When blockchain first burst onto the scene back in 2009 after being implemented by the creator(s) of Bitcoin, nobody knew what to make of it. The technology seemed compelling given that it was able to form the backbone of a private digital currency, something that was hitherto considered an impossibility. But it was also obscure. The idea that there could be an online register of transactions with no central coordination was just too weird.
Fast forward a few years later, around 2014, financial institutions realised that there were applications for blockchain technology that went beyond mere cryptocurrencies. Because bitcoin is well-suited for applications requiring transparency on records – like titles, notary services, and document histories – they realised that it could be used for a variety of insurance purposes too.
Right now, the insurance industry is lagging behind the rest of the banking world, which has already implemented blockchain for things like exchange services and customer payment technology. (Needless to say, the banking industry is still trying to find its feet in this new world).But there are many interesting use-cases within the insurance industry where blockchain technology could be applied. The industry is currently suffering from poor customer engagement, limited growth in mature markets and disruption by digital technologies. But blockchain has the potential to help firms increase the profitability, even in stagnant markets.
Better Customer Engagement
The first and perhaps the most important way in which blockchain can help with customer engagement is through better protection of personal data. At present, consumers are rightly worried about their personal data being lost or stolen during the process of being handed over to insurance companies. In the last couple of years, we’ve seen how customers of big businesses, from Sony to Yahoo have had personally identifiable data stolen, potentially putting millions of customers at risk.
What makes blockchain special under these circumstances is that there is no need for personal data to be stored on the blockchain itself. Instead, the blockchain is used merely as a method to determine whether or not that user’s information is accurate. For instance, records of a doctor’s visit don’t stay on the blockchain – rather, the details are stored on an individual’s personal device. Those details are then verified through a peer-to-peer system, given that there are sufficient parties to attest to the accuracy of the records. Hence, for insurance companies, scale will be critical.
Blockchain also has the capacity to improve the perceived fairness of insurance tariffs and claims handling. Currently, the industry is suffering from a bit of a PR disaster, often failing to pay policyholders because of some perceived minor infraction of their policy. Startups like InsureETH are working on ways of using blockchain to make the flight insurance market work better. They take data straight from verified flight data sources proving where and when flights have been cancelled, and then use blockchain to make the whole process more transparent. Customers immediately get to see when they have a case to make a claim and when they don’t.
Better Fraud Detection
According to estimates by McKinsey, around 5 to 10 percent of all insurance claims are fraudulent. The FBI estimates that this costs insurance companies (and therefore their customers) more than $40 billion a year.
Blockchain promises to change all that by making it much harder to make a fraudulent claim. Essentially, an online record of transactions can be kept that verifies the provenance of goods, the authenticity of documents as well as the ownership of assets by a particular person. This means insurance companies can use blockchain to determine whether somebody actually did buy an item they are claiming for with their insurance, or whether they’re trying to extract more compensation from the insurance company than they have paid for.
Another benefit is the fact that blockchain can be used to reconstruct a person’s prior claims history, as well as whether or not their identity is associated with fraudulent patterns of behaviour.
For these benefits to be realised, however, traditional insurance companies will need to expand beyond their niche industry and work in a more collective way with other data-gathering agencies. Insurers, customers, and manufacturers will all need to work together in an ecosystem – rather like autonomous car makers – to build the data repository that they need.
With the falling price of sensors, the Internet of Things, or IoT, is really coming into its own. Insurers have a vested interested in the development of the IoT since it is a tool that allows them to measure whether their customers are taking abatement measures or not. We’ve already seen some car insurance companies base premiums on how cautiously people drive, using sensors embedded in their cars. But now there is a good chance that a similar type of monitoring will be rolled out across other sectors of the insurance market. For instance, health insurers might want to know if patients are eating their recommended daily allowance of fruit and vegetables. The blockchain is a way to register all of these data in a secure way that respects individual privacy. All sensitive data remains in the hands of the customer and isn’t passed onto the insurer. Smart contracts then adjust, changing as a result of the data they are anonymously fed via blockchain.
Lower Administrative Costs
Administrative overhead for many insurance companies is significant, and it is what stops them from making their services more competitive. But blockchain has the potential to reduce these costs significantly.
One of the ways that it will be able to do this is through automatic verification of the policyholder. Currently, policyholders have to be identified manually, which is both time-consuming and open to the possibility of fraud. Automatic identification using blockchain skirts around this issue by reducing the human input and making it much harder to commit fraud.
Another way blockchain is going to help is in the realm of payments. Payouts for claims using a payments infrastructure based on blockchain will be more transparent as well as more secure. Other insurance companies will be able to view limited histories of an individual’s insurance payouts and use these to determine a fair price for any policy in the future.