This article first published in Feb 2018 issue of Asia insurance review and reproduced with permission from Asia insurance review.
I was recently involved in a minor car accident. Between insurance companies, adjusters, witnesses, repair shops and car rental agencies, it took dozens of phone calls, hours of effort and weeks before the claims process was completed.
This is the kind of process challenge that can benefit from the use of blockchain technology. While still largely unproven in the insurance industry, blockchain applications can potentially streamline and automate insurance claims by reducing reliance on the intermediaries involved in a claim.
The role of insurers as intermediaries
Processing a claim requires complex coordination among the participants based on well-defined business workflows. Since these participants may not trust or even know one another, we think of them as ‘counterparties’ with possibly opposing financial incentives. Insurers offer valuable services as trusted intermediaries to coordinate among these counterparties, such as getting my car repaired and making sure everyone’s accounts are settled.
Decentralised workflows using blockchain applications may just be the solution.
Blockchain as an alternative to intermediaries
Blockchain technology uses cryptographically secure protocols that let counterparties safely transact with one another without relying on trusted intermediaries. All required authorisations and instructions could be securely shared among counterparties in the claims process once they had access to a copy of the blockchain ledger. Relieved of redundant responsibilities, insurers could offer valued services as participants, not bottlenecks in the workflow.
Can a blockchain really simplify trust?
- Decentralised trust
Bitcoin has been in operation for nine years and is valued at hundreds of billions of dollars.
Bitcoin records all transactions in an electronic ledger shared among all parties. Baked-in cryptographic techniques provide trust otherwise offered by intermediaries, in a process called ‘consensus’.
- Asset tracking
The success of Bitcoin has paved the way for broader use in the transaction of all kinds of assets, which today require centralised authorities to act as intermediaries.
Instead of employing a central authority, the consensus process ensures that every transaction remains valid and tamper-free. This is particularly useful in complex workflows typical of insurance.
- Identity management
Today, our identities are managed by centralised authorities such as governments and influential online service providers. Resulting fragmented identity representations don’t easily interoperate between issuers.
Blockchain platforms offer options for individuals and organisations to retain control of their own identities and associated profile data. This form of ‘self-sovereign identity’ (SSI) management has been developed by blockchain projects such as uPort and Sovrin. SSI promises to reduce liability for insurers, while also mitigating the risk of identity theft and fraudulent claims.
Blockchain insurance applications
Possible applications in the insurance industry include:
Asset tracking and proof of ownership
Insurance companies have to establish ownership of insured property and then track the transfer of ownership.
Ownership records of property for, say, homes and automobiles, can be recorded in blockchain distributed ledgers. Insurers can reliably and inexpensively track details and the transaction history of just about any asset of value. These are often digital assets or, using a process called ‘tokenisation’.
Reinsurance and shared risk
Once physical assets are tracked as digital tokens, insurance companies can pool or distribute the risk much like securities are managed in financial applications. The Blockchain Insurance Industry Initiative (B3i) uses blockchain technology for streamlining reinsurance among participating companies.
Property ownership records tracked on blockchain ledgers are made trustworthy and virtually tamperproof. This reduces the need to replicate research efforts associated with title insurance and substantially reduces the likelihood of errors or fraud.
Smart contracts for insurance processing
Self-executing blockchain programmes called ‘smart contracts’ are being used for autonomous execution of underwriting, issuance, claims, verification and settlement processes. Smart contracts have the potential to increase efficiencies and reduce clerical errors.
Groups of participants not individually eligible for suitable insurance coverage might use the decentralised trust and autonomous processing smart contract capability of blockchains to self-insure the group by sharing risk at a reduced cost.
Certain low-value or exotic products are often just too expensive for coverage by traditional insurance policy processing. Blockchain automation has emerged as a way to reach untapped markets and insure assets that would otherwise not be worth insuring.
Internet of things (IoT) self-insurance
Smart devices and property aware of their own state can interact with smart contracts to buy their own insurance or file claims as established by their sensors. Just like a modern refrigerator informs a homeowner when the water filter needs changing, smart devices and property may also issue alerts when their warranties expire and require renewal, or even renew them automatically.
What the future holds
In a compelling near-future scenario, purchasing a car could automatically trigger an insurance quote smart contract on a blockchain. If purchasers accept an offered quote, they could immediately deposit monetary assets into a new insurance policy smart contract. Another transaction might add documentation proving ownership and value of the insured property.
Subsequently, a collision detected by sensors in a connected car might trigger a first notice of loss transaction, initiating autonomous workflows for verification, repair and rental authorisations, and payment via a smart contract. The policyholder would not need to file a claim, and the insurer would not have to manually administer it. This can reduce the potential for fraud, decrease administrative costs for the insurer and simplify the claims process for the customer.