Insurance is something that has been around since centuries. Even as early as a thousand years ago, Chinese merchants would pool together their wares in collective funds and help pay for the damages to any individual’s capsized ship.Coming back to the present, technology has completely changed and reshaped a lot of industries’ operations. However, the multi-trillion-dollar global insurance industry is still stuck in the past, for the most part - still trying to find their way out of the legacy challenges.
There’s no denying that there has been a rise in the number of online brokers, but consumers are a bit skeptical when it comes to taking that route. They’d rather call up the brokers to purchase/enquire about new policies. In fact, most of the policies are also processed on paper contracts, making the claims and payments extremely error-prone - because of obvious human supervision. Added to this is the inherent complexity of insurance, which involves brokers, consumers, insurers, as well as reinsurers, and who can forget insurance’s main product - risk?
Every one of the involved steps in this process holds a potential point of failure to the overall system. This could include losing crucial information, misinterpreting policies, and lengthening settlement times.
Enter Blockchain technology: a supremely secured form of shared record-keeping.
While Blockchain is often used interchangeably, albeit wrongly, with Bitcoin, it’s most killer applications are beyond just cryptocurrencies. It has the capability to be a transformative force for industries like insurance, which require the coordination and cooperation of many different intermediaries with different incentives.Read on for a deep dive into how blockchain is disrupting the insurance industry.
1. Fraud detection and risk prevention
The insurance industry is extremely complex, and the complexity of creates gaps in visibility. These gaps are often exploited for fraudulent activities. Shuffling of claims from insurees to insurers and reinsurers in a paperwork-driven process is slow and has a lot of intermediaries. This opens the possibility for criminals to make multiple claims across different insurers for a single loss. It also enables brokers to pocket the premium by selling insurance policies.Implementing a Blockchain-based technology architecture will enable a lot better coordination between insurers. This will help stop such criminals, and reduce these fraudulent activities. Based on the distributed-ledger technology, the Blockchain could help insurers collaborate and identify suspicious behaviour across the entire ecosystem.
As of now, insurers invest in public data to prevent fraud. This data can be easily used to identify patterns of fraudulent behaviour from previous transactions. However, it is often inconsistent because of the difficulty in sharing sensitive information between various organisations. Developing industry-wide fraud prevention technique gets crippled by the constraints around sharing personal information such as name, address, DOB, etc.
In such a scenario, introducing a Blockchain-based system will
Introducing this type of technology would take an enormous level of coordination between insurers to implement. But a blockchain-based effort to counter fraud could begin with the sharing of fraudulent claims to help identify patterns of bad behaviour.
This gives three major benefits:
- Eliminating double booking or processing multiple claims from one accident.
- Establishing ownership through digital certificates therefore reducing counterfeiting.
- Reducing premium diversion, for example, in the case of unlicensed brokers practising insurance and pocketing the premiums.
Less fraud will directly translate to higher margins for insurance companies, and therefore cheaper premiums for customers. Insurance fraud is one of the bugbears of the industry and combating the same is one of the most compelling use-cases of Blockchain in the insurance sector.
2. Property and casualty insurance
One of the major challenges with P&C insurance is gathering the required data to evaluate and process claims. Today, this process is extremely prone to errors because it involves a lot of data entry and co-ordination between various parties.By allowing holders and insurers to track the physical assets digitally, Blockchain can completely codify the business rules and automate claims processing using smart contracts - all the while providing a permanent audit trial.
In all honesty, insurance can be thought of as a contract that stipulates the premium that is paid by an insurer as well as the conditions in which the insurer is liable for the damages. The tricky part is that “damages” can be extremely subjective and insurance revolves around verifying that all the conditions around each policy are met.
Suppose you’ve recently gotten into a car accident and the other driver was at fault. To recover your losses, you need to submit a claim to your insurance company. The insurer will then examine the claim and recover the claim from the at-fault driver’s insurance company - which might have a completely different process for handling claims.
For these very reasons, Blockchain is an extremely useful tool for property and casualty insurance. It can transform the way physical assets are managed, tracked, and insured digitally.
Smart contracts on the Blockchain can easily turn paper-based contracts into programmable code. It’ll then help automate claims processing and calculate liabilities in insurance for all the players involved. A smart contract is an agreement between two or more people which lives on the blockchain, unlike the paper-based contracts that live on papers, and is enforceable by code.
For instance, when a claim is submitted with an insurer, a smart contract can quickly confirm coverage and trigger a request for manual review for losses that fit a specific criterion. For flight insurance, the smart contract could be linked to an air traffic control database and can automatically trigger compensation in case of delays or cancellations.
3. Health Insurance
Health insurance as of today is plagued by a ineffective ecosystem of providers, patients, and insurers.A single patient, ideally, sees multiple specialists and doctors over the course of his life. Again, because of so many different parties involved in the whole process, it is difficult to share and co-ordinate sensitive medical data between them.
Medical records get siloed within different healthcare providers and insurers which opens the gates to duplication and errors in records across different organisations. This leads to costly administrative overhead and also unnecessary procedures for patients.
A ledger-based Blockchain technology can help maintain patient privacy all the while creating an industry-wide, synchronised repository of all the patient data. This will no doubt help the industry save billions a year.
Suppose you’re seeing a surgeon for your leg. Getting the proper treatment depends on your physical therapist receiving precise and accurate information about your fracture from the hospital, and prior medical data taken from your primary doctors. A secretary at your surgeon’s office needs to painstakingly request document from various providers, obtain authorisation for the procedure from your insurer, and then submit a claim. Your therapist’s office manually requests for document from each provider. Each of the link in the chain represents a probably point of failure.
Sharing and cooperating the patient data is difficult in the healthcare industry for two primary reasons.
First, the back-end infrastructure that hospitals use for storing records is extremely outdated. While the global Electronic Medical Records market is estimated at $22B, various providers and insurers rely on various different standards for how they store patient data. So, the medical data often needs to be reconciled by hand across hospitals, clinics, pharmacies, and insurance companies.
Second, rigid privacy laws lead to accumulation of data within the organisation. In the US, Health Insurance Portability and Accountability Act (HIPAA) is there to help secure patient data, but on the negative part, it makes it extremely difficult to coordinate patient care across various insurers and providers.
The implications for these are really dire. In the US, administrative spending accounted for nearly 18% of all the healthcare spending in 2017. Costs can range from $20 for processing a visit to $215 fr a surgery. As an estimation, two-thirds of all these costs are related to billing and insurance. Considering that the healthcare spending hit an exorbitant $3.3 trillion back in 2017, that’s clearly not table stakes.
Blockchain technology can help return control to patients over their medical data and provide them access to it on a case-by-case basis. Rather than forcing insurers and providers to reconcile patient data across different databases, a Blockchain-based system can store a cryptographic signature for each record on a distributed ledger. The signature cryptographically indexes the content of each document and timestamps it - without actually storing any sensitive information on the blockchain.
Any time a change is made to the document, it is recorded, in real-time, on the ledger, allowing insurers and providers to easily audit information across organisations. The Blockchain-based solutions can enable granular permissions settings to comply with regulations, while allowing data to be completely anonymity and shared for usage.
The role of insurance is to help people offload risks and mitigate unexpected events. This can range from natural disasters to health problems. If you think about it, it can be an extremely risky proposition, especially in the advent of major disasters like wildfires or hurricanes. Reinsurance helps provide insurance for insurers in an inefficient system determined by manual processes and one-off contracts. Depending on the kind of reinsurance purchased, it can cover a good portion of the insurer’s risk during a set time period, or cover specific risks like hurricanes or earthquakes.If the data is shared on an immutable ledger, reinsurers will be better equipped to allocate capital for claims almost in real-time, which will allow them to not only process and settle claims quickly, but also ease the reliance on primary insurers for data around each claim.
The current process around reinsurance is not only extremely complex but also notoriously inefficient. With facultative reinsurance, each risk in a contract needs to be individually underwritten, and contracts usually take up to four months of wrangling between parties before they are signed. Insurers typically engage multiple reinsurers, which means that the data goes through various parties before the claims are processed. Different data standards between institutions also causes different interpretations on how a contract should be implemented.
Blockchain-based technology has the potential to completely upend the current reinsurance processes by streamlining the flow of information between insurers and reinsurers on a shared ledger. Detailed transactions around premiums and losses can exist on the computer systems of insurers and reinsurers at the same time - thereby completely eliminating the need to reconcile books between institutions.
Towards a Blockchain-powered insurance industry
While it is true that there is a lot of research still underway, when it comes to the Blockchain technology, but it can’t be debated that there are already more than a few promising use-cases of it in the insurance sector.But despite this overwhelming interest in the Blockchain technology, there’s still a lot of ground to be covered before it can completely overhaul the industry. From the industry’s perspective, insurance companies need to align around standards and processes within the Blockchain technology. While there’s no denying that Blockchain can help provide insurers with much better tools for collaborating and sharing data, those insurers themselves must be willing to work alongside each other.
Also, it goes without saying that the technology itself needs to be developed further. The good news here is that Blockchain is one of the most researched technologies these days. Public blockchains, where everyone can access each transaction on the ledger are completely unfeasible for the insurance industry due to obvious privacy and security concerns. For better implications, the insurance industry needs to turn towards private, permission blockchain. Finally, the insurance industry is totally regulated in order to protect consumers from abuse and companies from taking too much risk and going bankrupt. As the legal and regulatory framework around insurance evolve, they’ll provide clear guidance for the Blockchain technology to succeed.
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