Blockchain in the Insurance Industry

How Blockchain is impacting the Insurance Industry

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BLOCKCHAIN'S IMPACT ON THE INSURANCE INDUSTRY

The insurance industry protects individuals and businesses from potential financial losses they can’t control and can’t afford to pay for themselves. It can provide financial support to a deceased parent’s children and spouse; an income to someone who becomes disabled and can’t work; a rebuilt house to a homeowner who experiences a fire; a new car and medical care to a drive who gets rear-ended. But the insurance industry has numerous inefficiencies that result in a less-than-ideal customer experience and needless losses for insurance companies.

Insurance Industry Challenges Blockchain Can Help Solve

  • Insurers don’t have enough information to accurately price policies, which means some consumers are priced out of the market and go uninsured, some consumers pay more than they should, and others pay less than they should
  • Likewise, as a result of this mispricing, insurers can experience losses that are higher than predicted, straining their ability to remain profitable and remain in business
  • Consumers in emerging market countries lack insurance in part because operational and distributional costs are too high to issue policies. The premiums are too low for the policies to be worth the insurers’ trouble
  • Claims handling and underwriting are slow because some documents are still on paper and records can’t be quickly shared and validated among the involved parties
  • Insurers lose money over falsified injury and damage reports
  • Counterfeiting, double booking, document alterations, and contract alterations are also major sources of insurance fraud
  • Insurers share less fraud intelligence than they could because of technical, legal, and commercial challenges
  • Life insurance policies go unclaimed because beneficiaries can’t be located

One of the most intriguing possibilities for using blockchain in the insurance industry lies in parametric insurance. This type of insurance uses a parameter to trigger a smart contract, which is stored on a blockchain, to pay the policyholder. The parameter could be a late flight, a weather event, or any other event that an oracle can verify to trigger the smart contract to execute. Parametric insurance eliminates the need for consumers to file claims and for insurers to process those claims.

That saves time and paperwork for everyone involved; it also saves insurance companies from having to send claims adjusters out to verify and assess damage. Policyholders immediately get the money they need to remedy the disruption to their lives that the triggering event caused. Insurers lower their overhead costs.

Imagine if, after a major disaster like Hurricane Katrina in New Orleans or Hurricane Maria in Puerto Rico, policyholders whose homes were damaged or destroyed didn’t have to fight with thousands of other policyholders to make their way through an overburdened claims process. Imagine if they didn’t have to wait months for a claims adjuster to visit their property, and be waiting for their insurance policy to pay out during that entire time. Parametric insurance will reduce delays and hassles for everyone involved, but it will be especially game-changing for policyholders who don’t have enough savings to tide them over while they wait for a claim to be verified and paid.

Parametric policies could also be easier for consumers to understand, helping to improve trust between consumers and insurance companies and encouraging more people not to risk going uninsured or underinsured. Unlike a traditional policy, which covers a particular asset but has lots of exclusions,  parametric insurance   states what is included (e.g., winds above 100 mph) and doesn’t care what asset is covered. Policies could also be issued that cover periods shorter than one year. For example, a hurricane policy could be in force only during hurricane season. Parametric insurance already exists, but it can take up to several months to pay out. The product could be speeded up and expanded with blockchain.

How Blockchain May Disrupt the Insurance Industry

With blockchain, we can:

  • Record insurance contracts on the blockchain for faster verification when a claim is filed
  • Store the complete history of an automobile and its maintenance, repairs, mileage, accidents, and other details — like a more complete version of Carfax — so insurance companies can price policies more accurately with this broader picture of a vehicle’s history. The same can be done with other insurable assets
  • Create a life insurance registry that could do a better job connecting insurance companies and beneficiaries and reduce the amount of unclaimed life insurance money
  • Facilitate the cost-effective issuance of microinsurance to protect low-income people in developing countries against risks such as illness, crop failure, droughts, and flooding
  • Automate certain claims handling and underwriting tasks
  • Authenticate identities and the validity of claims to reduce fraud losses
  • Store receipts on a blockchain for different claim events to create a record that can be shared and audited and can’t be tampered with
  • Facilitate secure record-sharing to speed up insurance claims processing
  • Provide a shared platform that makes it easier for insurers to see if multiple claims have been submitted for the same accident and helps insurers root out fraud
  • Confirm an insured item’s authenticity and ownership before paying a claim

How It May Impact Consumers

Shifting the insurance industry to a blockchain could:

  • Make insurance pricing more accurate and policy terms more transparent, potentially encouraging more people to buy policies they could use but currently don’t purchase
  • Reduce taxpayer losses from government programs such as FEMA that step in to help the underinsured
  • Simplify the application process if customers’ identities can be stored on a blockchain and quickly verified by insurers
  • Lower insurers’ fraud losses, resulting in savings that could be passed on to honest consumers
  • Simplify information exchange at the scene of a car accident
  • Allow consumers to automatically start the repair process or receive a claim payment when a smart device detects that it is damaged
  • Verify your claim that your flight was late and pay out your travel delay insurance claim
  • Facilitate parametric insurance that would automatically pay out after a major earthquake or other widespread disaster to help people get their lives back to normal faster

How It May Impact Employment

Integrating blockchain into the insurance industry may:

  • Provide job opportunities for people who understand blockchain, insurance, and insurance industry regulations, since using blockchain in the insurance industry will require regulatory changes
  • Reduce the demand for claims adjusters because blockchain-based smart contracts can facilitate parametric insurance
  • Cut administrative jobs as blockchains replace time-consuming application-processing and claim-filing tasks
  • Increase demand for programmers to write smart contracts and provide other services that will help integrate blockchain into the insurance industry