Blockchain is a new technology that has swiftly become an obsessive interest in the financial services industry because it enables disintermediation, improved reconciliation of data and the efficient transformation of business models.
The insurance industry is uniquely positioned to benefit from blockchain technology which can help deliver on key digital opportunities to cut costs, increase efficiency, enhance customer experience, and improve data quality, collection and analytics. Through innovation, insurance companies can grow market share, gain competitive advantages, and create an integrated approach for higher-quality service.
A recent study from Accenture Insurance Blog has shown that nearly half of insurers have already integrated blockchain to their businesses, and that almost all insurers identify that blockchain and smart contracts can revolutionise the way that they engage with new partners.
In this blog post, we are going to share with you some use cases in which insurance is being enhanced by and having new practices enabled by blockchain.
Table of contents
1. Blockchain enhancing existing insurance processes
1.1 KYC/AML
Know-your-customer and anti-money laundering (KYC/AML) regulations are especially burdensome for insurance companies. By using a blockchain-enabled shared database, insurers can streamline and reduce the cost of their KYC/AML compliance. Onboarding of a customer need only be done once by one institution.
When the customer wishes to engage a new institution, that institution can request access to documentation already on-chain in order to confirm due diligence.
Encryption ensures that an institution has access only to the documents to which it is entitled, even as any change in the customer’s file is transparent, both as to when the change was made and by whom.
Transaction audits and surveillance can also be automated more fully.
Better capture rates might also reduce penalties. Finally, better security of information should reduce the cost of hacks or other negative cyber events.
Take, for example, according to Coindesk, in 2018, the IT multinational, Cognizant, partnered with 14 insurance companies in India to create a blockchain-enabled shared database.
The platform is designed to reduce the risk of data breaches, fraud and money-laundering, while delivering superior experience to customer through improved process efficiency, better recordkeeping, and accelerated turnaround time.
The decentralized and immutable nature of blockchains are enhancing the ability to combat document tampering and false billing.
1.2 Fraud Minimisation
Fraud is a huge irritation of the insurance industry. Higher costs due to false or exaggerated claims end up being paid by honest policyholders.
By enabling better coordination between insurers, blockchain can help the industry combat fraud.
A blockchain enabled shared database, with various levels of access and control, would enable insurers to eliminate double-booking or processing multiple claims from the same accident.
It establishes ownership of high-value items through digital certificate and so reduces counterfeiting; and reduces premium diversion (as in the case of unlicensed brokers selling insurance and pocketing premiums)
Fraud mitigation is a compelling use case for blockchain in the insurance industry given the huge sums at stake.
1.3 Reinsurance
Blockchain can streamline information and payments between insurers and reinsurers.
Using a blockchain-enabled shared database, insurers can enter primary data onto smart contracts, with the information being accessible to reinsurers, retrocessionaires and regulators in realtime on a need-to-know basis.
The data can be extracted from the blockchain for automated modelling, audits, and compliance checks. Risks can be ceded, and claims can be made with automated notification to all relevant parties and even automated settlement and reconciliation of payments.
With a permissioned blockchain, data quality is improved while costs, errors and time are reduced. In accordance with PwC, although this kind of implementation requires a high level of cooperation among insurers and reinsurers, its eventual adoption would result in enormous cost savings.
2. Blockchain enabling new insurance practices
2.1 P2P Insurance
Peer-to-Peer (P2P) insurance involves a group with some degree of affinity (family, friends, business associates, etc.) who team up to contribute to insure each other against loss. Through rigorous selection, this pool, akin to a reciprocal, can produce a lower loss ratio and hence a lower cost for its members.
What is more, funds that are available in the pool at the end of the coverage period can be refunded to the members, who are both policyholders and subscribers at the same time.
Blockchain can enhance the efficiency and transparency of this model and so render it more popular. Written premiums can be held in escrow on a smart contract. Claims can be paid out from this smart contract when the correct digital signature is applied.
The smart contract’s code might designate that the signature come from a certain third-party assessor, but it can also require that signatures be received from multiple members of the pool to validate the claim. Members can be confident in the voting mechanism as the blockchain maintains an immutable record of everyone’s decision.
An example of blockchain for P2P insurance in practice is Teambrella.
Teambrella is a decentralized application (dApp) that seeks to enable “teams” of “self-governing user communities” to cover each other for loss.
Teams manage all coverage functions, including setting coverage rules, accepting new members, appraising claims, and approving so called “reimbursements.” Teams can be created around the likeness of its members (e.g. dentists) or the likeness of objects covered (e.g. bikes).
Teammates make “reimbursements” from cryptocurrency wallets that they control. They underwrite new members, who pay premiums on the basis of perceived riskiness.
A teammate’s liability is never greater than the funds in his or her wallet, and no other member owes the teammate more than that amount in the event of a claim.
These rules are governed by open-source code. While this kind of arrangement is highly experimental, it does suggest the versatility of blockchain to invent and test new products.
2.2 Claims Handling
Gathering and processing data on claims can be challenging as well as expensive. Data is manually entered and shared between different parties with different systems, which can produce errors in transmission.
Blockchain technology can automate a great deal of claims-handling and reduce settlement times. For instance, a vehicle might one day be kitted out with a sensor that in turn informs a smart contract.
In the event of a collision, the smart contract automatically alerts emergency services, confirms insurance, and launches a claim. Such automation would result in better service for insureds and cost-savings for insurers. Manual processes would be reduced or eliminated
An example of blockchain for claims handling is Insurwave.
Insurwave was launched in 2018 by EY and Guardtime in collaboration with other insurance industry leaders, including Maersk, ACORD, Microsoft, MS Amlin, Willis Towers Watson, and XL Catlin.
This platform uses blockchain technology to support marine hull insurance30. A new vessel is registered onchain and a premium is set by an algorithm with policy documents automatically distributed to carriers.
The ship’s travel is recorded in real time, from location to weather conditions. When the ship moves through a risky area, this fact is recorded in its file and used for future underwriting. Premiums are made more accurate even as claims can be assessed and approved more quickly.
Data quality is immeasurably improved, and the immutable record of the ship’s life is accessible in real-time by various stakeholders for improved trust and transparency.
Regulatory Concerns
As with any emerging technology, there will be a period where existing regulations do not appropriately address the new possibilities that these provide, as many of today’s regulations were written before the advent of numerous modern technologies.
It has been seen for example that there are a number of features of blockchain which have the potential to be seen as inconsistent with, or ambiguous under, current insurance regulations.
In the context of GDPR in particular, regulators want to ensure that any policy or personal information being stored on a blockchain ledger is in compliance with existing privacy and data protection regulations.
Smart contracts could also face regulatory hurdles, with their self-executing nature which potentially could be implicated where an insured party asserts that a claim denial was inappropriate, or where a potential bug in the smart contract causes the contract to fail to perform as intended.
The immutable nature of smart contracts could also pose a challenge in terms of GDPR rights to be forgotten, or in an insurance delinquency proceeding, where for example, a court-appointed administrator may seek to cut off or delay future claims payments.
These are some examples of where regulations will have to catch up with blockchain technologies, however it is already being seen that nations and regulatory bodies are proactively looking to address these before issues arise.
The European Union in particular has been very active in looking to effectively regulate blockchain technologies, and has set up the EU Blockchain Observatory to review and propose regulations, as well as expert groups such as the International Association for Trusted Blockchain Applications.
Takeaway
On the whole, insurance with and on blockchain can transform the industry. The ability to break down data silos and move toward decentralization of information and power will save on costs and time while proving data quality.
Smart contracts and oracles will allow new products to be developed that will better serve the needs of customers while also enabling the automation of many current, labour-intensive processes.
For the insurance sector to unlock the benefits of blockchain technology, the following points should be considered:
1. Collaboration and partnerships will be absolutely crucial
2. There must be a focus on open architecture and microservices to enable the shift towards
new and improved business models powered by blockchain technology
3. Insurers will more and more be expected to quickly send and receive information in a way
which is not possible through traditional means
4. The full benefits of blockchain technology will appear when insurers engage and trust partner
organisations, and create an ecosystem where resources are pooled in shared ledgers