The insurance industry has been recognized as a crucial area for leveraging blockchain technology, which has significantly transformed the sector.
Transformative Impacts of Blockchain Technology:
Blockchain’s impressive benefits include increased efficiency, cost savings, enhanced transparency, faster payments, and fraud reduction. This technology enables real-time data sharing among multiple parties, ensuring trust and easy traceability. Blockchain introduces novel methods for delivering insurance services and activating new insurance markets.
As a critical field for blockchain adoption, the insurance sector is poised for significant advancements.
In this article, we examine the mechanisms of blockchain use in the insurance industry, introduce and categorize the types of insurance services provided through blockchain technology, and discuss the significant and positive impacts on the insurance sector. Stay with us until the end of this article.
Introduction to Blockchain-enabled Insurance Services
In a competitive environment, insurance companies cater to individual and corporate clients seeking the best opportunities for smart service solutions. Blockchain facilitates automation, creating opportunities for positive change and growth in the insurance industry.
By leveraging Ethereum smart contracts and decentralized applications, blockchain operationalizes insurance processes on distributed ledgers, providing detailed audit trails without manual intervention.
The low-cost nature of smart contracts and their transactions means many products can penetrate underinsured markets globally.
Traditional insurance business models have undergone notable changes. Nevertheless, traditional insurance also needs to adapt to digital technologies. Blockchain is a promising new tool in the industry, already utilized by major firms such as IBM and Enterprise.
As a distributed and decentralized ledger, blockchain enables the creation of more efficient, secure, and transparent insurance contracts.
While still in its infancy, blockchain adoption in insurance continues to grow, with many active companies utilizing its services. Blockchain is set to transform the industry by enhancing efficiency, security, and transparency.
Relationship Between Blockchain Technology and Insurance
Despite its long history, the insurance industry faces challenges due to outdated laws and traditional methods. Most contracts are still paper-based, and customer requests are often handled via phone calls.
Though current practices are effective, they risk human error and misuse of information, leading to data loss, manipulation, and even misjudgments.
The Insurance Anti-Fraud Organization reports that insurance fraud accounts for only 10% of property and casualty insurance claims but annually costs American consumers at least $80 billion. Blockchain holds promise in preventing such issues through improved security, efficiency, and customer satisfaction.
Despite these strengths, there are also barriers to using blockchain in the insurance industry. Insurance companies must pay attention to the legal obstacles related to their industry before fully adopting this technology. Many of blockchain’s features may not align with current insurance regulations. For example, the storage of personal customer information and privacy policies must comply with existing laws.
Furthermore, the emphasis on decentralization and information sharing may conflict with principles in some insurance laws, potentially reducing the flow of misaligned information. These challenges may arise for other industries in management, pricing, product development, etc.
Blockchain and the Digitalization of Insurance
Large and small insurance firms have seen significant strides toward digitalizing their operations in recent decades. These changes reduce costs, increase efficiency, and help companies identify and leverage new opportunities in the sector.
Blockchain has proven to be a highly efficient tool for companies already digitizing their operations. This technology allows firms to enhance their efficiency further and enact fundamental changes in their insurance business models.
Blockchain’s decentralized and transparent system facilitates secure, accurate transactions. Insurers leveraging blockchain can improve service processing, customer experience, and innovative insurance initiatives.
Insurers can benefit from enhanced transactions, better customer data protection, and improved internal processes by integrating blockchain into operational structures. These advancements contribute to economic efficiency while driving innovation and progress in the insurance sector.
Blockchain Applications in the Insurance Sector
Blockchain is an innovative, disruptive technology capable of coordinating multiple participants’ actions in an online marketplace at low costs. It allows direct access to multiple providers on a single platform and manages diverse policies in one environment.
The technology also enables seamless, cost-effective premium payments and claims processing, enhancing the speed and efficiency of financial transactions.
In peer-to-peer (P2P) insurance, blockchain strengthens P2P models by employing smart contracts and automating tasks. These contracts foster direct connections between individuals and support cost-saving measures.
Blockchain also facilitates the transfer of digital evidence for underwriting, including electronic health records (EHR). This ensures data accuracy and transparency, contributing to significant pricing and product development improvements.
General applications of Blockchain in the insurance industry:
Smart Contracts
Automating Claims Processing: Blockchain-based smart contracts enable the automation of claims processing without intermediaries, streamlining the process.
Transparency: Contract details are stored on a blockchain, making them accessible to stakeholders and increasing transparency in insurance transactions.
Reliable Payments: Blockchain ensures traceable and secure financial transactions and payment history.
Claims Management
Streamlined Compensation Payments: Blockchain facilitates efficient and timely compensation payments through automated and optimized processes.
Fraud Prevention
Eliminating Duplicate Claims: Immutable transaction records on blockchain prevent duplicate claims (double-dipping).
Digital Ownership Certificates: Blockchain-based digital certificates verify ownership and data integrity, reducing fraud and misrepresentation in insurance claims.
These advancements significantly enhance trust, transparency, process efficiency, and cost-effectiveness in the insurance industry.
Categories of Blockchain-Based Insurance Services
The performance of blockchain in the insurance sector varies depending on the types of insurance policies, and has different classifications and types.
Blockchain technology in Property and Casualty (P&C) insurance, which plays a key role in providing coverage for assets such as real estate, equipment, and infrastructure, can improve processes related to these types of insurance.
These types of insurance primarily involve collecting data to assess claims and determine damages. Currently, the process of assessing claims and paying damages traditionally relies on manual data entry and coordination between multiple parties. However, by using smart contracts on the blockchain, this process can be automated.
For example, when a claim is made to an insurer, a smart contract can automatically verify the customer’s coverage and send this confirmation to the responsible entity for calculating the damage.
Blockchain in this domain can help speed up claims and payout processes, providing accurate and transparent information. This automated exchange of information and verification of credentials can lead to reduced costs and increased efficiency in the insurance industry.
Reinsurance
Reinsurance becomes particularly important when an insurer wants to issue many policies and make multiple potential payments. Data-sharing between insurers and reinsurance companies is often inefficient due to its complexity, time consumption, and reliance on manual tasks.
These issues are caused by risk underwriting, policy and premium management, claims handling, and financial settlement. Blockchain technology appears to be a suitable solution to increase efficiency and reduce friction in this process.
Using blockchain in the reinsurance market can help simplify information flow and increase transparency in this domain. Blockchain creates an immutable ledger that serves as a comprehensive and credible source for all parties involved. This ledger, facilitated by smart contracts, can assist in matching and enforcing agreements between insurers. This approach can significantly improve risk management, claims handling, and financial settlement by creating an interactive and secure environment for information.
Digital Asset Insurance
Digital asset insurance, which includes insurance for Bitcoin, Ethereum, and other assets on blockchain networks, can involve simple agreements regarding the custody and management of these assets and payments to policyholders in the event of loss of custody. This type of insurance may also utilize blockchain technology to create encrypted solutions. These solutions may work for aggregating capital, agreeing on policy contracts, and executing claims processes using an “on-chain” structure. In other words, blockchain creates and manages contracts and processes directly carried out within blockchain networks and applications.
This type of insurance can cover various domains, including insurance for digital assets (such as Bitcoin) or even blockchain-related technologies and processes. It enables policyholders to take advantage of the security and transparency offered by blockchain in managing and protecting their digital assets.
Health and Medical Insurance
Health insurance traditionally faces two main issues: securing medical records with personally identifiable information (PII) and coordinating this data among stakeholders needing access. The use of blockchain in health insurance can lead to significant improvements in data integrity and process efficiency in this sector.
The confidentiality and privacy of medical information are of utmost importance. By creating a decentralized and secure network for storing and managing data, blockchain can resolve these challenges. Below are some of the advantages of using blockchain in health insurance:
Confidentiality and Data Integrity:
Blockchain uses strong encryption to ensure data integrity. Sensitive information, such as medical records, can be securely managed without disclosing personal information.
Accurate and Transparent Tracking:
Blockchain provides accurate and transparent tracking. Every change or addition of information on the blockchain is immutable and traceable, which helps ensure the authenticity and history of the data.
More Control Over Data:
By using blockchain and smart contracts, individuals can control their medical data. Information is accessible only to authorized individuals and organizations, and data owners can specify who can access it.
Reduction of Errors and Fraud:
Since data is stored on the blockchain in an integrated and reliable manner, the likelihood of human errors and fraud is reduced. This can improve accuracy in diagnostics, treatments, and insurance payouts.
Streamlining Administrative Processes:
Blockchain can improve administrative processes in health insurance, leading to a reduction in administrative costs. Blockchain’s importance in addressing regulatory gaps and detecting fraud in the insurance industry can be enhanced through blockchain technology. Some security advantages of blockchain in the insurance industry include:
Encryption Usage:
Blockchain uses strong encryption to ensure the integrity of data. Important information like personally identifiable information (PII) is securely stored on the blockchain using encryption.
Timestamping and Transaction Verification:
Multiple networks verify every transaction or change on the blockchain, and its timestamp is precisely recorded. This feature can be useful in proving the history of changes and transactions in the insurance system.
Role-Based Access Policy:
Some blockchain systems implement specific, role-based access permissions. These policies help prevent unauthorized access to sensitive information.
Zero-Knowledge Proof:
This feature allows one party to prove information without disclosing actual data. This reduces the need to share sensitive information and the risk of misuse.
Transparency:
Blockchain helps maintain transparency, offering a public view of the system. This transparency can help build public trust in the insurance industry and reduce risks associated with data discrepancies.
Advantages and Disadvantages of Blockchain in the Insurance Industry
Advantages
Blockchain can enhance efficiency and trust in the insurance industry. The impacts of blockchain technology in insurance include:
Increased Efficiency:
Automated Claims Payments: Blockchain can automate claims payments without human intermediaries. This reduces reliance on manual processes and decreases errors, helping increase efficiency.
Smart Policies: Through smart contracts, policyholders and insurers can automatically set terms and conditions, reducing the need for long negotiations and consultations.
Increased Trust:
Security and Transparency: Blockchain, using encryption and multiple verification networks, ensures the security of transactions. Each transaction is publicly recorded on the network, and modified data is traceable, which can increase customer trust in the insurance system.
Privacy Protection: With blockchain-based authentication, customers’ personal information is securely stored, enhancing privacy protection in the insurance industry.
Disadvantages
Some of the major challenges and risks of blockchain in the insurance and cryptocurrency sectors are as follows:
Risk of Cyberattacks:
Protection Against Attacks: Blockchain reduces cyberattacks with strong cryptographic algorithms and uses security technologies like private networks. However, updating the system’s security and adopting adequate security measures is always necessary.
Loss of Data Integrity:
Maintaining Integrity with Encryption: To prevent the loss of data integrity, information on the blockchain is securely stored using encryption. This ensures the accuracy and reliability of the data.
Operational Costs:
Operational Complexity: The increased complexity of operations due to greater interaction with blockchain may raise operational costs. However, with optimizations and the expanded use of blockchain, costs can gradually be reduced.
Blockchain Privacy Issues:
Privacy Management: Blockchain can create privacy issues in the cryptocurrency domain. However, some cryptocurrencies and blockchains have features and processes that can manage privacy, helping to address this challenge.
Organizations in the insurance and blockchain sectors must always implement appropriate security measures and use up-to-date technology to address these challenges and risks.
Leading Companies in Blockchain Use in the Insurance Industry
Guardtime
Guardtime provides blockchain-based solutions across various sectors, including cybersecurity, government, finance, and defense. The company has implemented a blockchain-based maritime insurance platform in collaboration with Maersk. This platform leverages smart contracts and helps insurance companies better manage their coverage by creating an immutable transportation chain. The “Insurwave” platform manages the insurance processes for over 1,000 ships and aims to oversee more than 500,000 ledger transactions.
Lemonade
Lemonade uses a combination of artificial intelligence and distributed ledger technology to provide home insurance to renters and homeowners. Insurance costs start at $5 per month and utilize blockchain smart contracts. The company’s business model receives a fixed fee from each monthly payment, with the remainder allocated for future claims. When a claim is made, blockchain smart contracts instantly attempt to verify the loss, ensuring that the customer quickly receives payment. If the claim is approved, the AI and blockchain integration processes the payment to the insured’s account within three seconds.
ET Risk
ET Risk is an open-source platform in the insurance field that creates decentralized, blockchain-based applications. The company is developing six decentralized applications, including crop insurance and cryptocurrency protection, using distributed ledger technology to reduce costs and claims management time.
B3i
B3i, founded in 2016, is a company with a group of insurers focused on assessing the use of blockchain and distributed ledger technology (DLT) in the insurance industry. The group was established to improve data management and payments, reduce risks, and optimize insurance performance. B3i is currently developing applications in this area.
B3i’s first completed product is a prototype blockchain for property reinsurance contracts. In collaboration with 38 insurers and brokers, the group has successfully implemented the entire reinsurance contract process securely on a blockchain.
DYNAMIS
DYNAMIS is a peer-to-peer insurance company based on the Ethereum blockchain. The company focuses on unemployment insurance, where applicants can submit their LinkedIn profile to verify their current employment status and receive their insurance payments through blockchain.
Fizzy
Fizzy provides flight delay insurance using blockchain technology. The company’s blockchain complements travel insurance that typically does not cover financial losses caused by flight delays. Users can customize their insurance coverage by entering flight details, and in case of a delay of more than two hours, they receive compensation immediately.
The Future of the Insurance Industry in the Use of Blockchain and Cryptocurrencies
In the future, using blockchain technology in the insurance industry could significantly improve accuracy, efficiency, privacy, and other aspects. However, emphasis on adhering to ethical standards in this field is a critical issue. Any insurance company adopting blockchain technology must use advanced ethical standards to ensure this technological transformation benefits everyone.
Common processes and standards must be designed to leverage blockchain as an effective tool for collaboration, data sharing, and reducing the complexity of insurance processes for customers. However, due to security and privacy concerns in the insurance industry, blockchain development must be sufficiently secure and privacy-compliant before being implemented.
Insurance companies are also responsible for providing clear and comprehensive regulatory frameworks for the safe use of blockchain technology. This act guarantees the credibility and reliability of the introduced technology. By establishing these frameworks, the insurance industry can utilize blockchain’s capacity to transform access to information, speed up processes, and enhance credibility and transparency.
By addressing these needs and responsibly developing blockchain technology, the insurance industry will be able to usher in a new era with more opportunities for companies and greater convenience for customers.
Final Thoughts
Blockchain, an innovative technology in the insurance industry, can significantly improve processes and performance within this sector. Some of the benefits that blockchain can offer are the use of smart contracts, automated claims processing, process optimization, fraud prevention, and access to comprehensive health information.
This technology facilitates increased trust, reduced costs, faster claims processing, and smoother contract execution. However, to fully benefit from blockchain in the insurance industry, collaboration across various sectors, upgrading standards and processes, and creating comprehensive agreements and coordination in the use of this technology will be necessary.
Sources:
https://journals.sagepub.com/doi/pdf/10.1177/21582440221079877
https://builtin.com/blockchain/blockchain-insurance-companies
