The global market for blockchain in insurance is expected to grow more than 50% annually through 2031 because of tangible benefits such as added security and transaction transparency. These are possible due to blockchain’s distributed architecture, which allows users to exchange information confidently without third-party involvement.
Let’s go through some prominent use cases of blockchain solutions for insurance to see how insurance companies can benefit.
Anti-money laundering
AML regulations require financial and insurance institutions to have specific mechanisms to detect and prevent money laundering. Thus, organizations set up robust customer due diligence (CDD) and know-your-customer (KYC) processes to assess potential customers before providing any services to them. Verifying the customer’s identity entails gathering information about the client's background, source of funds and transaction patterns. While the KYC and CDD mechanisms have proved beneficial to preventing money laundering, they require substantial investments, as financial institutions must collect, enter and process vast amounts of customer data once a client engages with them.
Private blockchains can help insurance companies save hours of work collecting and verifying customer data and, thus, save thousands of dollars by acting as a shared storage of customer information for financial institutions. Whenever customer information is updated, a new block is added to the chain, which maintains all transactions and serves as a trusted and traceable source of client information.
When a customer needs to engage with another financial or insurance organization, this organization can request access to the customer’s data stored in the blockchain. This way, companies streamline customer onboarding and eliminate data inconsistency across multiple institutions.
See also: Blockchain's Future in Surety Industry
Fraud mitigation
Insurance companies can use blockchain technology to combat fraud. Because blockchain presents an immutable ledger that records transactions in a secure and tamper-proof manner, once data is recorded on a blockchain, it cannot be altered or deleted. This way, insurance companies get an auditable trail of all transactions, which allows them to identify discrepancies, patterns or anomalies indicative of fraudulent activity, such as multiple claims for the same incident.
As a result, insurance businesses strengthen trust between the company and its customers: Insurance providers get a powerful tool to verify claims authenticity while customers gain more transparency in claims settlement.
Smart contracts
Blockchain is a backbone technology in smart contracts, which can automate the claim settlement process in insurance. Smart contracts are designed to execute actions based on contract terms automatically once predefined conditions are met, without third-party involvement. Here are some examples of how smart contracts contribute to parametric and peer-to-peer insurance efficiency.
Parametric insurance
With parametric or index-based insurance, policyholders get their payout based on the occurrence of a trigger event rather than the damage incurred by the event. The occurrence of the trigger event is detected by oracles, which are reliable sources of information. Once the trigger event occurs, smart contracts automatically trigger the payout to the policyholder without manual intervention.
Peer-to-peer insurance
Peer-to-peer insurance (P2P) is an insurance model where individuals (family members, relatives or business partners) consolidate their resources to insure each group member against specific incidents. These individuals can encode P2P insurance terms and conditions into smart contracts that will be automatically executed once one of those individuals files a claim.
Data privacy
Keeping data secure, accurate and integral in the insurance industry is paramount. Serving as a future-proof ledger for all transactions and data entries, blockchain can help ensure data privacy, reliability and accuracy. For instance, insurance companies can use blockchain technology to store the data collected with oracles for parametric insurance, providing for the integrity and transparency of the data used to determine policyholder eligibility for payout. Similarly, blockchain can help ensure transparency and joint trust among the P2P insurance members.
Reinsurance
Reinsurance provides financial protection to insurance companies in case of large payouts. Blockchain can make reinsurance more transparent and efficient, fostering trust between reinsurance and ceding companies. With self-executing contracts, both parties can benefit from faster and more transparent claim settlement. Additionally, partners can securely exchange data, eliminating fraudulent activities and improving the accuracy of reinsurance processes.
See also: How to Become a Future-Ready Insurer
A real-life example
One of the most prominent examples of how insurance companies embrace smart contracts on the blockchain is the insurtech company Lemonade. Together with renowned companies such as Avalanche, Chainlin, and Etherics, Lemonade launched a blockchain-powered crop protection insurance program.
As farmers' harvests in rural Africa heavily rely on the weather, insuring their crops against adverse weather is a reasonable step. Still, traditional indemnity insurance is not financially viable for African regions: Farmers can’t afford high premiums, including claims handling expenses and service coverage. As a solution, Lemonade worked out a parametric crop insurance program hosted on blockchain, which allows for triggering smart contract functions once drought is detected in the region. The program’s cost-effectiveness and transparent claim settlement process make the premiums affordable to African farmers and help them through tough seasons.
Summing up
Blockchain has found its niche in the insurance industry, and it is uniquely positioned to benefit from the technology. Blockchain helps insurance companies automate various effort-intensive processes related to claim management and increase mutual trust among the parties involved in the insurance process. Still, to embrace all these multiple benefits, companies must carefully plan blockchain implementation and ensure its seamless integration into their IT environment and business processes. Do not hesitate to partner with blockchain professionals if you lack the required expertise. Professional consultants can help you reduce costs for technology implementation and significantly accelerate the process.
