Application of blockchain technology in the insurance industry
- 3. June 2019
- Posted by: Blockruption Team
- Category: Applications
What is blockchain?
Blockchain, the technology behind Bitcoin, is growing rapidly and disrupting many different industries. In order to understand how blockchain technology works, you must first have an understanding of distributed ledger technology, or DLT.
DLT is used to validate transactions that are processed through a database of records. These records are not stored or verified by any one central organization, so the goal of DLT is to maximize security and accuracy. DLT, however, does not link transactions the way blockchain does.
The blockchain process starts off very similar to DLT but continues where DLT stops. Blockchain essentially creates an unchangeable ledger of records that have been validated through a consensus from a decentralized network.
Each computer independently approves, timestamps, and encrypts the transaction, and then the blockchain links them to form a chain. Together, these blocks form a digital ledger that holds a complete audit trail that cannot be tampered with or altered.
Application of blockchain in insurance
Blockchain technology has the potential to transform the insurance industry. It can improve accountability, transparency, and security while simultaneously increasing customer satisfaction.
For an insurance company to operate, it must handle large amounts of data that are interchanged between various third parties. Protecting information is a top priority, and data leaks are a major concern. With blockchain, insurance firms can interact with customers, banks, and other third parties while ensuring the data is accurate and free from manipulation.
Improving customer experiences is a major potential benefit of applying blockchain technology in the insurance industry. If a customer files a claim with an insurer using blockchain, all of the information and authorizations could be exchanged and settled essentially automatically. A customer would no longer have to jump through hoops of paperwork and phone calls to transfer information to different third parties. The security of blockchain encryption will also ensure that the data can only be seen by those parties authorized to view it.
An additional application of blockchain in insurance includes helping companies provide accurate reserve calculations for the reinsurance space. With this technology, property and casualty insurers can quickly and accurately determine how much money they have available to pay claims, as well as assist them with rebalancing their exposure against specific risks.
Examples of blockchain in insurance
While the use of blockchain in the insurance industry is still new, a few companies have already started implementing it.
Fizzy is a web insurance cover for flight delays or cancellation. It was launched by AXA and is based on the Ethereum blockchain. Fizzy offers a one-shot coverage tailored to a specific flight route, with automatic compensation in case of a delay or cancellation.
Allianz recently introduced a prototype that uses blockchain to settle catastrophe swaps and bonds. At the same time, an application called XLRAS from Blem Information Management has been developed to help insurance companies manage recoveries under “excess of loss” reinsurance.
Vrumi, a shared workspace provider, has taken a unique approach to implementing blockchain. They have partnered with SafeShare, a blockchain start-up, to offer insurance products underwritten by Lloyds of London for the hosts of their office accommodations.
Challenges with introducing blockchain
Blockchain offers great opportunities for insurance companies, but there are still several challenges associated with integrating it into the insurance sector.
Since most insurance firms have to interact with outside entities like customers or competitors (think an opposing insurance company during a car accident claim) creating the blockchain will be very complex. The insurance companies would have to be willing to disclose certain aspects of their internal operations in order to make the blockchain work and doing so without disclosing too much has proven to be a difficult task.
Appropriate governance is another hurdle insurance firms would have to overcome to successfully implement blockchain. While other public blockchains rely on open source communities, insurance companies might need to keep their network private and limited to insurers, customers, and partners. There are countless other complex compliance issues as well, including how to deal with fraudulent claims activity.
Disruption in the insurance industry
A study by the Boston Consulting Group estimates that blockchains could help property and casualty insurance providers lower their operating ratios anywhere from 5% to 13% and generate over $200 billion in technical margin from written premiums. In other words, blockchain could be a game-changer for insurance firms.
Many insurance companies realize this, and the SAP Digital Transformation Executive Study showed that insurance firms plan to more than double their investments in blockchain by 2019. Introducing blockchain into your business processes will be essential to staying relevant in the insurance industry of the future. The best way to do this is to work with a consultant to see how blockchain can be used to optimize your business operations and improve your bottom line.