheet that is duplicated thousands of times across a network of computers. imagine that this network is designed to regularly update this spreadsheet and you have a basic understanding of Blockchain.

Blocks on the Blockchain are comprised of digital pieces of information that exist in three parts. The first is stored information about transactions like date, time, amount/ price of purchase. The second is information about who is participating in the transaction and the third is the information that distinguishes one block from all other blocks. When a transaction occurs, the process generally includes:

  1. Creating a new block to represent the transaction.
  2. Verifying the block through every participant of the network.
  3. Attaching cryptocurrency or another proof of work signifier to the block.
  4. Adding the block to the existing chain.
  5. Updating the network and finalizing the transaction.

How can Blockchain help insurers get the basics right?

The insurance industry has been around for centuries, but unfortunately many of its processes are outdated. Many policies are still processed on paper contracts, consumers still call by phone, claims take a long time to be settled, the list goes on. While these processes work, the potential for human error and misuse could lead to risks where information can be lost, tampered and misinterpreted. 

In fact, the coalition against insurance fraud reported that fraud accounts for 10% of all property and casualty insurance losses and results in at least $80 billion stolen from consumers annually. Because of this, there is much left to be desired in terms of security, efficiency and customer satisfaction. Smart contracts along with Blockchain met with well-defined terms and conditions can solve these issues. In other words, Blockchain can help deliver on the digital opportunities that the insurers must get right. Blockchain can help insurers deliver on some brilliant basics:

  • Streamlined subrogation.
  • A more transparent claim process.
  • Using shared loss histories to obtain data-driven insights on prospective customers for more sophisticated pricing.
  • Supporting more efficient payments between insurers and third parties, especially during the claim process.

How can Blockchain benefit the Insurance industry?

Providing a single source of truth allows roughness in business process to be drastically reduced, using solutions such as smart contracts to facilitate and automate distributed ledger technology (DLT) networks. Data reconciliation is made easier, accuracy is improved, and time spent uncovering information is eliminated, allowing for transparency, efficiency gains and cost reductions throughout a value chain. Shared industry tasks and automation generate more seamless processes and lower total cycle times.

The aggregate improvements in speed and accuracy can also create more positive customer experiences. For example, shortening the claims cycle through improved efficiency could lead to higher customer satisfaction and retention, while faster and better access to data could enable smoother interaction between insurers and customers. Reducing inefficiencies and costs throughout the value chain could ultimately even lead to lower premiums.

How Blockchain helps Insurers innovate?

Companies from different ecosystems are coming together to provide different products and services. In order to transact they need a means to reliably exchange information. That’s exactly where a Blockchain can make difference, because what it does not require is two people working on the same core system. It’s like a connective tissue between players in an ecosystem, collaborating in a much easier format and high level security. Blockchain can also power new business models based on personalized, real-time risk assessment, rather than historical data and averaged pricing.

Insurance applications for Blockchain technology:

 Property and casualty insurance consist primarily of auto, commercial and home insurance. Processing claims requires significant manual entry, which leaves room for error. Blockchain technology could make claims three times faster and five times cheaper. By using shared ledgers and smart contracts to issue insurance policies, the claims and payment processes can be automated to create more efficiency and accuracy. The outdated nature of the insurance industry’s processes leaves room for error and potential fraud. To combat this, insurance companies could store claims information on a ledger that would help them communicate and identify suspicious behaviour. Etherisc, an insurtech company that uses Blockchain validation and user transparency to automate the claim process.

Impact of Blockchain Technology:

Blockchain can introduce enormous benefits both to companies and their customers, but there are certain limitations.

      BENEFITS: 

  1. Enhances efficiency – because so many processes are manual and time consuming, Blockchain can streamline paperwork and reconciliation for insurance contracts.
  2. Increases trust – cryptography in Blockchain ensures transactions are secure, authenticated and verifiable, ensuring customer privacy.
  3. Claim processing – Blockchain enables real time data collection and analysis, which could significantly speed up claim processing and pay out.
  4. Smart contracts.

 

       LIMITATIONS: 

  1. Prone to cyber-attacks- the global Blockchain market is estimated to be worth 20 billion by year 2024, with so many new users everyday it’s becoming more prone to cyber-attack.
  2. Loss of integrity of data – Blockchain must protect against fraudulent activity to ensure integrity of data.
  3. Cost of operations – as Blockchain becomes more and more popular, it becomes more expensive for insurance companies to adapt to new technology.
  4. Blockchain privacy – in cryptocurrency, Blockchain is publicly available, which means every transaction can be traced back to its original block. That information can potentially be accessed by criminals.

Moving towards a Blockchain Powered Insurance industry:

 While Blockchain shows promise in improving the insurance industry from every angle, the technology is still in its infancy. There is so much unknown about the true power of this technology, however there are some start-up companies leading the way with Blockchain, exploring how this tech could improve business processes and customer satisfaction in the insurance industry.

    1. Tokio Marine– A Japanese P&C insurer, tested Blockchain for marine cargo insurance certificates. It reportedly reduced the time it took for a shipper to receive an insurance certificate by 85%.
    2. Allianz– Used Blockchain and smart contracts to remove friction from complex processes. Successfully piloted the use of Blockchain and smart contracts to accelerate the contract management for CAT swaps and bonds.
    3. Black– A digital insurance company on the Blockchain, opening the centralized insurance market for crowdfunding. 
    4. B3i– A start-up providing insurance solutions on a Blockchain platform offering opportunities for efficiency, growth and quality across the value chain.
    5. ChainThat– Delivering business efficiency by coordinating and streamlining operational processes across business networks.
    6. Immediate- Makes policies transparent and trustworthy by using smart contracts.
    7. Lemonade– A start-up that offers homeowners and renters insurance powered by artificial intelligence, Blockchain and behavioural economics.
    8. Risk Bazaar– A peer-to-peer risk contacts marketplace that lets consumers enter contracts with their friends within seconds.
    9. Teambrella– A P2P insurance service app powered by Blockchain.
    10. Tierion– Turns the Blockchain into a platform for verifying any data, files or processes. 

 

Future of Insurance:

Blockchain can improve the industry in accuracy, efficiency, privacy and more, it is incredibly important to understand that every single insurance company that embraces Blockchain must agree to operate under ethical standards. Because the industry has high privacy and security concerns, Blockchain must be developed further to meet the standards of insurance companies before it’s really feasible. Also, insurance companies must provide clear regulations frameworks in order to safely utilize Blockchain technology. Once these needs are met, Blockchain has the ability to transform the insurance industry for companies and their customers.

Whether seeking to lead a new consortium or to build a network with their peers, insurance organizations must establish a structure and incentives that ensure fair and positive outcomes for all stakeholders. Their governance structures and technology stacks should be designed for the long haul. Companies should leverage or build technology that can scale well and efficiently bring together small and large businesses behind a common set of interests. As Blockchain gains traction in the industry with rising adoption rates, it is vital for industry players to closely follow the breakthroughs that the technology brings to the table — so as not to lag behind the digital transformation.

End Note

Visista insurance broking services pvt ltd, is one of the leading domestic insurance broking and risk advisory firms in India. With operations spanning almost two decades, we have been at the forefront in providing the most optimal mix of both the latest innovative and traditional insurance solutions from both the general as well as the life insurance space in India, to a rich and diversified clientele spanning across all the sectors. Currently operating out of seven different locations, we  service our clients both in corporate as well as retail space spread all over the country.   

For any queries related to insurance, as well as for any  requirements related to the same you may get in touch with info@visistarisk.com or visit our  corporate website www.visistarisk.com

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