Filed to Technology on Dec 12, 2017
The potential for blockchain technology to disrupt the insurance industry and change the way we share data, process claims and prevent fraud is intriguing, but we’re still in the very early days of its exploration and implementation—on the radar of innovative insurance industry pioneers but not close to widescale adoption. Now is the time for the insurance industry to actively work with start-ups, regulators and industry experts to figure out the best ways to navigate blockchain’s potential challenges to the realities of the insurance industry.
Individual insurance companies should begin testing new ways of utilizing blockchain with internal processes to gain learning to leverage as the technology matures.
A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block, a timestamp and transaction data. By design, blockchains are inherently resistant to modification of the data. Harvard Business Review defines it as "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way." For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.
One of Bitcoin’s greatest successes has been to show how a network of individuals can exchange value without the need for a central authority. When you consider the implications of projecting the same underlying technology, the blockchain, onto the complex web of underwriters, insurers, MGAs, affiliates and brokers that make up the insurance industry, you start to see how disruptive it might be.
Here are the most likely impacts blockchain will have on the insurance industry:
When you consider the characteristics of the blockchain in the area of claims, the far-reaching effect of this innovation start to become clear. An important element of blockchain technology that is worth mentioning here is smart contracts. These are lines of code that contain rules and regulations for actions that need to be taken in the event of certain things occurring, as well as the mechanism for executing these actions. In essence, they are digital contracts that are unambiguous in their design and don’t need any human administrator.
There’s a crisis of trust in the financial services industry. Even though the large banks are the focal point, the erosion of trust impacts all businesses. Lack of trust, high costs and inefficiency of the insurance industry all play a part in the extraordinarily high levels of underinsurance. For example, only 17% of California households carry earthquake insurance even though the likelihood of experiencing losses from an earthquake are high. Blockchain facilitates building trust of consumers because it provides transparency.
It is worth remembering that, in itself, the blockchain is not a particularly tempting consumer proposition. The lack of a shiny consumer blockchain brand is often one of the reasons skeptics point to in dismissing the suggestion that it will transform all industries.
However, much like cloud computing before it, this foundation technology will open up huge cost efficiencies in existing business models as well as entirely new business models. It is the organizations that can understand and utilize it properly in order to overlay customer-centric services on top that will win. After all, consumers aren’t generally interested in the tech stack behind the product they buy. They are interested if that tech stack makes a product cheaper or more personalized to their needs.
Anyone who has changed insurance companies or healthcare providers knows how inefficient the data-entry process is to get coverage or care started. In addition, customers have a very real fear of losing control over their personal data. Blockchain provides a solution to drive efficiency and security that would allow the personal data to be controlled by an individual while verification is registered on the blockchain. Tradle is one company trying to develop blockchain solutions for know-your-customer (KYC) data. The goal would be to have the KYC data verified and then it could be securely forwarded to other companies to use without the need to repeat the data entry or verification process.
The insured and the insurer each currently have issues that blockchain and smart contracts could solve. Insured individuals typically find insurance contracts long and confusing while the insurance companies are battling an extraordinary amount of fraud. Through blockchain and smart contracts, both parties would benefit from managing claims in a responsive and transparent way. It would start by recording and verifying contracts on the blockchain. When a claim is submitted, the blockchain could ensure that only valid claims are paid. The network would know if there were multiple claims submitted for the same accident.
One of the most compelling reasons insurance companies should investigate blockchain is its potential to detect and prevent fraudulent activity. An estimated 5 to 10 percent of all claims are fraudulent which, according to the FBI, costs U.S. on health insurers more than $40 billion per year. Validation is at the core of blockchain technology’s decentralized repository and its historical record which can independently verify customers, policies and transactions for authenticity. In order to work to its full potential, this would require extensive cooperation between insurers, manufacturers, customers and other parties who would use the blockchain to share info to prove policies, purchases of products, verify police reports and more.
Every insurance company needs to take action today to figure out how blockchain technology can impact the way they do business today and in the future.
While the exact way it will alter the insurance landscape remains to be seen, we can all agree that blockchain will be a disruptor for the insurance industry.