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Insurance and Blockchain: An A-Z Guide

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@golubevGolubev_Od_UA

Crynet.io (project manager), EU structural funds, ICO/STO/IEO, NGO & venture, marketing projects

The insurance industry is a huge market. In the United States, in 2019, the volume of paid insurance premiums amounted to a trillion dollars. However, despite such volumes, the industry is experiencing great difficulties, because of which insurance companies are losing more than $100 billion every year.
Most of the problems are fraud, poor-quality data, or lack thereof, as well as the general inefficiency of business processes. Blockchain allows to open new opportunities in insurance, solve some of the problems listed, and significantly modernize the industry:
  • The effectiveness of blockchain solutions will make the industry decentralized, transparent and more secure, reduce the processing time of requests and the cost of interactions and money transactions
  • Reducing the number of intermediaries and full transparency of public platforms will significantly accelerate business processes, reduce their cost and increase confidence in the system and the industry as a whole
  • Smart contracts automate administration, payments, reduce fraud risks, the amount of low-quality data (errors, inaccuracies, gaps) and improve the quality of customer service
  • New types of insurance will appear as parametric insurance, peer-to-peer (P2P) insurance, microinsurance, and others
  • The availability of insurance services will increase
Blockchain — a continuous chain of blocks with information and related to each other. Editing or deleting a chain is not possible; in addition, all information from it can be duplicated to other servers and computers.
Thus, this is a special case of distributed ledger technology. This means that the use of DLT and the analysis of big data will soon be indispensable in insurance: this way companies will simplify the calculation of losses, select an individual approach to the client and protect financial information.
Digital transformation is fundamentally changing the process of doing business: new products and services are emerging, a new infrastructure is growing, new principles for communicating with customers, and working with partners are being developed.
These trends are also characteristic of the insurance market. Its development directly depends on the perception of new technologies, primarily the blockchain.
From the insurer’s point of view, blockchain can provide a secure and at the same time safe way to track transactions and store information, integrate partner ecosystems into your business and develop completely new products for the client. Experts identify four areas in which the use of blockchain can give a new impetus to the insurance business:

1. Financial Security

Blockchain will minimize the human factor in doing business — both errors or negligence, and outright fraud. A decentralized digital database will allow independent and impartial assessment of customers, without the possibility of intervention.
A potentially dangerous area is instant cross-border transactions, including in different currencies. The blockchain system allows you to monitor risks in this area. An independent database will help reduce health insurance fraud to zero. Also, the blockchain will be able to reduce the number of errors in processing large amounts of data, which is especially important for the reinsurance market.

2. Work with reimbursement claims

Blockchain and digital technologies as a whole simplify and accelerate the dialogue with the client in case of an insured event. The easiest way — a remote assessment of damage by a specialist through the camera of a mobile phone.
Data comes to the insurance company much faster, which saves the time of the client and the insurer and, ultimately, the money. Further, when it comes to natural disasters, you can combine the use of mobile technology with satellite imagery to; for example, help send a rescue team to hard-to-reach areas. Farmers who have lost crops due to bad weather receive compensation, the size of which depends on the analysis of weather information.
The insurer receiving data from weather stations using the blockchain will allow calculating compensation more fairly. The use of blockchain technologies in the exchange of information with partners will help establish predictive analysis, that is, predict market trends and develop a clear business development vector.

3. New methods of distribution

Car insurance is an inexhaustible source of data for introducing innovations and creating new offers for existing customers. It’s not enough to put “smart” sensors in the machine, it is still important to quickly and accurately analyze the information coming from them, with which the blockchain will help.
Processing large amounts of data will help to offer customers personalized policies for a set of services. The use of blockchain will also stimulate growth in the microinsurance market and microfinance companies. By using blockchain, insurers are developing the concept of mobile wallets. The number of tools will limit their content, but the client will be able to use them anytime, anywhere.
The analysis of big data and the use of blockchain will allow insurers to more deeply and more accurately determine consumer behavior and look for some new interesting market niches for development.

4. Cybersecurity

The electronic network of the company is a single system of switches, routers, event logs, and much more. Blockchain technologies will allow the security service to monitor this entire system as a whole, moreover, in real-time. Insurance is a multi-trillion industry that suffers from opacity and fraud. Insurance is supposed to be designed to help and recover from unforeseen events.
Nevertheless, when an unforeseen event occurs, insurers often have to fight and prove the legitimacy of their insurance claims to companies whose profit depends on the number of payments in different currencies.
By ensuring the transparency of an opaque industry and democratizing data for policyholders, insurance platforms that have implemented or built a business on blockchain technology are aimed at eliminating the shortcomings that traditional insurance companies have, respectively, such companies have a competitive advantage.
Details of the competitive advantage of insurance blockchain companies
The most acute problems of classic insurance:
Opacity: insurance is an opaque industry. There are several studies that examine the lack of transparency in the insurance industry. Insurance often goes into the gray zone, from limited disclosure to complete non-compliance with consumer protection laws. An opaque and complex process of insurance claims, backed up by a lack of desire on the part of insurance companies to help clients with claims, is detrimental to policyholders and is beneficial to insurers.
Data collection: in the classic insurance industry, the data of the insured is collected for the application and is constantly stored by the insurance broker — even after the expiration of the insurance policy. Brokers are the dominant distributors of insurance products on behalf of insurance companies, taking advantage of the situation, they greatly benefit from the opacity of the system. In 2017, three top brokers generated about 40% of the revenue among the top 50 US brokers. The billions of dollars in revenue generated by them allow them to collect huge amounts of data and information.
Fraud: More than $40 billion is lost annually due to insurance fraud — and that’s not even counting the health insurance industry. One of the most common types of fraud is double counting. Double billing is when a practitioner submits an invoice to an insurance company several times for a procedure that happens only once.
The technology for solving the above problems through the blockchain:
Transparency: a transparent distributed registry, in theory, can allow anyone to check several levels of the value chain of insurance. Any contributions paid by policyholders are also recorded in the blockchain for control by the policyholder. Immutable digital certificates can establish ownership of the insurance policy, which will allow policyholders to make quick claims.
Data Ownership: Decentralized insurance platforms allow users to control data exchange with insurance companies and deny access to data after the expiration of the policy. Users can sell their data to insurance brokers on a decentralized platform. Transparency and data accessibility allow small companies to compete with their larger counterparties, and these large counterparties will no longer have advantages.
Fraud prevention: nodes on blockchain platforms, checking transactions, will help prevent double-spending. In the case of insurance, this may prevent policyholders from processing several claims in one accident, as the nodes can check if the claim has already been processed by the network. In addition, digital immutable certificates of ownership can also prevent falsification of ownership of an insurance claim.
In addition to these technical advantages, there are a number of economic issues. There are clear advantages to using the blockchain that open up new growth opportunities for insurance companies: improving customer interest, offering new, cost-effective products for emerging markets, and developing insurance products related to the IoT.
The key to success lies in creating based on new technology, a reliable distributed platform for direct work of clients with their personal data, collective insurance policies, and smart contracts:
  • Increasing customer interest. An important tool for influencing customers will be to take advantage of the blockchain to work with their personal information. Fear of customers to lose control over personal data at the time of their transfer to the company and dissatisfaction with the need to answer the same questions can be eliminated using a separate blockchain to verify customer data directly managed by them.
  • Another way to improve the indicator of customer interest is to increase transparency, as well as providing consumer-friendly tariff-setting schemes and insurance payment mechanisms.
  • Despite the fact that collective insurance as a business model has long been widely adopted and implemented using standard technologies, blockchain will make it even more transparent and understandable to consumers. As for insurance providers, the benefit of the blockchain lies in the automation of work processes.
  • Regardless of the context of the use of smart contracts, in conjunction with the blockchain, it offers a number of advantages: allow to automate the satisfaction of insurance claims, offer a reliable and transparent payment arrangement mechanism for all parties, and can be used to customize the conditions of each individual contract.
Blockchain can be useful for reducing administrative costs due to automated verification of the policyholder’s identity and validity of the agreement with it, registration of claims for insurance payments, verification of data received from 3 persons using the payment infrastructure based on blockchain and smart contracts.
The power of blockchain insurance showcases
Insurers are exploring the blockchain as they see vast potential in this new technology, most common research topics being: travel insurance and crop insurance.
With crop insurance: If the bad weather causes any damage to the crops then a smart contract can confirm the loss using weather data and pay claims automatically.
Similarly, in case of travel insurance, if the flights get cancelled by the airline due to a covered reason, then a smart contract built using blockchain technology could automatically enact payment to those with insurance. These examples showcase a blockchain’s ability to lower costs, thereby allowing consumers to realize savings.
  • Blockchains can improve access to underserved segments, enable instant policy issuance, and increase transparency in peer-to-peer insurance.
  • Blockchains can automate claims processing using smart contracts, improve assessment using past claims data, and combat fraud.
  • Personal auto insurers could save $21 billion a year through lower costs, which can be realized through application of blockchain-enabled smart contracts.
  • According to the survey by Market Force, Pegasystems, and Cognizant, 12 percent of insurance executives expect the use of the IoT, blockchain technology, and smart contracts to be mainstream within two years, and 74 percent expect it to be mainstream by 2030
  • Adopting a common blockchain across the sector could create a step-change in value in the insurance industry: claims handling could become more efficient and streamlined, resulting in improved customer experience. Such an approach could also help to reduce further, if not entirely prevent, fraud if identity management was also enforced on the blockchain — meaning that criminals could no longer crash for cash.
  • In another report, McKinsey & Company found sixty-four different use cases for blockchain technology. The report found that the insurance industry accounts for the most non-bitcoin blockchain uses (22 percent of the total), distantly followed by the payments industry (13 percent).
  • Another recommendation is to “identify a group of firms willing to join a consortium to investigate the business case for at least one of the potential use cases. Recommending that the industry “work with consortia, technology experts and startups, regulators, and other market participants to identify the challenges around blockchain’s open and decentralized nature. Among these challenges are technology limitations as well as market, legal/regulatory, and operational requirements regarding, for example, data protection and standardization
The blockchain technology speaks to all of these priorities, as it addresses automation, improved third — party integration, increased trust, more extensive market reach, and greater efficiency — thereby offering greater satisfaction among insureds and opportunities for growth by insurers.
These are a few major themes expressed by insureds (From the Perspective of the Insured):
Insured wished for an improved customer experience
A recent survey confirmed that customer satisfaction in this area is low and hence, insurers can utilize this solid opportunity by creating efficiencies through means such as blockchain. Customer with the need to complete complex questionnaires and maintain physical receipts has expressed extreme dissatisfaction. With new technology, the insureds expect a seamless solution with minimal delay
Scrutiny regarding affordability
Consumer groups and organizations like the Federal Insurance Office have started to scrutinize auto insurers. This step comes after auto insurers kept premium increases in line with income growth. Consumers always want lower premiums, but if loss frequency and severity increase, lowering premiums while maintaining solvency becomes increasingly difficult
Innovation of products
Innovation and insurance were not well connected. However, there has been the introduction of new technologies in the industries, such as ridesharing services, the IoT, driverless cars, and drones
Faster entry into emerging markets
It has been very costly for insurers to enter into the emerging markets. Although the potential of the market continues to grow. Insurers may take the first-mover advantage with the blockchain technology and deliver efficient service. Blockchain will be invaluable in this area.
The environment is getting competitive with low ROI and low-interest rates. The insurers have adjusted accordingly (From the Perspective of the Insurer):
Decreasing costs
In this industry, the record-keeping costs are high. The process of insurance involves the insurers to collect and identify data and documents such as identity, contract, registration of claims, and loss payouts. In fact, organizations involve 3rd parties such as service providers and other intermediaries to handle the processes. Blockchain can help create efficiencies for all by lowering costs and turnaround times.
Easing data retrieval
93 percent of insurance CEOs consider data mining and analytics to be strategically important, as reported by PwC. This proportion is larger than the rest of the financial services industry. Implementing the same has several difficulties because the insurers may have to depend on third-party providers. And the process manual, that implies that data cannot be offered in real-time.
Simplifying processes
According to Capgemini, personal auto insurers could save $21 billion a year by using smart contracts. As to process claims, loss adjusters review claims, ensure completeness, request additional information when necessary, confirm coverage, determine liability, and calculate loss amounts
Protecting from fraud
Insurance Research Council reports, fraud, including build-ups, adds up to about $7 billion in excess payments for auto injury claims — in the U.S. alone. Fraud makes insurance more expensive for insurers and insureds alike. So it stands to reason that by effectively combatting it, expenses for both groups could decrease.
Products, Pricing, and Distribution
The blockchain could help with parametric insurance by expanding parametric applications in insurance and automating the entire process. Instead of indemnifying on pure loss, insurers would agree to pay a certain amount upon the occurrence of triggers within present smart contracts. As mentioned earlier, blockchain-related research is already underway in-flight insurance and crop insurance, but could easily be extended to niche coverages, catastrophe swaps, and other areas.
Underwriting and Risk Management
Processing of data could be optimized by blockchain and processes related to information flow across can also be optimized across the entire value chain but particularly related to risk. Insurance-related parties may share data and register risk through a consortium chain.
Policyholder Acquisition and Servicing
Blockchain may improve record keeping by providing access to contract documentation only via keys. Only necessary parties like underwriters and brokers may be allowed to get access to the keys, allowing appropriate access to the documentation and updates that are reflected across the board. In this way, a blockchain can help ensure consistency among various parties and dramatically cut administrative costs.
Claims Management
Through blockchain technology, insurers could share certain fraud-related data through an insurer-only network while maintaining appropriate anonymity. Moreover, blockchain technology has the ability to generate a digital history of assets, which may help fight fraud and other crimes. A blockchain-enabled fraud register could quite possibly become part of a new blockchain-enabled claims process. Blockchain-enabled smart contracts can be embedded throughout the claims experience. These smart contracts can establish rules to enforce policy terms and pay claims without requiring manual administration or having loss adjusters review every claim.
Finance, Payments, and Accounts
For example, if Company A owes $100,000 to Company B, Company B should have $100,00 in accounts receivable in its books, and Company A should have $100,000 in accounts payable. Generally, these transactions are managed through invoices, and this process requires staffing and
Approval and this may require additional paperwork, approval, costs, etc. Nevertheless, with the help of blockchain, both the companies are able to access the same shared ledger rather than individual ledgers and conclude the transaction more efficiently.
Blockchain technology can also help accelerate transactions because blocks are confirmed every ten minutes. Finally, groups of transactions could be netted.
The amount of money exchanged in cross-border payments is staggering. Money moves from one bank (in other words, a middleman) to the next. Each intermediary takes a slice of the funds before forwarding them along the chain, contributing to payment-processing delays, expensive customer fees, and risk related to weaker banking standards.
A blockchain, which does not face the same geographic hurdles and can bypass middlemen, could change this approach, leading to lower fees
and faster transactions. For insurers, this could mean that less administrative support would be necessary; fees would go down because fewer intermediaries would be involved, and money would change hands quicker.
Regulation and Compliance
As proof, one can show that he or she has valid insurance is by putting their paper card (by the insurance company that lists policy information and effective dates) on the table. E-insurance cards have been termed as a valid proof of insurance in as many as thirty states. Regardless of the type, proof of insurance is issued for every vehicle with liability coverage — but costs accompany this proof.
For example, if a policyholder wants to update the information in this life cycle, then he/she has to go through additional costs, both direct and indirect. In addition, insurers, regulators, and policymakers seek to understand the uninsured, which make up a remarkable 13 percent of U.S. drivers.
The blockchain can help. It can allow for electronic safekeeping and updating of information across the board. And smart contracts could be used to alert insurers and other parties to suspicion of uninsured motorists.

Possible blockchain insurance issues

Capital efficiency: in contrast to traditional insurance companies, blockchain-based insurance products are designed to prevent insolvency in the event of force majeure by accepting additional security in the form of increased premiums.
Force Majeure is an event that deviates from the usual expectation of the situation, and it is extremely difficult to predict. Traditional insurance companies usually invest payouts to generate investment income. In theory, investment income from this should help maintain high insurance benefits.
Decentralized insurance platforms capture payments in smart contracts, effectively preventing the transformation of capital into value-generating assets. Thus, a decentralized insurance platform will have to charge a higher premium than its centralized partners do in order to ensure that claims are properly paid accordingly
Volatility: Since a volatile asset usually pays for decentralized insurance products, the dollar value of the policyholder’s insurance premium may fall below the basic value of the insurance policy.
In this case, a decentralized insurance company will be forced to increase insurance premiums paid by their insurers. Instability of the size of insurance payments may hamper the introduction of a decentralized insurance product
Limitations of Insurance Fraud: A transparent DLT can prevent digital fraud but cannot prevent physical fraud. Traditional insurance companies often hire auditors to confirm physically the insurance claim.
For example, an insurance company might send auditors to a burned-out restaurant to make sure it was not burned intentionally.
A decentralized insurance platform will not be able to cover claims requiring a physical audit. This limits the range of insurance products that a decentralized platform can offer.
Blockchain insurance development forecasts
In general, the blockchain in its modern form is quite suitable for study and research by insurance companies. However, its full operation is still far away.
This is because blockchain is a distributed system, and therefore its value largely depends on the effective cooperation of players with competitors, suppliers, and other third parties. In fact, the blockchain represents an investment in IT with the prospect of fully realizing all its advantages over five years. In some applications that do not have such an acute need for distributed mechanisms, there are alternative solutions that can provide similar benefits much faster.
On the other hand, even despite the absence of reference examples of technology implementation, the blockchain opens unique prospects for those industry players who can satisfy the needs of emerging markets through collective microcredit, develop solutions for the IoT market or participate productively in exchanging data with other interested parties to improve fraud detection or automate claims processing.
However, the market is full of promising startups in the field of insurance on the blockchain, which is focused on solving many of the above issues. For example:

In the area of fraud prevention

• Everledger — A distributed ledger that records diamond transaction histories for each individual stone, producer, reseller, and buyer. Among other things, the platform allows you to check information about current and previous insurance claims. This helps to detect and prevent fraud, as well as to counter it.
• OpenIDL (Open Insurance Data Link) — A network built on the basis of IBM Blockchain, which provides efficient, secure, and permission-based statistics collection and exchange. It offers a secure and reliable blockchain environment for data storage and selective exchange with the American Association of Insurance Services (AAIS) as an advisory organization and authorized statistical agent.

In claims management

• Insurwave — Platform for insurance of freights. It uses smart contracts to accompany all documents related to the support of ship and cargo insurance processes. Insurwave was developed by Guardtime with the participation of EY, AP Møller-Maersk, Microsoft and insurance industry leaders XL Catlin, Willis Towers Watson, ACORD and MS Amlin

In the KYC identification

• Prototype PwC and Z / Yen — A solution to speed up the process of user identification. The network keeps records of customer documents and evidence of verification by the authority that issued them. It speeds up the procedure and enables the client to maintain control over personal data.
• IBM Blockchain Trusted Identity — Hyperledger Indy DLT-based platform for personal identification in accordance with the Decentralized Identity Foundation (DIF) and World Wide Web (W3C) standards.

In the field of reinsurance

• iXLedger — A solution developed by the iX Technology Group for effective collaboration and data exchange between insurance providers and insurance agent networks throughout the insurance life cycle.
• B3i Services AG — Consortium owned by 16 insurance companies. B3i develops standards, protocols, and network to eliminate friction when transferring risks during reinsurance

In the field of microinsurance

• PAL Network — A startup from Singapore, created to provide insurance coverage to people outside the first world countries, to narrow the gap between consumers and insurance providers. The desktop version can be downloaded on Github, the PAL Wallet mobile app
• VouchForMe (formerly InsurePal) — A social insurance platform that provides discounts to customers of insurance companies if there are guarantors. This is a combination of traditional insurance and P2P approval, backed by social proof of financial security.

In the field of P2P insurance

• Teambrella — The insurance platform, where community members, based on the results of open voting, decide about new members, determine the level of risk and the size of contributions for them, confirm the occurrence of insurance events and approve payments.
• Friendsurance — The platform provides the possibility of peer-to-peer insurance of cars, housing, legal expenses, and private liability. A 40% cashback is declared in the absence of serious insurance payments in the community.
• insChain — The platform allows the use of IoT technology to automate decisions about the occurrence of an insurance event. There is also the possibility of using AI for underwriting and making decisions on payments

In the field of index insurance

• Etherisc — Ethereum-based DLT for developing and deploying decentralized applications for the insurance industry.
All these examples are only the beginning and it is promising for the usefulness of using blockchain technology despite skepticism and criticism.
Sergey Golubev (Сергей Голубев)

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