The
business of insurance is enormously complex: The process of evaluating
and managing a variety of risks that individuals and organizations face
every day inevitably involves coordination of the multiple parties’
efforts and reconciliation of extensive records. Both aspects make the
insurance sector an appealing ground for blockchain-based optimization —
and indeed, distributed ledger technology is a prominent feature of a
rising tide of technological innovations, collectively known as
insuretech, that seek to bring new efficiencies into the industry.
As Cointelegraph previously reported,
research firm MarketsandMarkets in 2018 projected that the value of
blockchain components in the insurance market will see a compound annual
growth rate of 84.9%, reaching $1.4 billion by the end of 2023. A 2019
insuretech-specific report by KPMG
noted that blockchain was not a “buzzword” or “future innovation” for
the insurance space but that it is already operational in flight delay
and lost baggage claims systems and is expected to improve other risk
domains such as shipping and, somewhat more remotely, health care.
A 2018 World Insuretech Report put together by a consulting firm Capgemini and fintech
industry association Efma named blockchain one of the technologies set
to disrupt the insurance business, alongside artificial intelligence (AI),
drones, wearables and robotic process automation. The document cited
enhanced information exchange, increased trust and efficiency of smart
contracts as major improvements that the technology offers.
Hartford’s Insuretech Trends report
observed that insurance companies already utilize blockchain technology
to “streamline processes, provide transparency, and enhance security,”
as well as for data management and protection, reducing administrative
costs and boosting consumer trust and loyalty. All in all, there seems
to be a host of actual and potential improvements associated with
blockchain implementation in the insurance industry. Here is a more
detailed look at some of the major areas of optimization.
Automating processes
Verifying
the authenticity of claims is a huge part of an insurance company’s
workflow. Legacy systems that rely on standalone databases and paper
records are slow and expensive: Manual approval of a claim may drag for
days and even weeks, and the process still leaves room for error or
abuse. Making these procedures fully automated — through a combination
of a tamper-proof ledger and self-executing smart contracts — could
dramatically lower insurers’ operational costs, resulting in lower
premiums for their customers.
One example of such optimization, reported
by Cointelegraph in late May 2019, is a pilot blockchain-based platform
that the United States insurance powerhouse State Farm is jointly
testing with the United Services Automobile Association (USAA), a
military-affiliated financial services group. The solution is designed
to speed up the auto claims subrogation — the last stage of a claim’s
processing when the insurer retrieves the costs it had paid to its
wronged customer from the at-fault party’s insurer.
Another successful optimization case is openIDL, an IBM
blockchain-based network maintained by the American Association of
Insurance Services (AAIS). Because insurance companies are subject to
tight regulatory oversight, the paperwork related to compliance eats up a
good share of companies’ resources. OpenIDL helps automate regulatory
reporting, making things easier for both insurers and authorities.
Fraud prevention
Insurance fraud,
facilitated by the lack of interoperability between the industry
participants’ databases and general complexity of paperwork that
accompanies claim settlement, is very common in developed countries. In
the U.S. alone, estimates of aggregate losses from this type of offence
is estimated at anywhere between $40 billion and $80 billion
every year. While it is insurance companies that sustain direct losses,
the burden ultimately gets equally shared between all the households
that use their services, in the form of increased premiums.
According
to the analysts from CB Insights, the fundamental improvement that
blockchain technology could bring to the area of combating fraud lies
in the potential consolidation of insurers’ databases. When all claims
are stored on a distributed ledger, wrongdoers are left with a very slim
chance to, for example, file multiple claims on a single insured event
with different companies. A unified transparent database of claims would
also enable interested parties to track claimants’ suspicious behavior
and identify patterns that might suggest abuse.
While the vision
of a universal distributed database accessible to everyone in the
industry remains a somewhat distant one, standalone blockchain
verification systems are already getting rolling. One example is the
global insurance broker Marsh, which is reportedly poised to unveil its Hyperledger-based proof of insurance platform. Recently, fintech startup BlockClaim has procured
500,000 British pounds ($627,000) of venture capital toward its
blockchain/AI solution designed to automate the processing of insurance
claims. The firm reports faster settlements, reduced claim costs and
successful implementation of AI-based features for fraud detection.
Health care
One
particular domain in which the arrival of operational blockchain
solutions will change the game entirely is health care insurance. Right
now, efficiently managing and coordinating patient data between doctors
and medical institutions while preserving patients’ confidentiality is a
major stumbling block for the sector. According to a CB Insights report, sparsity of data often leads to claim denials, costing medical care providers some $262 billion each year.
Related: How Blockchain Improves Daily Health Care Routine, Explained
One
of blockchain’s great promises is its potential to enable actors to
exchange data securely while precisely customizing who is allowed access
to which information. Once such a comprehensive distributed medical
database is up and running, patients will be empowered to decide which
parts of their medical history to share with a certain doctor or clinic.
In turn, medical professionals and administrators will see a major
efficiency boost from having instant access to their customers’
blockchain-verified health records.
Although creating a universal
ledger of medical records is an enormous task that will require
industry-wide cooperation, there are viable transitionary solutions
capable of optimizing industry record-keeping in the short run. One of
them is MedRec, an MIT Media Lab project.
The Ethereum-based system is designed to store not the records
themselves but hosts smart contract-enabled permissions that nodes on
the network — i.e., patients or medical institutions — can configure to
authorize other participants’ access to the database.
Life insurance
Health
records also play a significant part in determining the premiums that
holders of life insurance policies have to pay. Once all patients have
their medical histories moved onto a secure medical database running on a
blockchain, it will become possible for life insurers to calculate
premiums and issue policies automatically.
According to Ignite Outsourcing, finding a beneficiary upon the insured’s death is sometimes problematic
due to both family dynamics and flaws in record-keeping. The practical
effect is that, currently, $7.4 billion of unclaimed life insurance
money is sitting in carriers’ bank accounts. With smart contracts
triggered automatically in the event of a policyholder’s death, this may
become much less of an issue — given that the order of potential
beneficiaries is spelled out clearly in the policy.
The authors of
the report also note a little-known fact that nothing prevents the
owners of life insurance policies from selling them to third parties.
Whereas such deals are quite uncommon now, they could become more
convenient when policies run on a blockchain. A startup called
fidentiaX, branding itself as a marketplace for tradable insurance
policies, seeks to expand this niche by offering a platform for buying
and selling tokenized insurance contracts.
Property titles
Title insurance is a $15 billion market
that is projected to keep growing steadily over the next few years.
This type of contract is different from most “traditional” insurance
areas in that it protects not from future losses but against claims on
something that had allegedly happened in the past — for example, a
previous owner’s tax lien. A title policy will come into play if a
challenge arises to the legality of the new owner’s or lender’s property
right.
Insuring title rights requires the ability to verify that
these rights are well-substantiated by the appropriate records. In this
sense, the disruption that blockchain will bring to the title insurance
business is just another facet of a more general disruption of the
entire title record-keeping process. Storing titles on an immutable
ledger will minimize the risks associated with loss or forgery of
records, allowing legitimate property owners to easily prove the
validity of their claims.
Several months ago, two major players in the U.S. market, First American Financial and Old Republic Title Insurance, joined forces
to create a blockchain-based network of title insurance underwriters
designed to enable industry participants to exchange previous insurance
records.
Reinsurance
Insurers also need their risks
hedged. If a major disaster occurs, a company may get flooded with
claims that will drain its reserves too quickly and threaten its
solvency. To guard against dire scenarios like this one, insurers
purchase coverage from reinsurers or participate in consortium-style
intra-industry agreements.
Currently, underwriting reinsurance and
negotiating policy conditions is an inefficient and lengthy process.
Insurance firms typically rely on several reinsurers at once, creating
the need for multiparty data exchange — fertile soil for blockchain to
step in and streamline the complex web of interactions.
In October
2016, five major European insurers teamed up to form the Blockchain
Insurance Industry Initiative, or B3i. They have since been joined by an
additional dozen of big industry players representing Europe, Asia and
North America. The global consortium has since been at work
developing and testing a shared smart contract system that provides
reinsurance for natural disaster insurance. The system, whose working
prototype was rolled out in 2017, is capable of automatically processing
data from the affected parties and determining the size of payouts. The
arrival of the fully operational system is expected in 2019.
Peer-to-Peer Insurance
Peer-to-peer
(P2P) insurance is a model that predates blockchain, although it is
remarkably consonant with the ideology of decentralization that
permeates the crypto space. The idea is that, instead of relying on a
central insurer and an underwriter, a group of individuals pool their
resources together to create a safety net for whoever from their ranks
incurs a loss as a result of an unforeseen event. Participating in such
an arrangement, usually comprised of the people whom one knows
personally, is generally more affordable than purchasing a
corporate-sourced policy — and arguably offers a more pleasant
experience.
However, for all the transparency and convenience of
such friend pools, they can only scale up to a certain point before the
need for professional, centralized management arises. Here enters
blockchain to save the day. The whole P2P transactional structure of
these “horizontal” risk pools closely resembles a decentralized
autonomous organization (DAO). As PwC analysts have it,
DAOs are known for their “capacity to manage complex rules among a
significant number of stakeholders,” which is a perfect recipe for
projecting the peer-to-peer insurance model to a new level of efficiency
and scalability.
Going forward
With all the potential
efficiencies blockchain is set to bring to the table, many of the most
impressive insurance-related use cases are still aspirational. The bulk
of the technology’s disruptive promise resides in the domain of
coordination enhancement. In order to fully capitalize on this
potential, the industry will have to rally behind the idea of aligning
standards of information exchange, shared data pools and broad
cooperation. Initiatives like B3i will have to encompass the majority of
industry stakeholders, which is a gargantuan task, given the sector’s
size and inertia.
Regulation also remains a potential impediment
for blockchain’s explosive expansion. Insurance companies are subject to
heightened regulatory scrutiny and so is distributed ledger technology.
Bringing both together will require cutting through a lot of red tape,
as well as the creation of new rules to guide the symbiosis.
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