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Blockchain in Insurance Industry

Although we are accustomed to having insurance for our health, lives, and vehicles, there are many more things that the multi-trillion dollar insurance market today covers.

Insurance businesses can use blockchain technology to develop smart contracts that manage insurance claims, automate laborious paper-based procedures, and protect confidential data.

Despite being well-established and valuable, the insurance sector faces a number of issues, including inefficiency, fraud, human error, and, most worryingly, cyberattacks. In its most recent case, AnthemInsurance was ordered to pay $39 million to a collection of State Attorney Generals after disclosing a data breach in 2015 that exposed the private information of close to 80 million policyholders.

The future expansion will bring many benefits of Blockchain in insurance industry to establish trusting a distrustful ecosystem through the usage of public ledgers and stronger cybersecurity procedures. The Potential that using blockchain in insurance industry will unlock depends on three distinct qualities in particular, in addition to artificial intelligence and big data.

What is Insurance?

No one can predict what the future has planned for us. Most of us suffer from great financial loss in unforeseeable situations like illness, property destruction, fire, and even death. In such a situation, nothing can help you except an insurance policy.

"Insurance" is a contract accompanied by a policy in which an individual or a business entity receives financial protection or reimbursements against the losses made from the insurance company. Each contract binds two or more parties; the insurers, the insured, and the beneficiary. In this case, the insurance company, the insurer, pools the client's risk to make payments more affordable for the insured. At the same time, the beneficiary is the one who receives the benefit of the policy upon its maturity.

The insurance company promises to cover the loss incurred on behalf of the insured person on the happening of the insured contingency. While in return, the insured pays a premium consisting of monthly or yearly payments, depending on the type of contract/policy.

The legal policy has all the terms and conditions mentioned and it gives you an equal opportunity to nominate the beneficiary/beneficiaries. The contract also mentions the maturity period- after which you would get the whole sum! Life insurance is the only policy that provides insurance claims after the insured's death.

Many types of insurance policies are available, including life, health, automobile, and so on.

But while dividing the umbrella term of "insurance," we can easily classify it into three main branches:

  1. Health Insurance: Such a policy covers the cost of hospitalization, visits to the outpatient department, or even a doctor’s prescription for medicines. This is considered one of the most useful policies that almost 80% of employers provide around the globe. The healthcare providers and patients are the parties involved. The medical records are to be recorded without any mistake.
  2. Life Insurance: A life insurance policy provides the insured’s family or beneficiary insurance claims on the insured's death.
  3. Property Insurance is a broad term for a series of policies where the company either provides property protection or liability coverage to the property owner.

Understanding Blockchain in Insurance

Blockchain technology is widely used across the globe in multiple sectors of the economy, including cryptocurrency, media, and entertainment, and yes, in the insurance industry too! Expert blockchain development firms are helping to build decentralized solutions for a new insurance industry.

Blockchain is a digital ledger, a type of shared database that differs from a typical database in how it stores information. Blockchains store data in blocks that are then linked together via cryptography. As new data sets come in, they are entered into fresh blocks. Once each block is filled with data, it is chained onto the previous block, which makes the data chained together in chronological order.

This blockchain technology can be used for different data structures, but it is currently used as a digital ledger to record transactions. Moreover, these blockchains are decentralized - the data entered cannot be replaced or altered, which reduces the risk of fraud accounts. Blockchain technology, also called Distributed Ledger Technology (DLT), simply means immutable ledgers or records of transactions that cannot be altered or destroyed.

Blockchain, or we can call it cloud computing, itself is immensely diverse, with its distinctive functions that would help in binding the global network together in an easier and a cost-effective way. The insurance industry is one of the oldest and most traditional industries worldwide; knowing the fact that the world has evolved and has now entered into a new era of technology, the Insurance industry has started to change its traditional style of working to a much cost- saving, and human error-free style.

Blockchain technology represents an occasion for positive change and growth in the insurance industry. Insurance companies operate in a highly competitive environment where retail and corporate customers expect the best value for money and a superior online experience. So to maintain the quality and value of money, the Insurance industry has now shifted to a new and unique style of recording transactions. This way, loads of paper contracts can be reduced to just a database that could be viewed as a public ledger.

The analysis of two use cases identified between $99 million and $277 million in annual savings for personal auto insurance carriers in the US alone by the third year of use. Similar studies across the globe confirm that this Blockchain technology has the potential to change the traditional Insurance industry into a simpler and more compact risk prevention Insurance Industry.

Another potential use of blockchain would be the transmission of any type of digital evidence for underwriting, including the use of electronic health records (EHR). When digital evidence is easier to incorporate into underwriting, we can expect future changes in other areas of pricing and product development. The combination of the Internet of Things (IoT) and artificial intelligence (AI) will lead to the automation of insurance processes that will make our industry look very different shortly. However, these are still new technologies that require proper due diligence before being fully leveraged by the insurance industry.

Insurance companies can hire blockchain experts to help automate claims functions by verifying coverage between companies and reinsurers. It can also automate payments between parties for claims and thus lower administrative costs for insurance companies. A blockchain development company can provide custom blockchain solutions for the pharmacy industry to securely track and trace medication from manufacturer to patient, ensuring authenticity and reducing the risk of counterfeit drugs.

  1. Event-triggered smart contracts
  2. Increased back-end efficiency
  3. Disintermediation Magdalena Ramada-Sarasola, Ph.D. (InsurTech Innovation Leader EMEA, Willis Towers Watson) writes that blockchain can generate disruption in the insurance industry in six ways:3cing and risk assessment
  4. New types of insurance
  5. Reaching the underserved Within insurance policies, the claims and finance functions are high-value areas where blockchain could be beneficial, especially when we look back at the processes that need ongoing reconciliation with external parties. Consider how often Company A has a claim against Company B resulting in the exchange of money, typically in the form of a paper check or an electronic transaction. Such transactions could be automated entirely using blockchain

Many insurers apply a smart contract alongside blockchain, triggered when all the well-defined terms and conditions are met. An insurer can process transactions without human intervention (the middleman) and experience enhanced customer service by setting up an insurance contract that pays out under these circumstances.

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What is a Smart Contract?

But what if a client wants no such involvement of the third person or the middleman? Would this digital ledger facilitate this prerequisite of the person?

Oh yes, Of course! That is what smart contracts do.

The smart contract is a self-executing code that carries the instructions when they are completely verified on blockchain technology. This is a technological element that is not only present in blockchain but also in various other decentralized apps - dApps.

These digital contracts are typically used to automate the execution of an agreement so that all participants can be immediately certain of the outcome without an intermediary's involvement or time loss. One of the most exciting applications of blockchain technology and associated smart contract technology is the ability to facilitate complex computational tasks like those involved in machine learning and Artificial Intelligence (AI).

Being a key component of many blockchain-based databases, it is known to be trustless, decentralized, and observes pure transparency, unlike data silos that restrict people of the same company from viewing the data.

Examples of smart contract applications include financial purposes like trading, investing, lending, and borrowing. They can be used for gaming, healthcare, supply chain, and real estate and can even configure entire corporate structures.

Pros and Cons of Smart Contracts in Insurance

  1. Smart contracts increase the dependency on programmers. In the case of a situation where tech companies do not have enough skillful and talented people who could help us automate the contracts, it would be a difficult situation.
  2. Since the contract often includes terms that are not easily understood, it gets harder to interpret the smart contract by the primary insurers.
  3. They are really difficult to change. So just in case your finger slipped and pressed the wrong key, it would take long and time-consuming processes, which are quite expensive, to correct the mistake.
  4. While operating smart contracts, legal hurdles can exist as some programs are not accepted by a few governments.

Insurance and Smart Contracts Development

Enterprises, irrespective of size or industry, are supported by written contracts. Unfortunately, these are often inconvenient and unmanageable by insurers and are a source of business and legal conflict. A solution can be found in replacing traditional contracts with smarter ones.

Recently, we’ve seen a steadily growing interest in distributed ledgers and smart contracts. The financial industry has already been disrupted mainly by these innovations. Although insurance has relied on conventional methods for decades, this change has been new and difficult to adapt to, but once the initial processes are completed, insurers are all set to explore its diverse and immense features.

And in an industry where everything depends on accurate details and information and leaves no chance for mistakes by the insurers, these smart contracts make lives easier. With a computer code that works according to the execution of pre-programmable conditions, the Insurance Industry can now keep an unaltered record of people and their personal information and avoid any fraudulent claims and identify suspicious behavior.

In Insurance Industry, lack of trust is the biggest drawback, but now when the participants are aware that their information would be safe and secure and there would be no involvement of an intermediary, they tend to look forward to getting new policies, as now the claim processes and the claim payments would be carried out without any delay or hindrance.

There are a number of smart contract development companies that offer smart contract development services for the insurance industry. These companies can help insurers design, build, and deploy smart contracts to automate various aspects of the insurance business, such as underwriting, claims management, and policy administration.

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Use Cases of Smart Contracts in the Insurance Industry

  1. Smart contracts automate policies and services by the insurer to the insured.
  2. Such contracts reduce administrative costs and save labor as well.
  3. Using digital contracts increases the transparency between various parties involved, including the insurers and the policyholders.
  4. It helps automate claims processing.
  5. Smart Contracts prevent insurance fraud and manage risk.
  6. It also acts as an intermediary and eliminates the involvement of any other third party.
  7. It simplifies processes like underwriting and payouts for insurers.
  8. It improves the overall customer experience.
  9. Provide insurers with a simpler way to keep a record of transactions.
  10. After Smart contracts, the insurance claim can be made quickly – turn in paper contracts.

Conclusion

From making policies to claims processing, blockchain technology is a beseeching choice guaranteeing all the claims made in the contract. However, implementing this technology in the industry would be a challenging task that would require a lot of time, finance, energy, and support to implement in companies right from hiring blockchain developers and later, when adapting to the new system, perfectly maintaining blockchain accounts.

The insurance industry is always thought to be traditional. If 10-15 years back, someone had hinted or even suggested the idea/ layout of a program like that of blockchain, we would have just laughed at it and moved on. No one had ever considered that a program would change the future of Insurance. By using smart contracts and Blockchain in insurance industry, we can cut costs, and by using better tools, we can establish a distributed network where sharing data would no longer be difficult; the manual processes would be replaced by simplified forms of insurance contracts which would not only lower down the risk of altering sensitive information but provide a simpler working environment to the insurers. If the industries start utilizing their resources in a sustainable manner, they will emerge as a new standard of improving efficiency

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