Insurance today is an enormous market — in 2016, US consumers alone paid $1.35 trillion in insurance premiums. In spite of those sums, the sector is undergoing difficulties. Deloitte estimates that US property and casualty insurers saw $5.1 trillion in underwriting losses during the first half of 2017.
Swindlers and bureaucrats as well as a lack of trust between insurers and the public has been hampering improvements in the insurance sector.
Insurers are suffering because their consumers are lying to them. Analysts have calculated that insurance fraud in the US costs every family from $400 to $700 per year. Examples include patients colluding with doctors to cook up a fake diagnosis to defraud health insurers, or showing a fictitious damage amount on paper or passing off intentional property damage as an unfortunate accident to defraud property insurers.
The process of signing up for insurance, evaluating damage, and especially of receiving an insurance payout is a long, tedious, and bureaucracy‐riddled hassle. Coverable damage needs to be established and then verified. Policy holders may be denied a payout if they incorrectly fill out their claim, and while their incident report is being verified, they will have to wait for weeks or months for their entitlement.
Reams of information are still processed on paper, which creates a cumbersome paperwork, increases costs and time frames for examining claims for insurance compensation, and entails additional risks for information leaks.
Insurance is overpriced and includes a lot of needless expenses which can be optimized. First, there’s the risks to the underwriters we discussed earlier. The cost of insurance fraud is passed on in policy prices, which scrupulous beneficiaries have to pay. Second, there are the unnecessary middlemen who have to be paid, which increases the price of insurance. Insurance companies themselves have a bloated staff of appraisers, account managers, and other employees whose work could be optimized or entirely eliminated. Right now, the bureaucrats who are holding back insurance payouts are also being paid out of your pocket.
Insurance companies have a difficult time correctly appraising risks, ensuring that the insurance policy’s sum is neither over or underpriced. Both parties often make a deal without having reliable information about what’s being insured and without trusting each other. For example, beneficiaries can delete information about their illnesses from their medical records to decrease the cost of their insurance, while a car salesman can hide information about small accidents that were not reported, or about how a car was handled roughly or not serviced on time.
To correct the situation, insurance companies are increasingly considering blockchain — a distributed ledger technology. You can think of blockchain as an electronic record book which is immediately stored with many users. You can store new records in it, but you cannot correct prior ones. This opens up enormous prospects for developing the insurance sector. That’s why many insurance companies are now interested in blockchain or are testing it.
Blockchain decreases insurance risks, increases trusts between parties, and makes rates fair
Thanks to the fact that it is impossible to change data in blockchain after it has been entered, blockchain technology can help combat fraud. Insurance fraud in the US alone is estimated to total $40 billion, and that’s without counting health insurance.
For instance, blockchain technology can help eliminate instances where one loss is compensated twice. Right now, swindlers can insure their property with different companies and receive multiple payouts for one insured event. But with blockchain technology, this will become impossible: the system will immediately detect violations.
Currently, insurance companies don’t coöperate together well due to the difficulty of exchanging confidential information between organizations. But blockchain technology will provide top‐notch coördination between insurers, enabling them to fight fraud without jeopardizing data security. Underwriters can record transactions in blockchain and control access to various parts of this information using digital signatures and private keys. Storing claims information in a unified register will help insurers coöperate with each other and identify suspicious behavior by making insurance audits more rigorous.
Blockchain technology can also help automate the claims processing system, especially with property and casualty insurance. Smart contracts on blockchain can transform paper contracts into programmable code which will help automate claims processing and calculate all parties” liabilities.
Smart contracts are basically a computer program written into blockchain which automatically execute if a specified event takes place. The fact that this program is written into blockchain guarantees that it cannot be retroactively changed, which means that neither party can change terms as they see fit without the other party agreeing to it. A smart contract, for example, can automatically confirm an insurable event and initiate a request for an insurance payout.
Introducing blockchain will help customize insurance rates. For example, when buying a car, neither the buyer nor the insurance company can objectively appraise its condition: how and when the car was stored, whether it was in any unreported accidents, or whether it was regularly serviced. And it’s not just about beneficiaries wanting to hide these facts — after all, if you’re buying a used car, then its owner may not know important facts about how previous owners treated the car.
Currently, all information about a car is stored in the on‐board computer and can be changed there. If these data can be stored in some sort of «black box» on blockchain, where nothing can be retroactively changed, then that guarantees data authenticity and increases trust between parties. In that case, an insurance company can come up with an individual rate for a car without taking risks on it that are unacceptable for the specific car or driver. Moreover, insurance payments can be calculated for every car and every beneficiary in real time, changing based on how the car is handled.
For instance, it’s obvious that aggressive drivers have a greater risk of crashing than an easy‐going driver. Based on information that is established from various automobile sensory devices, you can definitively determine the driver’s style of driving. If this information is transferred online and recorded in blockchain, then insurance companies can decrease customers” rates during periods when they are driving safely, and raise it when they are driving aggressively. Smart contracts can do more than just automatically calculate rates — they can also deduct the rate from the beneficiary based on this and a multitude of other factors.
Increasing trust between participants and the using rate decreases as an incentive is a driving force for the entire insurance industry. It’s possible to increase trust thanks to the fact that’s impossible to change data in blockchain, and rates can be reduced via automated processes, reducing the number of middlemen, eliminating insurance fraud schemes, and incentivizing beneficiaries to be on good behavior, which decreases the likelihood of risks occurring. Moreover, in this instance, insurance companies can reduce their rates without reducing their profitability. Ultimately, introducing blockchain technology will make the insurance sector more efficient, decrease the amount of time all parties to the deal waste, and make rates simultaneously cheaper and more fair.
Insurance companies are already using blockchain, but establishing a unified network is still a long way off
Today, some insurance companies are already using blockchain. The London‐based company Everledger is using blockchain to establish a central diamond registry for their buyers, sellers, and insurers — and they’ve already registered 1.6 million diamonds in blockchain. Diamonds with a laser engraving have a digital fingerprint which contains unique information for every gemstone — like its serial number, clarity, and cut. This fingerprint is saved on the blockchain
Let’s say that an owner of a jewelry store reports a diamond heist and files an insurance claim, and then fakes certificates and tries to sell the gemstones as new. Since Everledger’s blockchain saved the unique characteristics of each stone, the insurance company will receive a notification of when they turn up on the market, and can confirm the fraud.
Allianz Insurance recently launched a prototype on Hyperledger Fabric’s blockchain for property insurance. The prototype records premium payments on the blockchain as well as claims processing, which decreases the flow of transactions between parties. As Yann Krattiger, principal of Allianz Risk Management, said, «automated processing replaces the exchange of thousands of emails and massive data files.»
Blockchain simplifies the lives of not only underwriters, but their clients as well. For example, DocuSign recently teamed up with Visa to launch a prototype that simplifies the auto leasing process and ensures the vehicle through a blockchain‐based platform. It records, renews, and verifies every action from auto selection to selecting and paying for an insurance plan on the blockchain.
MedRec is an example of a decentralized system for medical content management. Instead of storing medical data directly in a registry, it indexes them on the blockchain, granting access to the information suppliers” reports, taking relevant rights into account. That decreases the amount of data that have to be stored on the blockchain, but also maintains confidence that the document provided b the information supplier was not retroactively changed.
One of the largest European insurers, Allianz cooperated with major re‐insurance risk manager Nephila Capital Ltd in order to use blockchain and smart contract technology to provide natural disaster risk transfer products. When an event happens, like an earthquake in California, the smart contract automatically initiates a payout from the reinsurer to the beneficiary.
To study prospects for introducing blockchain into the insurance industry, the consortium B3i was established. The largest companies on the insurance and reinsurance market — AIG, Allianz, Aegon, and Swiss Re — are part of the group. Recently, B3i launched a smart contract management system for Property Cat XoL — a sort of reinsurance for natural disasters. Every reinsurance agreement on their platform is written as a smart contract on blockchain. When an event occurs, such as a hurricane or an earthquake, the smart contract assesses data and automatically calculates the payout to the injured parties.
In 2018, several ICOs in medicine and insurance took place — like the ICO for the global WELL telemedicine platform and Solve Care blockchain’s healthcare platform. Both of these platforms offer to automate many processes and decrease healthcare expenses, and also afford the possibility of simplifying contact and transactions between all process participants — patients, clinics, doctors, and insurance companies.
Rolling out blockchain in the insurance sector will require developing technology and coöperation between underwriters
Although blockchain is still considered a young and immature technology compared to conventional databases, the insurance sector has many prospective ways to roll out blockchain technology. Enormous companies like Allianz and Swiss Re are already using it.
But in spite of the generally large interest in using blockchain technology, some obstacles impede it from being fully implemented in the insurance industry. First and foremost, insurance companies themselves should harmonize standards through using this technology. At the same time, blockchain can provide underwriters with better instruments to work together and exchange data. Underwriters should be willing to work with each other.
The technology should be more customized to meet the needs of insurers. Public blockchain networks, where everyone has access to every transaction in the register, doesn’t work for the insurance industry due to confidentiality and security problems. Insurers need to develop blockchain systems with regulated information access rules.
Finally, the insurance industry is strictly regulated to protect consumers from abuse, and insurance companies from excessive risk and bankruptcy. Legislation and norms should be revised to allow blockchain to be implemented. Insurance companies and startups working with blockchain technology should overcome significant normative and legal barriers in the future.
It’s still too early to talk about whether blockchain technology can overcome those barriers to become a standard technology in the insurance industry. But the technology’s potential is obvious, and insurance companies are actively interested in adopting it.