Blockchain In Insurance

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21 Aug, 2024

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Blockchain In Insurance refers to the application of smart contracts and decentralized finance (DeFi) in the insurance industry. It utilizes the power of distributed ledger technology to conduct transactions. Thus, it is easy to settle the claims, prevents fraud, and eases payment protocols.

The use of blockchain in the insurance market has been prevalent for many years. Insurance companies deploy it as a tool to reduce complexities and tackle problems in this industry. Also, it enables more transparency in the claim process. Thus, with blockchain, any malicious activity can be detected in the initial stage itself. However, switching to this technology can take a lot of work.

What Is Blockchain In Insurance?

Blockchain in insurance is merely a simplified application of this technology, along with smart contracts and decentralized finance (DeFi) protocols in this industry.
Insurance companies like Allianz, Liberty Mutual, State Farm, IBM, Berkshire Hathaway, Munich Re, XL Catlin, and others have deployed this technology in recent years.
The real-world use cases of blockchain include payouts, claim settlements, fraud and spam detection, parametric insurance, and others.
In addition, this technology also acts fruitful in reducing costs, excess time taken, complexity, and disputes during settlements.

Blockchain In Insurance Explained

Blockchain in insurance refers to the usage of blockchain technology in the insurance sector. It tries to install smart contracts and use a public ledger for issuing insurance to policyholders. Also, it helps in the claim settlement process. So, if a policyholder wants to use health insurance, the insurer can use blockchain to release payout to the former quickly. However, the mechanism to install it varies as per its application.

The implementation of the blockchain in the insurance market is similar to the crypto or financial industry. Here, the roadmap starts with identifying the problems faced in the current state. It allows firms to analyze core areas that either consume more time or resources. If it occurs, the efficiency of the business may slow down. Some of them include data security, claims processing, and others.

Once identified, insurance companies can decide on blockchain-based solutions that solve these challenges. Also, firms need to select the blockchain type (permission or permissionless) based on their requirements. Likewise, they can deal with blockchain-based firms for partnerships and work on it.

At this stage, it is also essential to conduct pilot testing. It tends to test the technology in a sandbox environment before implementing it. So, if there are any glitches in the initial stage, they can be detected and improvised. Some examples of such companies include Allianz, Liberty Mutual, Munich Re, XL Catlin, State Farm, Chubb, Aon, and Nationwide. These companies have utilized blockchain solutions like B3i and RiskStream. Furthermore, even IBM, Etherisc, Guardtime, Tierion, and Kaleido are a part of it. However, the use cases are not just limited to settlement but a varied range.

Examples

Let us look at some examples to understand the concept in a better manner:

Example #1

Suppose LifeSave Ltd is an insurance company that has been operating as an insurer for the past ten years. They provide a wide range of insurance covers to individuals and businesses. However, with the increase in their business, their efficiency has also reduced. In other words, they needed help managing the claims and applications of users. But, in the later stage, Kevin came up with a solution to this issue.

The company collaborated with Parksky Solutions to incorporate smart contracts and DeFi protocols. Also, they installed Internet of Things (IoT) sensors and smart devices to detect the incidents prior. They try to collect data in that environment and store it in the blockchain. If conditions are fulfilled, the blockchain results in payments. For instance, if a person has a smart device that shows symptoms of a heart ailment, the smart contracts will automatically release payouts from the health cover policy.

Example #2

According to a news update, as of January 2024, the Berkshire Hathaway Insurance Specialty (BHSI) has opted for blockchain technology. This decision came after the company's objective to expand its multinational business. They have partnered with WorldLink (a blockchain-based firm) to cater to 178 countries. With this technology, they aim to provide transparency and efficiency to their customers.

In the broader context of the insurance industry, BHSI's embrace of blockchain technology represents a significant milestone. While the sector has historically been slow to adopt emerging technologies, BHSI's proactive approach signals a paradigm shift. It underscores the growing recognition among insurers of the transformative potential of blockchain in addressing longstanding industry challenges. As other insurance firms take note of BHSI's pioneering move, we may anticipate a broader uptake of blockchain solutions across the industry, ushering in an era of unprecedented innovation and efficiency in insurance operations.

Real-World Use Cases

Blockchain indeed has endless options and use cases to offer the insurance industry. Since this industry has many areas to cover, blockchain further acts fruitful. Let us look at the application of this technology in detail:

#1 - Payouts and Claim Settlements

The prime advantage is in claim settlement. It allows insurers to process and resolve claims faster. Usually, the process of settlement involves identification and assessment of the conditions before settling the claim. And it takes a considerable amount of time to release payouts to the concerned policyholder. However, with the use of blockchain and smart sensors, the process is simplified in all. It utilizes the decentralized Oracle data and smart contracts to release payouts.

Likewise, firms can record transactions on the public ledger deployed on the blockchain. This ledger further allows them to process data from the First Notice of Loss (FNOL) until it gets settled in court. Thus, it is possible to track payouts at each stage.

#2 - Parametric Insurance

Blockchain is also helpful in parametric and accidental insurance, where conditions are implied for the incident. With the help of smart sensors and various devices, the approach for claims gets easy.

#3 - Spam Detection

Another widespread usage of this technology is visible in spam and fraud detection. It allows insurers to identify spammers trying to misbehave with their identity. For instance, a person may fake their details to gain claims.

#4 - Automate Underwriting

This tool can also guide the underwriting process while curating insurance coverage for individuals. With blockchain, insurers can offer seemingly better pricing options. Also, automate the Know Your Customer (KYC) process and verify the bank details.

Other use cases of blockchain in this sector include providing tamper-proof records of policyholders in reinsurance matters.

Benefits

Many insurance companies have deployed blockchain technology in their daily operations. And the benefit of this move is visible in various areas of management.

Saves time and cost: The foremost benefit of applying blockchain is visible in the efficiency. Since everything gets automated and performed on-chain, time consumption is reduced. Also, it saves costs in deploying more employees to solve the queries.
Lesser disputes in claim settlements: In addition, there are fewer disputes in the claims obtained by the policyholders. As the blockchain ledger contains records of the transactions done, the doubt of query at the payout stage reduces.
Automation in processes: As this technology involves smart contracts, the entire process of issuing an insurance payout becomes automated. There is no need for too much manual interruption. Thus, the complexity which was earlier faced in the business also drops.
Enhances transparency in transactions: The usage of blockchain takes away the control of inspection from claim processors and policyholders. It happens with the smart sensors and devices installed at the insured's place to record the details of the incident. The claim process gets authenticity, and both parties agree to the facts recorded in the sensors. In short, the process of settlement gets fully transparent to them.
Streamlines the regulatory compliances and codes: Lastly, insurance companies can comply with the regulatory standards with blockchain. Since the blockchain provides tamper-proof transactions, the audit process is also enhanced. Hence, it is easy to conduct trials and follow the codes.

Frequently Asked Questions (FAQs)

How big is the blockchain in insurance market?

According to the recent statistical report as of November 2023, blockchain usage in the insurance market was valued at $1.8 million in 2022 and is expected to rise to $98.9 million by 2032. A significant adoption of this technology comes from Aegon, Prudential, MetLife, AIA, Munich Re, and other players.

What are the challenges of blockchain in insurance?

Following are the challenges or limitations faced by insurance companies while installing blockchain. Let us look at them:
a. Vulnerabilities and sensitivity are faced in software installation due to consensus mechanisms.
b. At certain stages, hackers and malicious actors may try to disrupt the oracles.
c. A lack of proper structure or framework can create issues in legal compliance.

What is the future of blockchain in insurance?

The future of blockchain in insurance is promising, with widespread adoption expected to revolutionize the industry. Blockchain technology offers unparalleled transparency, efficiency, and security in insurance operations, leading to streamlined processes and enhanced customer trust. As major players like Aegon, Prudential, and MetLife continue to embrace blockchain solutions, we anticipate significant growth and innovation in the insurance sector.