How can blockchain be used in insurance?

By Paul Doran / Partner, Nuon AI

I’m fascinated by innovation and transformation within all elements of the insurance industry, and have recently been reading a lot about decentralised finance and blockchain. This blog starts to look at what blockchain could mean for the industry and for customers.

Just a few days after I first shared this post, something incredible happened. The first legally binding reinsurance contract on the blockchain was placed by Allianz and Swiss Re, enabled by B3i’s live production network – as reported by Insurtech Insights.

Only in 2-3 years time will the significance of this be more fully understood. The speed, efficiency and transparency this will in time bring to consumer-facing insurance is untold.

Blockchain and other technologies like algorithmic underwriting have the potential to reinvent insurance, bringing the risk and the capital which protects that risk much closer together.

This could mean much greater control and transparency for the customer and massive efficiency gains for the insurer.

Read on to find out more about what I learned when I took a deep dive into the technology…

Blockchain and cryptocurrency are very much a hot topic, but they are also a hot potato in that they are new and emerging technologies that are not well defined, particularly in relation to insurance.

Blockchain
Source: gartner.com1

What is blockchain?

In essence, blockchain is a secure information system that is part of the decentralised finance – DeFi – universe.

Blockchain works as a duplicated digital ledger and is distributed across the entire network of computer systems on the blockchain – each block in the chain contains several transactions. Every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger.

Cryptocurrency is essentially a digital token that exists within the blockchains. Bitcoin is the most widely known cryptocurrency – it was the first, after all.

The main benefit of blockchain technology is what lies at its heart: trust. Information is secure and cannot be erased.

Further reading: How will decentralised finance affect insurance?

Blockchain can help ease the administrative burden, making insurance more open and efficient

Onboarding a new client is a win for any insurance business, but it can take time and be prone to human error.

Blockchain can fix this by having the necessary documentation made available to anyone who has permission through its distributed network. Records are secured with cryptography and linked together – preventing them from being edited or amended at a later date.

If a customer has their identities secured on the blockchain, insurers can quickly access and then verify their eligibility without the need for multiple sources.2

Insurance is a contract to pay out in the event of a claim – Meet smart contracts on the blockchain

Smart contracts are crucial to blockchain tech working for insurance businesses. They are digitally signed agreements between two or more parties.3

As with physical contracts, smart contracts will stipulate the rules between two parties. However, with smart contracts, you’ll also be able to track insurance claims – a bonus for everyone involved.

When an insurance claim is ready to be paid out, funds are transferred instantly. This is a huge advantage to customers. One that – as a customer – I would have been delighted with when a glass of water was knocked over my Macbook recently…

If the worst case happens, such as a fraudulent claim by the policy owner or the insurer no longer agrees to cover a condition previously agreed upon, no problem. The smart contract will instantly be dissolved and funds transferred back to the individual.

This process further embeds the sense of trust between policyholder and provider. The automation involved also makes financial sense with lower admin costs for providers.

Blockchain to help with crime and fraud prevention

Looking at how blockchain can be applied within the industry, it’s increasingly at the forefront of fraud and crime prevention. The decentralisation of blockchain ledgers creates a secure ecosystem that is close to being invulnerable.

That is an incredible incentive for the insurance industry globally, especially with FBI experts putting non-health insurance fraud in the  $40 billion per year bracket.4
Crash for cash motor insurance scams in the UK cost the motor insurance industry £400 million a year.5

Blockchain can go a long way to eliminating insurance fraud in a number of ways:

  1. Insurance claims can’t be modified
  2. Ease of communication between insurers, with immediate access to a shared blockchain ledger
  3. All parties would know when a claim is made – stopping multiple claims for the same issue
  4. Information is shared securely without revealing sensitive or identifiable data

One exciting application is within diamond insurance, with blockchain records of precious stones and diamonds being created – making life more difficult for your everyday diamond thief.6

Improved customer service and claims management

Another area in which AI and blockchain will work together is claims management. Placing property and casualty insurance alone on the blockchain can save insurers over $200B a year in operating costs.7

Other benefits include:

  • Streamlined claims processing
  • Accelerated claims adjudication
  • Rapid document digitisation – moving away from physical signatures
  • Faster and more accurate underwriting – from several weeks to several minutes
  • Improvements to fraud detection and prevention
  • Winning insurance customers with competitive premiums

We cover how AI can help with all of the above in our previous blog – what does AI mean in insurance?

AI being used to assess accident damage
AI being used to assess accident damage / v7labs.com

A future of possibilities

We are at the very start of a new era of digital and internet technologies, the blockchain being just one.

The early 1990s gave us Web 1.0 when we digitised information. Web 2.0 saw applications made more universally accessible. And now web 3.0 where services, interactions and experiences are more immersive and connected.  These are interesting times not just for insurance but for many new and emerging industries.

When it comes to learning more about the world of blockchain, some resources worth keeping an eye out for are:

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SOURCES
1 | The CIO’s guide to blockchain | gartner.com
2 | Three areas in the insurance industry to use blockchain | ibm.com
3 | Blockchain and the future of everything | wtwco.com
4 | Insurance fraud fbi.com
5 | Blockchain applications in insurance | deloitte.com
6 | Bitcoin: possible bane of the diamond thief | ft.com
7 | The first all blockchain insurer | bcg.com
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