Blockchain technology, the future of insurance companies
Sergio Velasco||
When we talk about blockchain technology, the first thing that comes to mind is cryptocurrencies, banking, and financial services, but the truth is that this technology could play a major role in many other sectors in the foreseeable future.
One of these sectors is, as we will see below, insurance.
To understand the repercussion and impact that blockchain technology can have for insurers, we must first understand how it works and what its main characteristics are.
In simple and general terms, blockchain is a distributed database of transactions - information is simultaneously validated, stored and replicated in several decentralised nodes - in which information can only be consulted and added. In other words, in blockchain, previously uploaded and validated data cannot be modified or deleted.
Any user or entity can add and read information to and from the database. The information stored in this database is the transaction that can be validated by anyone. These transactions are grouped into blocks and these blocks are linked to the previous blocks, thus generating a chain of blocks; blockchain.
In this way, blockchain allows barrier-free, transparent and secure access to the information contained in the stored transactions. As it is a decentralised system, it is extremely unlikely that it could succumb to a cybernetic attack or suffer service interruptions, given that it does not have a single central point of failure. Moreover, as we have seen, the information cannot be manipulated or modified, which makes it a more reliable system than traditional databases that depend on third parties.
Blockchain and the insurance industry
As we can see, blockchain technology has a list of qualities (security, transparency, reliability, auditability, decentralisation...) which make this technology extremely appealing for its use in a sector such as insurance, in which a lot of information is processed and in which the veracity and reliability of the data is very important. If we also use a public network with native cryptocurrency (Ethereum for example). We have "money" programmed into the network itself so that it can be integrated with any insurtech application.
According to a report by MaketsandMarkets blockchain technology will account for around $1.4 billion in the insurance market by 2023.
In fact, we have already seen big movements among companies in the sector. In 2016, B3i (Blockchain Insurance Industry Initiative) was created, a group of insurance companies united with the aim of collaboratively exploring the uses they could make of blockchain technology.
The Institutes RiskStream Collaborative has also been set up, this is yet another group of 34 insurance companies that have joined forces to find blockchain-based solutions to specific problems in the industry such as fraud detection, access to different information flows or risk calculation.
Let's look at some specific applications where blockchain technology for insurers can improve the performance and profitability of insurers.
Blockchain for insurers: Smart contracts, fraud prevention and risk forecasting
Blockchain technology can be very useful for insurance companies of all types (life insurance, home insurance, car insurance, etc.) when estimating risk and pricing policies. Having reliable, up-to-date and accessible information is essential.
Furthermore, the application of blockchain for insurers makes it possible to automate insurance contracting processes, as well as renewals and even compensation payments by means of so-called smart contracts. Based on the previous definition of blockchain as a database of transactions, these transactions can also store code that is kept on all computers in the network, cannot be modified once it is written (like transactions) and has a guarantee of execution, this is also known as unstoppable programs.
A smart contract can be defined as a computer program that self-executes through a transaction. This program usually has built-in business logic to automate transactions or perform certain specific operations, based on rules or conditions.
In other words, when a series of requirements are met (such as, for example, those required to take out insurance or collect compensation after an accident), autonomously and without the intervention of any human intermediary (lawyers, notaries, insurance brokers, experts, etc.), the planned actions are triggered; in this case, the taking out of insurance or the collection of compensation.
On the other hand, no one can manipulate the code once it is registered. Also, the blockchain's own verification system makes it difficult for counterfeit documents or erroneous information, which could lead to fraudulent collection of compensation, to be considered valid due to the system's auditability.
In short, smart contracts can significantly improve the processes of today's insurers as they are more secure, agile and cheaper, while preventing fraud.
This could result in higher profits for insurers but also in better conditions for insurance beneficiaries, who could see their premiums reduced and benefit from more agile processes without human errors or subjectivity.
Another use case could be insurance between individuals in the form of a collaborative network without intermediaries. In these new disintermediation models, insurers could generate business based on tokens, which would provide value to all the parties involved in the community and automate most of the current operations in a much more efficient, secure and transparent way.
Guaranteed access and data privacy
In the case of health insurance, blockchain technology would make it possible, for example, to improve the flow of information between medical centres, hospitals and the insurers themselves. In blockchain, the user is the custodian of his or her data and can choose what information he or she shares and with whom - all securely through cryptography (self-sovereign digital identity systems and attribute-based credentials). In this system, patient confidentiality would be guaranteed. In addition, the fact that the data cannot be manipulated would increase trust and prevent attempts to commit fraud.
On the other hand, there is the case of reinsurance companies. Reinsurers provide insurance to insurance companies. Moreover, insurers often hire several reinsurers to cover the same risk. The idea is to guarantee the subsistence and liquidity of insurance companies in the event of natural catastrophes or situations in which claims and indemnities skyrocket.
In situations of this type, with so many actors involved and with a high volume of incidents, the exchange of information between all actors is not always easy. The processes are often still manual and therefore slow, subjective and inefficient.
Blockchain would make all this information flow much simpler and even payments and collections could be automated, as we have seen through the execution of smart contracts.
New business models: the example of IBISA (Inclusive Blockchain Insurance Using Space Assets)
On the other hand, blockchain technology allows insurers to explore new business lines such as microinsurance or even new markets.
The Spanish company IBISA, for example, has implemented blockchain to offer affordable and almost customised insurance to smallholder farmers in developing countries. Through a mutualisation model, IBISA's insurance allows farmers to share risks without a central authority and in a highly transparent manner.
Administrative tasks have also been automated to reduce errors and costs. For example, compensation to farmers in case of floods or droughts is regular and instantaneous. There is no need for a prior claim on their part. IBISA regularly evaluates the condition of the insured fields, thanks to the information provided by satellites.
If you would like to know more about the value this technology brings to the insurance industry, please contact our blockchain experts.