According to Verified Market Research, blockchain in the insurance market was valued at more than $200 million in 2020 and will reach $25 billlion by 2028, with an astonishing compound annual growth rate of more than 80%. These remarkable figures raise the question about the future of conventional insurance software.
In this article, we'll go over the key benefits and drawbacks of traditional and blockchain-based insurance solutions and explain how custom insurance software development allows embracing the strengths of both.
Traditional software in modern insurance
Pros:
A wide variety of features and tools. Because there’s a wealth of traditional solutions on the market, insurers can cover a broad spectrum of operations and tasks with them, from policy management and underwriting to claims processing and billing.
Established processes. Traditional software has been used for decades, so insurance professionals are accustomed to how it operates.
Built-in security and regulatory compliance. Insurance software vendors are expected to apply robust security measures to safeguard sensitive customer data in their solutions. Moreover, they design their software to align with relevant regulatory frameworks, significantly reducing the legal risks associated with compliance breaches.
Cons:
Insufficient automation. In traditional insurance software, tasks such as policy issuance, claim processing, underwriting, third-party verification and reimbursements often rely on manual data validation and verification. These routine procedures eat up time and fraught with human errors.
Issues with centralized databases. If an insurance company’s server or database suffers a technical problem or a security breach, such an accident will affect the entire system and lead to downtime or data loss. Such databases can also experience performance issues when facing high traffic, which slows down the response to customer inquiries or claim processing and decreases customer satisfaction.
Vulnerability to fraud. With traditional insurance software, communication among individuals involved in claim processing often doesn’t happen in real time. Delays in sharing information and lack of real-time data analysis complicate detecting inconsistencies or suspicious details. There’s also the risk that insurance agents can conspire with policyholders to make fraudulent claims.
See also: Blockchain's Future in Surety Industry
The growing use of blockchain in insurance software
Pros:
Faster workflows. Smart contracts running on blockchain technology eliminate the need for intermediaries, because they automatically execute actions, such as policy issuance and claims processing, when specific conditions are met. This results in less administrative overhead, faster settlements and fewer errors.
Fraud prevention. Cryptographic hashing used in blockchain secures sensitive insurance data, such as policyholder details and financial transactions. Once this data is recorded on the blockchain, it’s impossible to alter or delete it. With real-time data access to data on blockchain, insurers can stay vigilant, ready to spot odd patterns, such as unusual claim frequency or duplicating claims.
Additionally, insurers can easily double-check information with third parties. For example, an automated request can be sent to a healthcare provider that either uses blockchain technology or connects to the insurer’s blockchain network via application programming interface (API) to verify the details of a claim.
Transparency. Smart contracts provide better visibility into agreements, and real-time data access allows monitoring information as soon as it’s recorded on the blockchain. What's more, blockchain doesn't just keep records; it time-stamps them. As a result, all stakeholders can access the contract terms and transaction history and be sure that the insurance process is fair.
Cons:
Heavy upfront investments. Creating a blockchain-based insurance solution requires skilled specialists to research and develop smart contracts, consensus rules, advanced security and company-specific insurance features. In addition, insurers have to pay for setting up the necessary infrastructure, including nodes, servers and various software components. Altogether, such a project can cost much more than the development of a traditional insurance solution.
Adoption hurdles. Integrating blockchain solutions with existing systems, databases and workflows in an insurance company can be challenging due to the fundamental differences in architecture and data structures. Insurance professionals used to traditional software will have to make an effort to get blockchain's benefits.
Lack of established standards. Blockchain best practices and standards are still evolving, so insurers need to deal with a lot of uncertainty when it comes to security and compliance.
Customer concerns. Not all policyholders will be enthusiastic about blockchain transformation. They might worry that blockchain is too complicated or that it'll make their insurance dealings more complex.
How to choose
Given the inherent strengths and limitations of both software types, companies must carefully consider their unique needs and resources before making a choice. Traditional solutions are a great fit for companies on tight budgets with standard operations and low transaction volume. Insurers in stable regulatory environments may also lean toward traditional solutions.
But blockchain automation and transparency can prove beneficial if your company operates internationally or interacts with a diverse range of stakeholders, such as policyholders, beneficiaries, brokers and reinsurers. For those looking for cost-effectiveness and innovation, custom insurance software can help strike that balance.
Why custom insurance development is the optimal solution
Custom development allows insurers not to choose between traditional and blockchain software and integrate the necessary technologies within a tailor-made insurance solution. This approach can also offer such benefits as:
- Increased performance due to targeted automation of company-specific routine tasks and complex processes.
- Improved data protection combining secure blockchain mechanisms with time-tested security measures.
- Wider customization capabilities and better scalability, allowing insurers to cover their unique requirements and accommodate to growth plans.
- Great user experience with personalized interfaces, enabling policyholders, agents and brokers to easily interact with the system.
See also: Guide to Insurance on Cryptocurrency
To sum it up
Traditional software offers a rich feature set, familiarity, security and compliance but needs more flexibility and agility. On the other hand, blockchain-based software promises enhanced performance, fraud prevention and transparency but requires significant upfront investments and is fraught with adoption challenges.
Custom insurance software empowers companies to blend the best features of traditional and blockchain-based systems. What’s more, it has higher chances to remain relevant to the company’s operations over time, sparing insurers from significant modifications or costly replacements.
