You've heard about Bitcoin, the world's first major cryptocurrency, which has a valuation that is apparently tied to whatever direction your building's elevator is moving at the moment. You've also heard about the digital currency's promise to disrupt the global banking system, or to bankrupt its starry-eyed investors. Fanaticism over Bitcoin has stirred up cynicism among many financial experts, and unfortunately, it has overshadowed the real use cases of the technology underpinning most cryptocurrencies: blockchain.
However, the real-world applications of blockchain haven't slipped past insurers. Several insurance consortiums have formed in recent years to develop blockchains for use in the insurance industry, and while the technology is still young, its uses look promising.
As a type of distributed ledger, a blockchain can store data derived from a number of disparate sources more securely and efficiently than a centralized database. Additionally, certain blockchains, such as those built on top of the Ethereum network, can enforce "smart contracts," which will only finalize a transaction once preset criteria are met. These functions could be invaluable in situations where multiple parties need to share and sign off on information in order to complete a business transaction—in other words, almost every task undertaken by an insurance company.
Consider when someone takes out a policy on a used car they've just purchased. Ideally, both the driver and insurer will know the car's entire history—whether it contains original equipment manufacturer (OEM) parts or generic versions; whether it's been involved in a collision or received repairs from flood damage; and even whether previous owners regularly changed the oil.
Currently, insurers can run CLUE Auto reports to obtain some of this information, but the reports are often limited, since the process of compiling and reporting on a car's history is manually intensive.
Under a blockchain-based reporting system, the vehicle manufacturer, parts supplier, original seller, repair shop, insurer and driver could all act as nodes on the blockchain. Even the individual parts that go into a car could be recorded, creating a far more robust vehicle history report than currently exists, in a format that is far more protected from data breaches.
"It makes the entire vehicle history transparent to all industry partners," said Olivier Baudoux, Head of Product Strategy at Mitchell International, a leading provider of software solutions to the property and casualty (P&C) industry. "Just as important, though, is that this data would be available to a consumer to validate that the vehicle they have purchased is in safe driving condition and that, if in a collision, the vehicle was properly and safely repaired."
Manufacturers would be incentivized to participate in this process because, among other things, it would enable them to better track which specific vehicles contain which specific parts. This could save them millions of dollars during a product recall, since they could track and notify individual drivers who own vehicles with faulty components, rather than issuing a blanket recall on an entire make and model.
For car insurance companies, having all of the above information secured, up-to-date and readily available could enable them to largely automate the policy underwriting and claims processes. "Underwriting a policy requires deep understanding of the 'Actual Cash Value (ACV)' of a vehicle, which is directly tied to appreciating previous damages and proper repairs (a.k.a. Diminished Value)," said Baudoux.
All of this is along the lines of what Mitchell International intends to accomplish. The company announced its forthcoming blockchain solution in January. "Within the next five years, we envision that blockchain will be used not only across the entire P&C industry, but also along the entire automotive value chain," said Baudoux. "An entire ecosystem yet to be built is being developed as we speak."
However, the benefits of blockchain aren't limited to the automotive industry. Several independent companies and insurance consortiums—including John Hancock, The Institutes RiskBlock Alliance, the Blockchain Insurance Industry Initiative (B3i), Bajaj Allianz and R3—have formed initiatives to develop use cases for blockchain in the broader insurance industry.
Eighty-six percent of insurance professionals across all industry segments believe blockchain will be either "important" or "very important," according to a recent Cognizant survey of professionals who are familiar with the emerging technology. Further, 54% of respondents believe blockchain will fundamentally transform the industry.
But while many in the insurance industry have an optimistic outlook on the implementation of blockchain technology, they haven't yet determined exactly how it will be used. Blockchain is a nascent technology, and at this point, its ultimate use cases are undefined.
Potential use cases for blockchain in the insurance industry
With all of the fervor around cryptocurrencies and blockchain, one might wonder if businesses are developing blockchains simply out of hysteria. In truth, some probably are.
Situations exist where a centralized database may still make the most sense, or the benefits of a blockchain-based system might not be worth the research and development involved. Businesses shouldn't implement blockchains into their practices simply because the technology exists. In its report, Cognizant laid out several criteria for identifying an eligible use case for blockchain technology:
- Multiple parties are involved.
- There is value in having shared data access on a tamper-proof platform.
- The process could benefit from increased automation.
- There is value in eliminating the need for a trusted intermediary.
- The benefits of a decentralized ledger outweigh the benefits of a central database, such as latency and scalability.
- A decentralized blockchain approach is feasible.
With these standards in mind, insurers have begun exploring the following use cases, in which blockchain technology could improve business processes.
Improved collaboration among multiple parties
Behind every insurance policy is a web of business relationships, including insurance agents, financial advisers, third-party service providers, government agencies, reinsurance companies and customers. Data associated with an individual's policy, or the dollars used to pay for it, can change hands several times. Managing each of these relationships is manually intensive, and having so many parties involved creates multiple opportunities for a data breach.
A decentralized blockchain could enhance security while giving each of these parties an efficient source for the information they need to audit, approve or participate in business deals on a daily basis.
Faster payment processing
Collectively, insurers receive and remit billions of payments globally each month. These payments vary in size, currency and parties involved, and they can be incredibly labor-intensive to execute and record.
With a blockchain-based system, claims reimbursements to customers, subrogation between insurers, commission checks to insurance brokers and payments to reinsurance companies could all be set up to occur automatically according to preset parameters. Doing so could save insurers significant time and money, plus reduce the possibility of payment fraud.
Automation through smart contracts and telematics
Smart contracts, a feature of some blockchains, execute an order when preset criteria are met. Telematics, such as the Nest Protect smart smoke alarm, are connected devices that monitor consumer behavior and transmit data back to the proprietary company. By integrating these two technologies, insurers could write policies, validate claims and trigger rate changes based on real-time data without any human intervention.
For example, a telematic device installed in a vehicle may alert an insurer if a driver rear-ends another car before a claim is ever filed. Similarly, if a telematic water and leak detector notices a burst pipe in a policyholder's basement, it could trigger a smart contract to send out an alert and initiate the claims process automatically, reducing damage and saving time for all parties involved.
How will blockchain affect policyholders?
It's too soon to say for sure which changes will obviously affect policyholders. However, anything that helps an entire industry operate more efficiently should ultimately benefit consumers. Here are three changes that policyholders may see in the coming years.
Faster claims reimbursements
If blockchain technology enables insurers to automate or efficiently process claims, it's likely that individuals will receive reimbursements more quickly. An excellent example of this is the life insurance claims process.
Currently, when a policyholder dies, beneficiaries must actively complete a tedious death registration and claims process. Since this inefficient process takes place during what is already a stressful and traumatic moment in a beneficiary's life, billions of dollars of life insurance benefits go unclaimed. In many cases, beneficiaries don't even know they're entitled to a payout.
However, if policyholders, beneficiaries, hospitals, funeral homes and life insurance companies all existed as nodes on a blockchain, that claims process could occur automatically, as soon as a hospital records that a person has died. Insurance companies could save time tracking unfiled claims, payouts would be remitted automatically and beneficiaries could focus on more pressing issues.
The security measures and smart contracts built into some blockchains allow geographically and economically dispersed people to trust each other. Because of this, some industry professionals expect peer-to-peer insurance to become more common.
Peer-to-peer insurance describes the collaborative agreement wherein a group of individuals agree to pay for other individuals' claims, spreading the risk across the group. Essentially, it's insurance without a large central company taking a cut. Blockchain makes facilitating this type of agreement far more feasible.
Several crypto companies, including InsurePal and MediShares, are already working to leverage blockchain technologies for this purpose. However, it's likely that major insurance companies are also researching how to facilitate this business mode without being entirely cut out of the process.
Usage-based insurance already exists, but it's likely to become more common under a blockchain-based system. Under usage-based insurance, your coverage or policy premiums are directly connected to your individual behavior. For example, Metromile bases a portion of its auto insurance premiums on the number of miles an individual policyholder drives in a given year.
Since blockchain enables companies to capture and track data on a more detailed level than was possible before, it will likely allow insurers to gain deeper insight into policyholders' daily behavior. Because of this, policyholders may see their insurance rates based more heavily on their behavior, such as distance and speed they drive, the number of steps they take in a day or the number of hours they spend in their house each week.
Regardless of your views on cryptocurrencies themselves, blockchain is an emerging technology that could be transformational to a broad range of businesses. While still underdeveloped, blockchain looks especially promising for the insurance industry. Even if the ultimate use cases for the technology aren't as disruptive as some have claimed, consumers should expect to see blockchains further implemented within the insurance industry in the coming years.