Many of the most attention-grabbing sectors of recent years have lived with the mantra of moving fast and breaking things. Social media in the mid-2000s. Sharing economy platforms like Uber in the 2010s. After some initial chaos, amazing consumer products tend to emerge.
Other industries move slowly. Rather than chaos, there is inertia. And the consumer suffers through complexity, cost, and red tape. Healthcare is the poster child for this.
Insurance is not far behind. But what happens when a fast-moving and revolutionary technology collides with a slow-moving, slow-to-improve sector like insurance? Potential.
I mean changes that can make the customer experience orders of magnitude better. For something as crucial to an individual’s peace of mind and future financial security as insurance, that matters. I’m talking about the blockchain meeting the insurance industry and the trapped energy that could be unleashed to power an InsurTech revolution. But let’s not get ahead of ourselves. First things first.
Beyond the Buzzwords
Let’s begin with a useful no-jargon primer on blockchain technology.
Imagine it as a digital ledger. This digital ledger is a secure and decentralized way of recording transactions. Rather than a gatekeeper who maintains the ledger and ensures its accuracy, accuracy and integrity are maintained with math (cryptography).
Pair this concept with the fast-evolving realm of InsurTech – where technology meets insurance – and you’ve set the stage for a transformative union.
Blockchain, in essence, is a secure and decentralized digital ledger technology. It’s like a high-tech, tamper-proof notepad that records transactions across a network. Each record, or ‘block’, is linked to the previous one, forming a ‘chain’ of information. Put them together, and you have a ‘blockchain’.
This distributed and transparent structure ensures trust and security in data transactions. For complex transactions, trust and security are crucial. The key difference in this process is that it doesn’t require a ‘gatekeeper’.
In traditional non-blockchain ledgers, the parties put their faith in a third party who essentially says, ‘I stake my reputation and future economic success on the truthfulness and accuracy of this set of records.’ Banks are one example of such a gatekeeper. A government that maintains a ledger of property transactions in its jurisdiction is another.
Blockchain does away with the need for those trusted third parties by providing a high-trust, high-efficacy ledger that doesn’t rely on an external validator to assure all other parties that what is in that ledger is correct. That assurance comes from multiple participants in the network agreeing that was is in the ledger is true and correct.
Insurtech Today
The current InsurTech landscape is where data analytics, mobile applications, cloud computing, and seamless customer experiences converge. While this is happening, traditional insurance continues much as it always has.
But InsurTech means that change is coming. The best companies, those that will survive and thrive in the future, are moving fast and directing internal resources to harness the power of data and connectivity.
Blockchain is not just a buzzword; it’s a seismic shift in how we manage, secure, and leverage data in the world of insurance technology. That’s the primer done. Now, we can delve into how this revolutionary technology is ushering in a new era of security and transparency in insurance.
The Need for Blockchain in Insurtech: Addressing Challenges Head-On
“Why?”. It’s a good question. Insurance has existed for centuries. It was created to help manage the risk of dangerous, uncertain voyages taken by ships during the Age of Exploration. Why does that established, successful model need to change?
Many reasons. But the main thing that connects those reasons together is clear: the customer. The customer experience of insurance as it stands today is sub-optimal. Nearly every other industry, from complex international travel to simple ride-hailing, has undergone a tech-driven transformation and, as a result, vastly improved the customer experience.
That isn’t true for the experience customers have with the insurance industry. Traditional insurance models grapple with various pain points, prompting the need for a transformative solution like blockchain.
Unraveling the Challenges: Traditional Insurance vs Blockchain in InsurTech
Anyone who has had to make a personal insurance claim might be familiar with some items on this list. Those who have worked in the field of assessing claims will be familiar with others. Here’s a short list of the main struggles of the traditional insurance model.
- Fraudulent Claims and Opacity: The traditional insurance industry has long battled the costs of fraudulent claims and the lack of transparency in transactions. Those increased costs are then passed on to customers through higher premiums. Less fraud would mean lower costs for all parties. Blockchain’s immutable and transparent nature protects against such malpractices, ensuring a trustable record of every interaction.
- Delays in Claims Processing: The number one thing a person making an insurance claim cares about is how quickly it is resolved. Blockchain’s efficiency assists here. It can streamline the claims process by reducing paperwork, minimizing bureaucracy, and enabling quicker, transparent settlements.
- Complexity of Policy Management: Managing policies is not simple for individuals. But it’s fiendishly complicated for organizations. Blockchain simplifies this complexity by providing a decentralized, real-time repository of policies that a company can easily access. This not only enhances accessibility but also ensures a synchronized, up-to-date understanding of policy details across the network.
Blockchain Fundamentals
We’ve done the primer. Now, let’s go one level deeper. There are three core features that are the foundation for why blockchain is fundamentally strong as a means for storing information.
Decentralization
Access to the network isn’t concentrated in one entity that can act as a gatekeeper but is distributed across all participants. That’s decentralization – a fundamental feature of blockchain. It eliminates the need for a central authority, fostering a democratic and resilient system. An example of a centralized network we encounter daily is the App Stores run by the tech giants. Access is gated and controlled by a single entity. A ‘decentralized’ model would allow for ungated access.
Immutability
Once information is recorded on a blockchain, it’s set in digital stone. Immutability means that data cannot be altered or tampered with. That’s what creates a trustworthy and reliable record.
Transparency
Blockchain’s transparency means it’s like an open book. Every participant in the network has access to the same information. That means that gatekeepers cannot charge for access, and all participants are equal regarding information availability.
So, how does blockchain deliver these core features? This is the ‘how’.
Distributed Ledgers
A distributed ledger is a shared digital database spread across multiple computers. Each participant has a copy, and when a new transaction occurs, it’s added to everyone’s ledger simultaneously.
Consensus
Blockchain can achieve consensus on what is true and accurate without central authority. Various mechanisms ensure agreement among participants on the validity of transactions, enhancing security and reliability.
Smart Contracts
These are self-executing contracts with the terms of the agreement directly written in code. When predefined conditions are met, the contract executes automatically, eliminating the need for intermediaries and reducing the potential for disputes.
This webpage from IBM collates some additional features and nuances of blockchain for those interested in further reading. In traditional settings, trust often hinges on intermediaries. Blockchain, however, redefines trust as a design feature.
Combining decentralization, immutability, and transparency creates a foundation where trust is baked into technology, not internal procedures. Participants can rely on the system’s integrity without the need for intermediaries to provide that ‘trust layer’.
It’s a difficult concept to fully accept since we’ve all lived in a world that’s filled with gatekeepers and intermediaries. But once you grasp it, a new world of possibilities opens up.
Benefits of Blockchain in Insurtech: Tangible Gains
The theory is important. But its application is more important. Let’s look at the concrete advantages that blockchain injects into InsurTech.
Fraud prevention
Fraud is a constant challenge in insurance. The core features of a blockchain make fraud orders of magnitude more difficult for bad actors. The immutability of data ensures that once a transaction is recorded, it remains unalterable, creating a robust defense against fraudulent claims and unauthorized manipulations.
It also prevents repeat offenders from lodging multiple fraudulent claims. This is important because many insurance company losses are concentrated among a small group of fraudulent claimants or criminal gangs working to deliberately defraud the system.
Efficiency
Claims processing is labor-intensive and inefficient. Blockchain’s efficiency means that processes can be automated and sped up. This can happen by minimizing paperwork and reducing bureaucracy. This benefits insurance providers and, more importantly, expedites relief for policyholders during critical times when they must use their cover.
Information
Information is power. Blockchain’s transparent ledger gives policyholders real-time access to their policy details, premiums, and claims history. This heightened transparency instils confidence and empowers policyholders to make informed decisions, fostering a healthier and more collaborative relationship with their insurance providers.
Smart Contracts: Transforming Insurance with Code on the Blockchain
No discussion of InsurTech and blockchain could be complete without examining the promise of smart contracts. Smart contracts are simply contractual agreements with a 21st-century upgrade.
They can be executed automatically when predefined conditions are met. Think of them as self-executing code that facilitates, verifies, or enforces the terms of an agreement. The applications for the insurance industry are exciting. It means translating policy conditions into lines of code and creating a streamlined and automated enforcement mechanism.
That might one day mean that policies don’t just exist on paper but actively enforce themselves. By translating policy terms and conditions into code, these contracts automate the enforcement of policy rules. The simplest example would be where a payout is automatically triggered in case of a valid claim supported by pre-approved documents. Another is an automated adjustment in a premium payable based on new data, with no need for an underwriter to become involved.
Conclusion
The potential of a future insurance industry highly influenced and enhanced by blockchain is clear: a more secure, transparent, and customer-centric era. That’s what InsurTech could deliver.
Blockchain doesn’t just refine processes. It redefines the relationship between insurers and the insured. The results could be tangible and reshape how customers interact with the entire industry. We’ve seen plenty of examples of this in our lives. Think of how the new technology of smartphones and GPS revolutionized how we interacted with the decades-old act of hailing a cab.
Quicker claims processing, enhanced policy management, and streamlined underwriting processes are not lofty ideals but deliverable outcomes. The melding of data, technology, and a new breed of insurance executives is poised to elevate the insurance landscape to deliver a far better customer experience.
The journey has begun. The destination is a seamlessly connected and customer-embracing insurance industry. Now we just must build the road to that destination.
