Blockchain in InsurTech: How Businesses Strive for Industry Disruption

The global insurance industry is now regarded as one of the biggest industries worldwide, so it’s under constant competition between entrepreneurs — everyone wants to get a piece of this pie. Since it can’t resist the advent of new technologies and the recent years provided plenty of those “wow” moments, the industry is now called “insurtech” and has slowly started taking advantage of the situation.

Whether you follow the novelties or not, such things as Big Data, AI, IoT, and blockchain have firmly stepped onto the insurtech stage to bring it to a new level: data security, risk mitigation, motion sensors, and smart contracts are now ordinary features and not gimmicks.

All these things are now insurtech integral parts but, alongside IBM, I believe that blockchain stands out the most when it comes to practical use that you will notice shortly after it gets widely used. If you are still confused about this technology, I recommend that you read my other article that perfectly explains what the blockchain is and how it works.

Smart and complex contracts that replace lawyers and have countless conditions, as well as claims processing, is what will push the industry forward. Hereby, blockchain is what can add the spice to your service and will give the edge when competing with countless rivals worldwide. Double value sounds twice as intriguing, so I invite you with me on a journey toward combining these two things and see what we get.

Short-term Operational Improvements

A regular insurance case pattern:

• Slow paperwork flow
• Countless people to process your contract
• Middleman fees
• Finding proper policy
• Legal restrictions

And the list goes on… Then, if an insurance case happens, you can spend another million years waiting to receive a decision: payment approval or denial.

The blockchain enables storing a full history of transactions and allows for keeping them in a live mode to ensure every intermediate aspect. But the key feature is a smart contract, an auto-processing algorithm with a variety of status checks that can automatically prevent frauds, detect errors, and assess the external data. At the same time, it can handle incoming claims, increase operational speed and transparency while the associated costs and delays greatly decrease. By immutably recording the events, claims, and payments that are free from manipulations by any party, blockchain proved itself to be a backbone of a successful partnership.

It’s crucial that the smart contract is capable of detecting fraud — more than a half of the insurers consider fraud as the number one threat to their prosperity. Also, at least 10% of them believe it has caused their financial losses, as well as collateral damage to their brand and reputation. With the erratic nature of premiums, it’s important to decrease their cost, and the blockchain is what could ease the financial burden associated with policies to become a win-win solution for both parties involved.

Another great feature is that it can vastly improve the verification process and remove delays associated with it. The autonomous workflow vastly reduces the expenses and staff dependance, therefore, it improves the customer experience, giving you the edge in a dense competition. You won’t need a number of checks or databases to store all the necessary information and sync it up — thanks to this technology, the companies get new possibilities to establish trust in the digital world.

The insurers get access to a universal database that has all the actual info about the clients — it is instantly accessed and easily updated to further boost the operations workflow and secure fraud protection. Also, thanks to the blockchain multi-node structure, the system will keep working even if some nodes go down, unlike a regular server that is vulnerable to attacks. By using this method, the multi-node technique comes out on top in both security and cost-effectiveness departments compared to centralized storage. It also helps insurers spot risky transactions or suspicious customers, and creates a transparent, user-based cooperation model.

Medium-term Product Advancements

Thanks to their core principles, blockchain-built ledgers can spawn some neat solutions in other areas as well, so let’s check them out:

The encryption standards are what enables its regulation with multiple conflicts of interest and guarantees confidentiality, data privacy, and establishes data ownership, creating a digital profile for every person. The recently emerged digital data holders are now used for creating precise actuarial models and market analytics that lead to crafting new policies tailored to the needs of every individual.

Instead of using old-fashioned historical profiles or the market average, the contracts are now based on the personalized data and near real-time risk assessment.

Thanks to smart contracts, every person becomes a keeper of his/her own data and, for the first time in the digital age, will be able to choose what information should be revealed. Also, with the rise of IoT, the volume of such information could be seriously increased and offer more opportunities to assess the customers better, decreasing the cost of premiums even more.

Photo by Hitesh Choudhary on Unsplash

Peer-to-peer Insurance

The easily accessible and low-cost services create an incentive for family members, friends, or individuals with similar interests to cooperate and create an “insurance pool,” where each member contributes to the loss incurred by the others. The pool fuses individuals with different risk groups, so the premium is calculated individually and is reduced for the lower-risk pool members. This leads to paying less for premiums in case of fewer claims for the same type of coverage for every pool member.  Every participant gets to know the other members, the author of the claim, and how much money there is in the pool in a live mode. The main feature is that all the remaining money is refunded to the members by the end of the insurance period. On top of that, the whole payment and claim system operates as a stand-alone program, eliminating the need for mediators — another factor that cuts expenses.

Axieme is an Italian P2P insurance platform that has already jumped on the bandwagon and allows their users to create a group with others to share the risk. A person becomes a member by buying a policy from Axieme and can create a new group or enter an already existing one. As a group member, you need to make two types of payments: one to Axieme and the other to a shared account, with both sources contributing to a final payment in the event of an approved claim.

Tribe is a Norwegian life/health insurance startup that allows its members to form groups consisting of friends and family members. Each insurance claim leads to a 20% next-year discount and is valid to the point when all the members pay the same price they would be paying without the pool membership. Each new member gives a 5% discount to other members, and because the group size is limited to 10 people, all ten individuals earn a 50% savings.

Reinsurance

Insurance allows people to feel more secure if something unexpected happens. Moreover, insurers also want to be looked after. And in case of a major disaster, the amount of payment can be excessive to cope with, so some insurers want to mitigate the risk and be insured themselves. To do so, they pass a piece of a portfolio to other parties by a predefined agreement. The party that purchases the reinsurance shares the same responsibilities, which allows the initial company to create a balanced economy model, secure financial stability, and broaden the spectrum of a client base that was previously unavailable for a sole company. In other words, that’s just 2 or more levels of payments to distribute the risks, much like getting a loan to cover another loan but, instead, lending.

The current reinsurance process is fairly inefficient and complex — it takes a lot of time to settle the contract between the parties and, due to the standards mismatch, leads to a different understanding of how the contract should be treated.

Meanwhile, blockchain data principles allow both parties to settle all disputes in a real-time mode and automate the information stream, so the insurers have clear visibility of their contracts and risk exposures. Also, within the industry, the benefits include automatic calculations based on the purchased share and information updates about the status of claims.

B3i is the blockchain insurance initiative that includes large international companies and aims to explore the potential of a distributed ledger and benefits to all participating stakeholders. The company’s motto is to create a system of products and services developed “by the market and for the market.”

On-demand Insurance

I just couldn’t pass over the sharing economy, an area that has spawned new, adjustable products. The mobile wave stepped into our lives and the insurance was no different — now every smartphone is capable of purchasing on-demand insurance whenever individuals want. Although this product is a welcome step to meeting the new market needs, it also brings security concerns down the line that need to be promptly addressed. After all, not only does it transform the interaction of the parties involved but also changes the way we protect it.

Blockchain not only meets these challenges but is also great against fraudulent activities when a user turns the policy on and off to abuse it in the event of an incoming claim — this possibility is simply prevented.

Blockchain has already become a prime option for those who want to move their insurance services to the mobile realm, which has lead companies like GetSafe and YRisk to take advantage of these on-demand solutions. Safe-Share Global is a London-based company that provides short-term rental insurance. It enables its users to fill the ever-present gap in residential agreements when private property is used for commercial purposes, providing timestamped records of insured assets upon request.

Adoption Concerns

For a few moments you may think, wait a minute — there’s a ton of advantages, why not use the blockchain right now to become one of the first on the market? As a matter of fact, it has almost no drawbacks, but the administrative edge is what can keep it restrained.

First, you can’t build a public blockchain net that is accessible to everyone for your business — right now, the only way is a private version that will feature invited members only. It will incorporate your partners, customers, and other insurers into the industry and is now the most preferred option by insurers.

Second, the regulatory aspect is painful for blockchain as a whole. For example, the area of the public ledger (the most popular nowadays) falls under the jurisdiction of open-source communities, while the future of private blockchain is still vague and depends on the governance of each country. Actually, today 48% of companies view it as the number one barrier to technology adoption.

Funnily enough, the lack of trust is another major factor on the list, which is ironic given how good the blockchain is in terms of security. According to the survey published on 24 May 2017, blockchain tops the list of less understood technologies with 80% of people unable to explain how it works, even if they’ve heard that such technology exists. Furthermore, users still need to build confidence in the emerging technology as it’s relatively new and unknown to many of them.

When talking about business owners, the task becomes twice as hard as they should also grasp the business advantages it brings upon itself, not to mention the core technological aspects. Making crucial decisions is a risky affair in itself, and introducing blockchain can only make it spicier, so you gotta “risk it for the biscuit.”

The technical limitations are also in place, some of which are:

• Scalability — until now, most of the projects were small-scale, and it’s unclear how blockchain will perform under thousands of active members generating millions of transactions; however, Thai elections proved these concerns to be in vain;
• Speed — the process of approving new blocks can also slow down and increase the price that may impede the expected financial advantages;
• Standardization — most of the launched prototypes use a variety of different protocols and development tools that need to be synced; if not, it may create flaws in the final build;
• Security — new stuff — less secured product, as simple as that. Even if it’s made to boost the protection level, it may not prevent security problems if made by developers with no deep expertise.

What to Expect and How to Prepare

Maybe life isn’t like a box of chocolates, but you never know which technology will come into full effect, becoming a new “big thing” for all of us. Now, it’s a near perfect time to take advantage of blockchain or, at least, to view it as a backup plan; it simply gives more than it takes — at least for now.

Considering all the pros and cons of this technology, blockchain is here to stay and gain its footing. Will it be the insurance sector? Well, it depends.

Knowing your goals and capacities is the recipe to take the best of blockchain, which is a fine option to further improve your service in virtually any of the insurtech qualities: production speed, security, efficiency, and cost-effectiveness. Whether you want to press the gas pedal and take the W in a disruption race or simply refine the workflow — be sure that the improvements it brings are worthy, especially for smaller companies.

As a result, it won’t engrave your name on the inventors’ board but will certainly boost the product quality for your customers and give the edge in an ever-growing competition.

This article is prepared with a help of X1 Group.