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Blockchain continues to remain one of the popular technology buzzwords globally with several industries including insurance embracing it to drive efficiencies. Blockchain holds the potential to transform the way insurance industry operates offering greater transparency and streamlining different processes involved in the value chain including, KYC, recordkeeping, underwriting, and claim settlements. These associated advantages are driving insurance companies to explore blockchain technology to adopt streamlined and automated mechanisms that are faster, cheaper, accessible, and more secure. As per a report by Markets and Markets, the global market for blockchain in insurance is expected to reach $1,393.8M by 2025 at a CAGR of 84.9%.
Benefits offered by blockchain in the insurance sector:
The decentralized and immutable characteristics of blockchain offer several benefits for the insurance industry. Some of the key benefits are listed below:
- Streamlined process and increased efficiency: Blockchain helps in streamlining paperwork and record-keeping for insurance contracts through digitalization, eliminating the need for manual exchange and review of documents, and reducing intermediaries.
- Improve trustworthiness: – Blockchain offers enhanced transparency and traceability by providing tamper-proof storage of data, which helps in building trust between different entities.
- Empowers automation: The use of smart contracts and decentralized ledger can automate outdated paper-heavy processes, reduce human error, speed up operations for insurance businesses, and save billions of hours of paperwork.
- Enhanced fraud detection and prevention: Blockchain reduces the risk of data breaches as it is secured by cryptographic signatures and advanced permission settings. It also helps in identifying false claims by validating the authenticity, ownership, and provenance of goods as well as documents, and detecting a history of fraudulent behavior.
- Better data quality: Blockchain can help improve the quality of the data by collecting a wide set of data using technologies such as artificial intelligence and the Internet of Things, which help insurers to make informed decisions.
Related reading: Navigating the insurance market: The benefits of competitive intelligence
Emerging use cases of blockchain in the insurance industry:
New insurance models: Peer-to-peer (P2P) insurance is a new type of emerging insurance model where a group of individuals, that share mutual interests, consolidate their funds, and manage their private insurance. Blockchain-based P2P insurance products are also now emerging. The members’ premiums are collected into a digital wallet, an escrow-type account. Claims are automatically settled when appropriate conditions are met. All the transactions in this model are done using cryptocurrencies such as Bitcoin or platform-specific token to reduce costs.
Reinsurance in insurance: In Florida, in 1992, Hurricane Andrew caused $15.5 billion in damage rendering seven U.S. insurance companies completely insolvent. This is where reinsurance comes into place where it helps insurance companies with securities, claims, and demands when unusual and major events increase the financial burden. The essence of reinsurance companies allows insurance companies to do more business and provide cover against any possible disaster. But the problem in the current system is overloaded with lots of complexity and inefficiencies. The paperwork could take up to 3 months for a contract final agreement. Blockchain technology helps in solving this problem by enhancing the current structure of reinsurance. It can streamline the information shared across the network between the groups by providing an automated view of the entire process of placement, premiums, losses, and payment, that can be shared among all parties simultaneously.
On-demand insurance: On-demand insurance is an emerging insurance model which provides the flexibility of turning on and off insurance policies to policyholders based on the time spent and involved risk (i.e., renting of vehicles or appliances). This model involves heavy underwriting, more policy documents, buyers’ records, costs, risks and claims, compared to traditional policies. Blockchain simplifies this process by offering an efficient record-keeping mechanism starting from policy inception to its disposal.
Microinsurance: Microinsurance offers protection against specific risks, at lower premiums compared to traditional policies. This insurance model has low-profit margins and involves high distribution costs. Blockchain can help reduce the dependence of agents, automate underwriting and claims management mechanisms using defined rules and reliable data, thus lowering overall handling costs for insurers.
Internet of Things (IoT): Smart home appliances and connected devices can be integrated with insurance policies and administered digitally by smart contracts over a blockchain network. These devices on detecting damage or accidents can automatically trigger claims and payments for repairs from an insurer. Instead of a manual human verification, blockchain can help verify all transactions and changes autonomously.
Challenges that are hindering blockchain adoption in insurance industry:
The implementation of blockchain in insurance has its own difficulties. Some of the key hurdles include:
Scalability issues: Blockchain is still in the early phases of development and the available computing resources limit the insurance industry from reaching the potential of implementing this technology. While blockchain has the potential to offer savings in transaction costs and time, the initial investments are huge. The integration of blockchain also may require significant overhauls of existing systems, which further increases setup costs.
Lack of regulations: Currently, there is no universally accepted regulatory response to the blockchain. One of the major challenges of blockchain in insurance is the lack of regulations. Furthermore, regulations in the insurance industry are dynamic, which also is hampering wider adoption of blockchain.
Requirement of high expertise and maintenance: Blockchain is still in its early stage of development where limited knowledge is available among different parties. Although decentralized and distributed in nature, blockchain doesn’t come with a proper maintenance and governance system, requiring companies to develop high expertise to maintain this technology.
A lot of hype: The discussion of cryptocurrency and the ability to conduct anonymous transactions on the dark web are both partially related to blockchain technology. To enhance its adoption, there must be a wealth of convincing evidence regarding its beneficial effects.
The way ahead of blockchain with respect to insurance industry:
Undoubtedly, blockchain has the potential to revolutionize the insurance sector, enhancing and automating its internal processes including client onboarding, claim submission and processing, and fraud detection and prevention. However, achieving industry-wide collaboration among market participants and introduction of a robust regulatory and legal framework will ultimately decide the wider implementation of the technology in the industry.
Nevertheless, addressing these key challenges will make blockchain a strategic interest to insurers. Eventually, the industry will witness further developments in this area in the upcoming years and insurance companies will develop more scalable blockchain use-cases and reap benefits from the technology.
As the insurance industry experiences fast-paced changes, with new entrants and evolving consumer expectations, it is critical to stay ahead of the competition. Netscribes recognizes this need, and hence, offers the latest technology insights to assist firms in making informed decisions. Contact us to know more.
