When you see blockchain in the news, it usually has to do with cryptocurrency. Bitcoin and its crypto cousins depend on blockchain to exist, and they have captured a public moment bordering on mania.
But volatile cryptocurrencies, and the cyberpunk libertarianism they enable, aren’t the only applications of blockchain. Less dramatically but more practically, blockchain may soon change the way people buy and sell insurance.
The insurance industry has been with us for hundreds of years. Like many seasoned institutions, it is resistant to change. Brokers who moved mountains to build a successful practice understandably take an attitude of “If it ain’t broke, don’t fix it.”
But it is broken. Insurance still relies on outdated business practices like manual data entry, phone intake, and paper contracts. These antiquated processes are riddled with potential for expensive human error.
And fraud is a huge cost in the insurance industry as well. In fact, according to the Coalition Against Insurance Fraud, fraud accounts for a whopping 10% of insurance transactions, at an aggregated cost to consumers of over $80 billion.
The problems are obvious. But why do future-facing insurance companies think that the tech behind cryptocurrency is the solution?
What Is Blockchain, and How Does It Work?
At its heart, blockchain is fairly simple. It’s simply a database of information, duplicated and distributed across a decentralized “chain” of computer servers. One chain could encompass thousands of computers. Each piece of information is called a “block.” At regular intervals, the chain gets updated so that all blocks within the chain match.
Each block consists of three separate categories of information:
- Ledger data about a transaction—time, date, transaction dollar value.
- Participants in the transaction. Although blockchains are inherently public, transactional parties can be anonymized.
- Data to distinguish that block from every other block on the chain.
When a transaction occurs on the blockchain, typically the following steps ensue:
- A new block is created to represent the transaction.
- The block is verified by every participant in the chain.
- A “proof of work” is attached to the block—for example, a cryptocurrency ID.
- The block is added to the chain.
- The network is updated so that every version of the ledger in the chain accurately reflects the transaction.
Blockchain ledgers were first used to record cryptocurrency transactions in an anonymized, public-facing way that was hard to falsify, since false block entries can easily get caught by comparing them to other copies of the database within the chain.
But the technology has many more potential applications, including, but definitely not limited to, document transfer, transactional security, and smart contracts.
Applications for Blockchain in the Insurance Industry
Widespread adoption of blockchain by the insurance industry is still several years off. There are several kinks to work out, not the least of which includes regulatory and legal limitations. The inherently public and transparent nature of blockchain puts it in conflict with several existing insurance laws regarding data protection and privacy.
Nevertheless, both tech giants and scrappy startups have committed to adapting blockchain for the insurance industry. The IBM blockchain network is currently developing blockchain solutions to automate the underwriting and claims process, while Enterprise is using its blockchain network to develop smart contract technology that meets the needs of insurance companies.
Here’s what it might look like if blockchain integration for insurance companies were to become a working reality.
Shared Ledgers
The current claims process for property and casualty insurance (home, auto, commercial, etc.) depends mostly on manual entry, which is slow and prone to human error. The shared ledger technology that forms the basis of blockchain could be used to automate claims processing by triggering certain outcomes when various conditions are met.
Using blockchain shared ledgers could make claims processing up to three times faster and up to five times cheaper.
Smart Contracts
First there were e-signed contracts; smart contracts represent the next step in the tree-saving march away from paper contracts. “Smart contracts” can detect the fulfillment of conditions of the contract and then trigger certain executed actions when the right conditions are met.
A contract’s position on the distributed, decentralized ledger can also make it hard to falsify, although storing private contracts on a public-facing ledger is a legal knot that insurance innovators are still untying.
Fraud Detection
With billions of dollars lost to insurance fraud every year, any technology that can plug that leak is worth pursuing. The storage of claims on a shared ledger would make suspicious activity easy to spot, because anomalies can easily be identified by comparing the ledger to a thousand other versions distributed along the chain.
Consider the work of insurance-tech startup Etheric, hard at work on a blockchain ledger that can be used to compare claims data to public data like weather reports, satellite images, flight delays, etc. to confirm the validity of claims.
Blockchain and Insurance Tech: Pros and Cons
Pros:
- Increased Efficiency. Blockchain could help replace costly and time-consuming tasks like manual data entry, phone intake, and contract filing.
- Greater Trust. For the privacy of its users, blockchain transactions are encrypted, with authentication and verification required.
- Faster Claims Processing. Blockchain could speed up processing and payouts by analyzing data collected in real time.
- Smart Contracts. Smart contracts use automated “if/then” technology to “self-execute” when the right conditions are met.
Cons:
- Cyber Threats. As blockchain gains popularity, with more users will come more vulnerabilities and more vectors to cyber attack against this lucrative technology.
- Data Integrity. Data integrity within a blockchain ledger is not guaranteed. The technology still has some evolving to do before it can reliably preserve data integrity.
- Cost. With the demand for blockchain growing, so too are the prices users must pay to satisfy that demand.
- Privacy. While blockchain transactions are encrypted, the ledgers themselves are public, making them vulnerable to prying eyes and creating a compliance issue for insurance organizations.
As insurance ramps up its belated entry on the tech stage, expect “insurtech” (as a subset of fintech) to continue to adopt blockchain at scale. For such an old industry and such a new technology, they really are a match made in heaven.
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