Recently, there has been a lot of hype around blockchain. Everyone seems to be talking about it and how it would affect the future of businesses. In this article, we will discuss how blockchain could potentially disrupt the insurance industry.
It is a well-known fact that there is deep consumer mistrust in the insurance industry. A survey conducted by IBM showed that 57% of consumers did not trust their insurance company. Making claims has always been a nightmare and you have to jump through all kinds of hoops to receive money that’s rightfully yours. There is an inherent conflict of interest that comes with the insurance industry: every dollar that’s paid out in claims to consumers, is a dollar of profit reduced for the company. This is where blockchain could come in and resolve these issues.
What is Blockchain?
A blockchain is a peer to peer ledger of records called ‘blocks’, which are linked and secured using cryptography. By design, these blocks are extremely difficult to modify and therefore incorruptible. It serves as an open and distributed ledger that records the transactions between two parties in an efficient and permanent way. These transactions are permanently recorded on the blockchain and can be verified at any time, therefore it provides complete transparency to any process. No tampering or changes could be done on this transaction or agreement between the two parties.
Here are the three major areas where blockchain could improve the insurance industry:
Bring back the trust
As discussed earlier, there is very low consumer trust in the insurance industry. One major factor that contributes to this is the lack of transparency on the workings of the company. For example, typically insurers collect money from the policyholders and then use this money to make low risk investments which would grow it and aid with the payouts. The policyholders do not know the details of where these investments are being made, and what returns are being generated. Blockchain could be an added layer to this whole process. Since blockchain adds transparency by providing a shared ledger, the policyholders could get an end-to-end real time view of the workings of the insurance company. Knowing the processes of the company would give some insight to the policyholders and make them feel more secure and comfortable. This is how blockchain could improve the relationship between insurers and policyholders.
Making the claim process fair
The claim process is where the biggest problem of the insurance industry lies. It serves the interest of the insurer to try their best to not make a claim payout, or at the least; try to drag out this process for as long as possible. The entire process lacks transparency and is extremely inefficient.
Blockchain could improve the claim process using ‘smart contracts’. A smart contract is a condition based agreement which is built on top of the blockchain. It could be programmed to perform a certain function when certain conditions have been met. Therefore, it acts purely on a pre-determined set of rules; and if those rules are met, the smart contract will automatically perform the required function.
In the case of insurance, the typical insurance contract is long and confusing and some clauses could be interpreted in different ways; which could be used by the insurance companies to deny the payout of claims. These insurance contracts could be recorded on the blockchain having clauses that are understood by both the parties and are not open to different interpretations. Consequently a smart contract would be programmed with the triggering events and all the clauses, and if all these conditions are met, a payout would be made to the policyholder. This would make it impossible for any individual to game the system and unfairly deny the payout of claims. Through these self-executing agreements, automatic claim payouts could be made instantly and with no human intervention. This is how blockchain could make this whole process quick, efficient and transparent.
On the other side, blockchain could also help the insurance companies to better deal with insurance fraud. According to McKinsey, 5-10% of insurance claims are fraudulent and in the US alone, this costs non-health insurers more than USD 40 billion per year.
Blockchain could be used here to maintain a cross-industry registry of policyholder data. It could be used to verify the ownership and authenticity of goods and documents (such as medical reports) and to detect their past claim history and whether they have a pattern of making fraudulent. Since blockchain provides a ledger that cannot be manipulated, these details would be completely authentic and could be quickly obtained.
Blockverify is a start-up that allows for fraud detection for goods such as pharmaceuticals, electronics and luxury items. It helps user to identify whether the goods are stolen or counterfeit by labeling each product and recording the entire history of its supply chain on the Blockchain. Similar applications could be used in the insurance industry.
Blockchain technology could truly disrupt the insurance industry by completely changing how the claim process is handled, allow for better fraud prevention and change the way that these companies are interpreted by the general population. It is worth noting that Blockchain is still very new technology and its applications are still being tested and developed. Insurance companies would be smart to research the uses of this technology and build ways to incorporate it in their operations. As seen in many different industries, only the companies that are willing to innovate and embrace new and revolutionary technology are the ones that stay ahead of the curve and grab the market share from their peers, who are stuck to the past.