By: Uday Kumbhare, Consultant - P&C Insurance Practice
There is no central authority, it is a decentralized system. Therefore, there is no influence of any member on the database, which makes it more transparent, efficient and tamper-proof. All transactions are recorded across the network and are shared among members. There are two types of ledgers –
- Public ledger: Anyone, who is a member of the network, can write or read data
- Private ledger: It is blockchain network, where participants are known to each other and they are held as a group of companies under one group.
Validators in the network ensure that they all have same copies of shared ledger, which makes it difficult for one member to tamper with the blockchain, as any change in the blockchain needs validation from all the validators in the network. There are rules for each blockchain for the validation of transactions.
Transformational Use Cases of Blockchain in Insurance
- Premiums & Claims through blockchain & crypto currencies
- Smart Contract’ on Blockchain
- Delayed & Cancelled Flights’ Claims
- Automatic Accident Detection, Prevention
- Hail Storm Claims & Fraud
- Auto Glass Repair and Replacement/Auto Damage Repair
- Associated Medical Institutes
- Peer-to-Peer Insurance
Direct and regular transactions can be easily made using crypto currency, for example – bitcoins. Insurers may allow their customers to pay their premiums through crypto currencies. These payments can be cashed out on the same day. For small scale claim settlements, companies can offer to pay in crypto currency for the users who are already having crypto currency wallets. These transactions are much faster. Similarly, the Brokerage, Agency Commission, Administrative charges, Surveyor fees, Risk inspection fees, etc. can be moved to blockchain & crypto currencies.
Defined terms of insurance and rules that would be executed automatically, when certain conditions are met. A smart contract can be written if triggers from (blockchain) reliable data source for natural catastrophe or events or purchase transaction, banking transactions, etc. are captured to offer relevant insurances. All types of policies could be written electronically on blockchain. Small scale policies could have certain criteria, which can be verified completely without manual intervention, can trigger and settle the claims automatically just when policy conditions are met giving the benefit of automatic payments to the customer, and reduced processing time for the insurers. It will ensure efficient claim handling, fraud prevention and increased customer satisfaction.
Smart contract providing direct compensation to thousands of affected passengers of delayed or cancelled flights. The data about flight schedule is available on the block, and there would be no argument about it. The entire claims process will be automatic.
Sensors in home, industrial equipments or public property can trigger payments or cash transfers from an insurer on detection of an accident, totally eliminating the manual processing.
Tornado, hail can cause severe damage to one home, while the home next door sustains little to no damage. Thus, it is difficult for the insurance companies to validate these kinds of claims. They need to train employees and hire some forensic experts, who can help insurance companies identify whether these claims are fraudulent or genuine. All this adds up to the cost of an insurer.
Sensor devices can be installed on the rooftops; window panels and these sensors can then pass on the information to a database, which will be recorded and checked. When there is a hail storm, the device will measure the intensity of storm; and if a threshold limit is exceeded, then it would pass on the event record to a blockchain. This will help check whether damage done during hail storm, was due to hail storm or it was inflicted after the hail storm activity.
‘Smart Contract’ could prevent customers from taking an expensive damage repair option. It could be coded with required rules and conditions, and put it on network. (Duplicate claim checking will be removed). Insurers can advise their glass suppliers, Auto Damage Repairers’ to use blockchain and also accept crypto currencies. This will eliminate a lot of paperwork, and reduce the cycle time for claims settlements.
In the healthcare sector, a private blockchain could be used to save and manage patient data securely without risk of manipulation or unauthorized access, and allow such information to be exchanged between various authorized users such as doctors, hospitals and health insurers.
Guevara in UK and Friendsurance in Germany are new online platforms, which allow customers to come together and form online social networks to share risk. This is same how it used to be during the 17th century at Lloyd’s, but this time it’s happening online. People come together and pay their premium into a mutual pool. A portion of premium is used to pay the insurer, who provides Group Insurance and helps the group in case the pool runs out of funds. When there is a claim, it is settled from the pooled premiums. Money left at the end of the year, after all the claims and costs are carried forward, a pool member needs to top up to replenish the pool. This generates huge savings for customers.
Guevara, a UK- based P2P Motor Insurance Network, says it saves up to 80% of their members’ premiums; and Friendsurance in Germany, says its property insurance members save up to 33% when compared with conventional ways of insurance.
Possible risks in this kind of setup:
- Fraudster can become a member of this group and make false claims
- There is no central authority, so it will be difficult to validate claims and resolve issues
- A group among a P2P network can come together and liaise with each other to put pressure on the remaining group to process some claims.
- Transparency will be an issue as a member of P2P would like to know where is money coming from and where is it going. So, each member would like to have a shared ledger.
All these risk could be easily mitigated by using blockchain technology. It helps validate and increases transparency. No member can edit or tamper with this database without the permission of majority of the people in the network. Shared ledger will eliminate any accounting discrepancy, and blockchain updation will audit the ledger whenever there is a transaction. Fraudulent claims can be identified and that member can be thrown out of the group by checking with other insurers on this blockchain network.
Regulatory requirements can also be carried out without any need of accounting staff by including a regulator in this blockchain group. There won’t be any need for centralized systems and backend staffs. This will significantly decrease the costs and benefits, which will be shared by the group in the form of much more discounts on premiums.
Blockchain is an emerging Technology and is still in evaluation stage. Use cases mentioned above are being experimented and many more will follow before getting Industry-wide acceptance.