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Quite a few voices are betting that the emerging blockchain technology will be the greatest revolution after the Internet boom. While blockchain was one of the most popular buzzwords in 2017, there is no doubt that it will continue to feature dominantly in the coming years too
Financial organizations have been among the early adopters of this game-changing technology.
While it is yet to be accepted as a mainstream technology in the insurance sector, blockchain is certainly creating the right amount of buzz. It has great potential for the entire value chain of the insurance sector—from underwriting, payments, claims, back-office functions, and risk capital.
What is Blockchain?
In blockchain, each block is a record of new transactions, which could include anything like- the location of cryptocurrency, or medical data, or voting records. After completion of each block, they all are clubbed together to create a chain of blocks, simply known as a blockchain.
With a blockchain, people can write entries into a record of information and can control how the record of information is updated. It assigns a unique identification to the user whose personal details are never revealed during the transaction process. Thus, enabling one to conduct secure, transparent and anonymous transactions that are backed by the blockchain technology platform.
How Blockchain Will Work in Insurance: An Example
Say a customer named Viraj Chauhan contacts a life insurance company (Company- A) for a new policy. However, Company A rejects the proposal due to unsatisfactory medical reports. Now, Viraj contacts another insurer (Company- B) for life insurance.
Under the current scenario, Company B will strive for a separate medical examination. However, if both the insurers are using blockchain technology, Company B can access Viraj’s medical test reports that were conducted just recently by Company A.
This is a simple example that showcases that the use of blockchain technology benefits not only the insurer but also the customer. Let’s understand this in detail -
Blockchain Benefits for Insurance Companies
1. Help in Fraud Detection
Fake claims are a big issue in the insurance industry. Almost 85%-90% of life insurance frauds, fall in the bracket of Rs 1 lakh to Rs 10 lakh (Source: The Economic Times). The use of blockchain database will help to validate the authenticity of claims, customers and the transactions involved in the process. As, a decentralized public ledger, it provides historical data that will help insurers to detect fraudulent activities. Additionally, insurers will be able to identify duplicate transactions for preventing fraud. Processes involving multiple currencies can be streamlined, and discrepancies can be eliminated.
Take the case of online term plans which are plain-vanilla policies. Here, the lumpsum payout is paid only if the policyholder passes away during the policy tenure. There are no survival/maturity benefits in case the policyholder survives the tenure. In case a fake term plan claim is filed, the blockchain technology can help the insurer in detecting the fraud. It effectively serves as a cross-industry and distributed registry with comprehensive customer data. Once the data is digitally entered, the platform would validate the authenticity of documents, check police reports and detect any fraudulent patterns. Moreover, as the data is decentralized, tampered documents and false term plan claims are less likely to be ignored.
2. Reduce Administrative Cost
Blockchain will reduce administrative cost through automated verification of policyholder identity, contract validity, auditable registration of claims and data from third parties. This will give insurers controlled access to claims and claims histories registered on the blockchain, thus improving transparency as well. According to a PWC report, blockchain could remove 15%-25% of expenses accrued during insurance processes, delivering an industry-wide saving of $5-10 billion. (Source: PWC,2016)
3. Ensure Transparency
The existing delays and lack of transparency in the claims process have given rise to a ‘trust deficit’ that has alienated the customers. The blockchain platform can help to rebuild trust by generating new data streams that will provide updated and relevant information for speedier claims processing (Source: Harvard Business Review, July 12, 2017).
A long-term plan for blockchain implementation should include combining transaction data with other data streams that are made available through mobile and digital technologies. Using the blockchain network, insurers can automatically receive alerts when a calamity or an accident occurs. The automation also enables speedier data routing to third-parties like healthcare services, repair garages, rescue services, and police teams. A blockchain database that is linked to the weather system can automatically pull weather readings to determine accurate claims amount.
4. Improve Data Quality
Blockchain will improve the data quality of front-end and back-end office sources. The errors and inefficiencies in the system will be eliminated, thereby bridging the gap between the end-users and insurers. Specialty insurers and reinsurers are two segments that will immensely benefit from the blockchain technology (Source: Ernst & Young Report, December 15, 2016).
5. Help in Product Development
The linking of blockchain data with other data sources will help insurers to come up with more accurate actuarial models. For example, a company selling auto insurance can generate insights by gathering usage-based data about driving patterns, speeds, distances, safety features and braking habits. Analytics can help to identify high-risk drivers and customized offerings and premium plans can be devised accordingly.
At present, it seems very challenging to aggregate relevant data from a large number of data sources. However, the blockchain database will provide an effective platform for collaborating with other large and complex peer-to-peer data networks.
Blockchain Benefits for Life Insurance Policyholders:
1. Speedy Claim Processing
In insurance, blockchain can simplify claims processing for the nominee. Once the insurer verifies the claim, it will be recorded on blockchain to trigger the right contract execution. This blockchain-powered automation will significantly reduce the claim settlement time and streamline the operations. Thus, benefitting the policyholder’s family as their waiting time for claims payout would reduce significantly due to improved processes.
Example:
Current Scenario:
To initiate the claim settlement in case of term insurance, a nominee needs to obtain a death certificate from the respective authority and submit it to the insurance company. The insurer will verify the information and process the claim. This entire process can take up to 30 days.
Blockchain Scenario:
A blockchain solution could improve manual death registration and claims processes. The network of blockchain will include participants like insurers, hospitals, funeral homes, the department of health and the beneficiary. When the death of the policyholder occurs in the hospital, the details of the deceased would be entered into the hospital’s IT systems (which would be integrated with the blockchain network). Immediately, the insurers would be notified of an insured match.
Hence, rather than placing the onus on the beneficiary to file a claim and follow up, the insurer would process claims automatically. This can expedite the claim settlement process.
2. Instant Fund Disbursement
The interaction between insurers and policyholders will become more direct during the claim process. With technology advancement backed by blockchain, insurers will be able to transfer claim proceeds directly into customers’ digital wallets.
Limitations of Blockchain Technology
Although the blockchain technology has its share of benefits, we cannot certainly ignore its limitations. As the blockchain’s network of users grows in the coming years, it will be more attractive to cyberattacks. Also, if events are not originally registered with accuracy, the trustworthiness of the stored data could be seriously doubtful. Apart from this, transaction cost and complexity also add to the limitation list.
The Way Ahead
Adoption of blockchain technologies by insurance companies will have long-term implications as it will not only enable efficient delivery of services but also help insurance companies to adhere to regulatory requirements. According to McKinsey, insurers must attempt to fully understand the advantages and limitations of blockchain technology before they chalk out a long-term plan to implement it.
It is critical for insurers to identify the high-impact areas that will be benefitting from blockchain. Internal proofs-of-concept, prototypes and customer processes need to be tested before a full-scale implementation is carried out. Ultimately, widespread adoption of blockchain in the insurance sector is possible if the technology is rolled out in a phase-wise manner.
ARN:- Jul21/BG/19
