The insurance industry has been around for centuries, but unfortunately, many of its processes are outdated.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 to purchase new policies, 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 with, and misinterpreted. 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 American consumers annually. Because of this, there is much left to be desired in terms of security, efficiency, and customer satisfaction, which are issues that blockchain could help solve. While blockchain is the hopeful solution, it is still likely to come with its own set of obstacles. Insurance companies must overcome regulatory and legal hurdles before fully embracing blockchain technology. Several blockchain features could be inconsistent with current insurance laws. For example, personal customer data and their policy information residing on the blockchain must comply with existing privacy and data protection regulations. In addition, decentralization strengthens information sharing and reduces the advantages that information asymmetry provides. This provides new challenges for management in pricing, product development, claims services, and more.
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Insurance applications for blockchain technology
- Property & casualty insurance
Property and casualty insurance consists primarily of auto, commercial, and home insurance. Net premiums written for this sector totaled $1.32 trillion in 2019. Processing claims requires significant manual entry, which leaves room for human error. Blockchain technology could make claims processes three times faster and five times cheaper using blockchain technology. By using shared ledgers and smart contracts (software that checks for certain transactions in the network and automatically executes actions based on pre-specified conditions being met) to issue insurance policies, the claims and payment processes can be automated to create more efficiency and accuracy. Smart contracts can turn paper contracts into programmable code that helps automate claims processing.
- Fraud detection & risk prevention
According to the FBI, the cost of insurance fraud in the U.S. is more than $40 billion a year. The outdated nature of the insurance industry’s processes leaves room for error and potential fraud.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 behavior. One start-up currently working on this is Etherisc, an insurance company that uses blockchain’s validation and user transparency to automate the claims process. Using multiple time-stamped points of comparison, like weather reports, flight delays, satellite images, and more, Etherisc hopes to prevent insurance fraud with its simpler means of claims verification to make fair payouts.
The impact of blockchain technology
Historically, the insurance industry has been slow to embrace new, more efficient processes. Blockchain can introduce enormous benefits to both companies and their customers, but there are certain limitations.
Benefits:
- Enhances efficiency – Because so many processes are manual and time-consuming, blockchain can streamline paperwork and reconciliation for insurance contracts.
- Increases trust – Cryptography in blockchain ensures that transactions are secure, authenticated, and verifiable, ensuring customer privacy.
- Claims processing – Blockchain enables real-time data collection and analysis, which could significantly speed up claims processing and payouts.
- Smart contracts – These programmable contracts contain logic that is automatically executed when predefined conditions are met. “Because these if/then contracts reduce paperwork on the back end, they will become the insurance equivalent of no-frills airlines,” said Jeff Stollman, Principal Consultant at Rocky Mountain Technical Marketing. “They will be cheap to administer and less costly than more robust policies, and payment can be immediate.”
Limitations:
- Prone to cyber-attacks – The global blockchain market is expected to be worth $20 billion in the year 2024. With so many new users every day, blockchain is becoming more prone to cyber-attacks.
- Loss of integrity of data – Integrity of data must consider the validity of every transaction, which brings fraudulent insurance transactions into question. Blockchain must protect against fraudulent activity to ensure the integrity of data.
- Cost of operations – As blockchain becomes more and more popular, it will become more expensive for insurance companies to adopt this new technology into everyday processes.
- Blockchain privacy – In cryptocurrency (like bitcoin), blockchain is publicly available, with means every transaction can be traced back to its original block. That information can potentially be accessed by criminals looking to exploit that information.
What is next for the future of insurance?
While 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. Standards and processes must be aligned for blockchain to provide insurers with better tools for collaborating, sharing data, and making insurance processes less of a headache for customers.
Because the industry has high privacy and security concerns, blockchain must be developed further to meet the standards of insurance companies before it’s feasible. Also, insurance companies must provide clear regulations frameworks to safely utilize blockchain technology. Once these needs are met, blockchain can transform the insurance industry for companies and their customers.
