Technological advances in the 21st century have transformed global industries on an unprecedented level, causing the rise and fall of many large corporations. However, this disruption has not extended to the multi-trillion dollar insurance business, which has more or less stagnated. While there have been minor changes recently, most of these are negligible and only really significant in major cities.
The processing of most contracts and claims are carried out in person and often require insurance agents and other intermediaries to verify documentation and paperwork. However, the dawn of a new era may soon be upon us as blockchain technology aims to be the key to unlock the true potential of this massive industry.
Below are the main advantages the blockchain could provide to the insurance industry:
Despite technological advances and the creation of various online portals, most customers still choose to call or personally meet insurance brokers in order to purchase or negotiate policies. Policies themselves are often processed on paper, which means claims and payments are error-prone and require human supervision.
With the implementation of blockchain technology, insurance companies can effectively cut out the need for such intermediaries. This can potentially save billions of dollars in costs by storing all the required data on a highly encrypted digital ledger. It can also help them by reducing labor hours and eliminating human errors.
Provide legal certainty
Blockchain technology can provide immutable proof to both parties of the contract by showing that the documentation has been processed and claims have been filed. Furthermore, it can help automate the payment process and be used to automatically secure assets as collateral for contracts as and when required. Hence, the payment of premiums and settlement claims becomes virtually irrefutable.
No single point of failure
Since there is a central point of failure, there are many cases in which information is lost or policies are misplaced. This is detrimental to the policy-holder as the settlement time is thereby extended. However, with the implementation of blockchain technology, this problem can be eliminated as there is no single point of failure. This is due to the fact that the protocol runs on a decentralized, digital ledger which has an immutable storage system. Furthermore, blockchain’s highly encrypted nature makes data virtually impossible to hack or manipulate in any way.
Digitally track medical records
Hospitals, doctors and clinics tend to use different electronic systems, thereby providing each of them an incomplete record of patients health history and treatment records. In high risk and underdeveloped areas, such records are often misplaced or non-existent. This fragmented data collection can lead to complications, especially with respect to the validity of insurance contracts.
Blockchain technology can solve this problem by maintaining data integrity on a transparent, distributed system, thus, improving risk profiling and facilitating the efficient exchange of information. Moreover, its highly encrypted digital nature makes all the required records easy to access and difficult to hack, while eliminating errors and the possibility of data being misplaced.
Prevent insurance fraud
Insurance fraud is one of the major issues that insurers deal with in today’s world. Despite advancements and counter-measures took to combat it, billions of dollars are still lost to fraud every year. The main causes of insurance fraud are –
- Double-booking. This involves making multiple claims across different insurers on the same claim event by the insured party.
- Faking ownership of insurance policies through counterfeiting.
- Premium diversion. This involves fraudulent parties posing as agents of an insurance company and creating fake contracts.
Blockchain technology can be used to effectively combat insurance fraud. The system does away with the need for intermediaries while making contracts irrefutable and eliminates the possibility of any manipulation. Digitalized records make double booking and premium diversion impossible, thereby protecting customers while maintaining the integrity of insurance companies.
Insurance provided to insurance companies themselves is known as reinsurance. This is particularly important to protect a company’s portfolio in the event of large unexpected catastrophes that could potentially upend the business. Reinsurance can be purchased for a number of purposes, such as to mitigate risk for a certain period of time, for specific disasters in risk-prone areas, or even for unexpected events.
It is important to note that the process involved in reinsurance itself is extremely complex and inefficient in nature. This is particularly due to the sheer volume of data to be shared and the private negotiations that often take place on each contract. Furthermore, insurers often purchase reinsurance contracts from multiple parties, further complicating the system.
Blockchain technology has the potential to streamline this flow of information and optimize this process. This can take place due to the fact that detailed transactions concerning contracts and premiums can simultaneously exist on an insurer and reinsurer’s computer systems at the same time. This eliminates the need for the parties of the contract to reconcile their statements for each individual claim.
While there are many clear benefits to adopting blockchain technology, the adoption by the real world has been slow so far. Insurers are skeptical to move away from the traditional model that has been so profitable for them in the past. This reluctance stems from a lack of awareness about the benefits this technology provides and the significant costs companies might have to spend to adopt this technology.
Blockchain faces numerous regulatory and legal hurdles which it has to overcome before it can be adopted on an industry-wide scale. However, with the introduction of IBM Blockchain, which is radically transforming the landscape with faster verifiable data exchanges, transparency for all parties to the contract, and transactions upheld by security and trust, many insurance companies are finally sitting up and taking notice. This could open the floodgates to the wide-scale implementation of blockchain technology and the subsequent disruption in the insurance industry which is soon becoming a question of not if, but when.