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Insurance policies have always been difficult to manage and record, whether they are sensitive information of policyholders or medical records of the participants, it was always a risky kind of situation with it.
In the past, there have been multiple incidents that led to diminishing trust in such policies within people. Since then the Insurance companies were looking forward to a software program that would ease their load and bring back life to the industry.
The insurance process undertakes a whole systematic investigation of the conditions provided by the insured and the contingency conditions mentioned on the contract binding the parties. It requires excessive inquiry of the policyholder- whether he is a fraud or not. Also, the insured people need to make sure that the companies are not misusing the information or exploiting the person. Thus, we agree that this whole industry depends on trust. And for trust, we need to eliminate the chance of mistakes. To avoid this human error, a programmable code just like blockchain, was really a desperate need of the Insurance industry.
No one can predict what the future has planned for us. In unforeseeable situations like illness, property destruction, fire, and even death - a majority of us suffer from great financial loss. 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. The insurance company who is the insurer, in this case, pools the client's risk to make payments more affordable for the insured. While 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 which either consists of the monthly payment or yearly payments, depending on the type of contract/policy.
The legal policy has all the terms and conditions mentioned while it gives you an equal opportunity to nominate the beneficiary/beneficiaries. The contract also necessarily mentions the maturity time period- after which you would get the whole sum! Life insurance is the only policy that provides the insurance claims after the death of the insured.
There is a multitude of types of insurance policies available, including life insurance, health insurance, automobile insurance, and the list goes on...
But while dividing the umbrella term of "insurance" we can easily classify it into three main branches:
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!
Blockchain is a digital ledger, type of a shared database that differs from a typical database in the way that it stores information. Blockchains store data in blocks that are then linked together via cryptography. As new sets of data 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 types of data structure, 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 reduce risk of fraud accounts. Blockchain technology is also called Distributed Ledger Technology (DLT) which 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 in a cost-effective way. The insurance industry is one of the oldest and 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 in which both retail and corporate customers expect the best value for money and a superior online experience. So in order 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 which could be viewed as public ledgers.
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 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 in the near future. However, these are still new technologies that require proper due diligence before being fully leveraged by the insurance industry.
Blockchain has the ability 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
Magdalena Ramada-Sarasola, Ph.D. (InsurTech Innovation Leader EMEA, Willis Towers Watson) writes that blockchain has the potential to generate disruption in the insurance industry six ways:
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 completely automated using blockchain.
Presently, many insurers apply a smart contract alongside blockchain, which is triggered when all the well-defined terms and conditions are met. By setting up an insurance contract that pays out under these circumstances, an insurer can process transactions with no human intervention (the middleman) and experience greatly enhanced customer service.
Well before this technological era of development, the whole insurance process was a lot more than just "tiring" - it was accompanied by loads of paper contracts and time consuming claims process and claims payments and no such measures for fraud detection or to prevent insurance fraudulent claim. It was definitely risky, thus a majority of potential clients were filtered out because of trust and security issues.
But as the mentioned industry evolved, it not only fulfilled all the requirements of its customers but also came up with a unique and flawless idea, that would root out the problems of people related to this said process.
The blockchain powered insurance industry, is what the people were looking for. With its various features and functions, it brought back life to the insurance policies, by earning back the trust of people, data sharing, ensuring instant claims processing, and by preventing insurance fraud.
Unlike a traditional centralized computer database system, the blockchain is now decentralized and its records are distributed and maintained on many different computers at once. The records also called the “distributed ledger” give users controlled access to a shared copy of the ledger.
As new 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 individual blocks. If someone tries to access a block of information without a proper key, the system rejects the attempt and leaves evidence of tampering. Thus completely overrules the chance of hacking or changing the information of the transaction.
Providing a single source of truth allows friction in business processes to be drastically reduced, using solutions such as smart contracts to facilitate and automate Distributed ledger technology 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. What’s more, 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. The claims process and claims payments are speedy and cost effective. For example, by shortening the claims cycle through improved efficiency we could lead to higher customer satisfaction and retention, while by faster and better access to data we could enable smoother interaction between insurers and their customers. Reducing inefficiencies and costs throughout the value chain could, ultimately, even lead to lower premiums.
Despite having online access to insurance companies and databases, the clients still used to prefer insurance brokers to help them find the best insurance policy because of the risk of potential fraud and lack of trust in online transactions. But now with blockchain technology evolving into the Insurance industry, the clients feel safe and secure as they now know that their personal information would not be in the hands of any hacker nor any kind of suspicious behavior would be observed. It has now given a new business value to offer insurance companies and has inculcated enough trust in insured clients that they would definitely consider getting future policies too- to get reinsured!
The list of Pros and Cons of blockchain technology is as follows:
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 to view the data.
Examples of smart contract applications include financial purposes like trading, investing, lending, and borrowing. They can be used for applications in gaming, healthcare, supply chain, and real estate; and they can even be used to configure entire corporate structures.
With a lot of advantages, this program does have a few flaws too:
Enterprises, irrespective of size or industry, are supported by written contracts. Unfortunately, these are often inconvenient and unmanageable by the insurers and are a source of business and legal conflict. A solution can be found in replacing traditional contracts with smarter ones.
In the past years, we’ve seen a steadily growing interest in distributed ledgers and smart contracts. The financial industry has already been largely disrupted 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 not a single chance for the mistake by the insurers, these smart contracts are what 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.
Another feature that makes smart contracts secure - Blockchains let insurance companies include state-of-the-art risk assessment models into their smart contracts. This logic relies on a blockchain-based ID system. IDs are instantly verified and supplemented with new data, eliminating the time-consuming stages of traditional identity verification. A smart contract reads all information related to an individual and automatically assesses risks, saving time and effort on data collection and verification.
By using blockchain and smart contracts, insurers can lower the premium and the admin cost as now there would be no need for several parties involved in confirming the information and meeting the requirements.
Following is the list of uses of Smart contracts in the insurance industry:
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 whole lot of time, finance, energy, and support to not only implement it in companies but also to adapt to the system and perfectly maintain 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 the fact that a program would change the future of Insurance. By using blockchain and smart contracts 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 up as a new standard of improving efficiency!
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