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The insurance industry at its core is built on the legal promise to pay a compensation in case of a loss. Trust is at the core of this promise. However, the level of trust consumers have on their insurance provider is average. The IBM Institute for Business Value (IBV) surveyed 1,100 business insurance executives in 34 countries globally from May to July 2020; additionally surveyed 10,061 insurance customers in nine countries. The result with regards to customer trust is very stark: 42 percent of customers don’t fully trust their insurer. Improving trust among customers must be the top priority for the insurance industry. Blockchain technology can help bridge the trust deficit.
Permissioned blockchain at its core uses distributed ledger technology (DLT) — a peer-to-peer network consisting of replicated data without the need for a central administrator. When an event needs to be recorded in the blockchain, each node runs through the transaction and if the required nodes agree on the outcome (consensus), then each node records the transaction data into its copy of the ledger. Blockchain technology also ensures the data is tamperproof or cannot be modified in any manner.
Blockchain is convergence of multiple technologies — peer-to-peer networking, cryptography, information security, smart contracts and more. Consensus, replication and immutability in a blockchain network provides ability to record trusted transactions and thus provide provenance and traceability.
Blockchain can provide easier and fair claims processing and settlements; Also enable for better fraud management, efficient and transparent underwriting; easier client on-boarding. Our previous blog describes the blockchain components and how businesses can take advantage to expand their network and get competitive edge.
The insurance industry is undergoing radical change with smaller entrants redefining customer insurance experience using blockchain, IoT, AI and other technologies. These new offerings have lot of potential to disrupt the traditional players over long run. The incumbents have distinct advantage over new players, thanks to their access to longstanding customers and deep knowledge, as well as related data from their processes, value chain partners, and competitive surroundings.
Tokens, identity, provenance and platform (TIPP) in blockchain
To understand the customer better and derive insights about their behaviour, businesses need access to trusted customer data. A consortium of insurance companies can leverage the platform and partnership benefits of a trusted business network using blockchain technology. TIPP using blockchain technology can help address the challenges and transform the processes within insurance value chain.
Tokens provide a mechanism to represent assets in a blockchain in digital form. The digital asset could represent any physical asset or even an agreement and can be traded across participants. Tokens allow expansion of the ecosystem by allowing participants to own shares of high value asset and promote newer business models. Tokens allow decomposition of traditional insurance value chains so that risks can be priced, transferred and managed by a group of independent service providers without having to rely on a central authority.
Trusted identity is core to any system not to mention a blockchain network. Insurance is highly regulated and subject to know your customer (KYC) and anti-money laundering (AML) compliance for participants. Decentralized identity provided by a blockchain network will provide higher level of trust to the customers and partners in the ecosystem. In a decentralized identity system, the customers private information is stored locally and blockchain network provides a framework to exchange of data from customers to insurers. This will in-turn enable quicker customer onboarding as each insurance provider need not complete the KYC again. Decentralized Identity in an insurance network ensures reduction in attack surface in the event of data breach.
Provenance in a blockchain network provides participants an immutable record of the assets and services that are exchanged within the network. Smart contracts can turn paper contracts into programmable code that helps automate claims processing and calculates liabilities in insurance for all players involved. The claim process involves multiple manual steps involving the customer notifying the insurer of the event either online or via phone. During a large-scale natural disaster in a region, the adjusters in the locality find it difficult to cope with the large number of claims. The availability of surveyors become a bottle neck in the overall claim processing. With the availability of trusted data, blockchain can help expedite the claim processing by automating some of the steps using smart contracts.
Platforms are business models that create value by establishing the infrastructure to facilitate exchanges between two or more interdependent groups. Platforms are often a game-changer in multiple industries with their business and operating models gaining a decisive edge over competitors. According to a IBV Global C-suite Study, companies operating business platform models can achieve market valuations as high as eight times their revenues.
Transforming the insurance industry with blockchain
Insurance companies have grown more aware of the disruption coming their way and are starting to prepare with investing in creation of insurance platforms. More than three quarters of respondents to IBV agree that blockchain platforms are disrupting the traditional insurance value chain. Platforms can improve revenue by allowing insurers to reach more customers, offer new and different products, and joining value-added partner ecosystems. They can also improve the cost side by shifting away from legacy systems, thus increasing flexibility. Finally, they drive innovation and foster an innovation mindset.
Insurtech industry is exploring avenues to gather newer data streams of data that can help offer innovative solutions to customers. The proliferation of sensors and connected devices (IoT) can provide large volume of data which could be used to analysed using AI. The information generated from these devices could result in valuable insights that could be crucial to new products.
Blockchain-based platforms can further add trust to the data collection collected in the network and with regard to usage on how customers data is being used. This trust on how the data is being consumed could lead to customers monetizing the data by making it available to other parties in the network. Blockchain platforms can help simplify the implementation and distribution due to the creation of trust in the system both in terms of quality and consumption of data.
With blockchain-based solutions, organizations have access to large volumes of trusted data of interactions within their own ecosystem. The value of insights harvested from this data would be very valuable in building and pricing new products. Blockchain-based networks can help build trusted marketplaces for enterprises providing data security while broadening the ecosystem of all participants enabling access to customers, brokers, re-insurers, sellers, bankers and regulatory agencies across the insurance ecosystem.