Insurance is one of the industries actively adopting new blockchain technology. It is not only startups exploring ways to leverage the new technology of blockchain for insurance and disrupt the industry but also the major old players.
Blockchain is used to make insurance more efficient, low-cost, and customer-centric. It is also being used to design new models and products. Indeed, blockchain is being adopted at two broad levels in the insurance industry.
In the conventional insurance setup, insurers and agencies design, market, and deliver products. These are registered businesses with shareholders and centralized management.
It is also the case that insurance companies are linked to one another through reinsurance. This is an arrangement where the players in the industry pool their own risks together so that if a significant claim hits one, the others can help it out.
The centralized insurance providers are embracing blockchain insurance primarily as a technology for improving processes, increasing efficiency, and cutting costs. Major industry players have formed consortiums to explore the technology.
The most notable consortium is B3i, which has over 20 major insurance companies from around the world as its shareholders. Other companies such as R3, Hyperledger, and Casper Network, even though not primarily focusing on insurance, are building solutions that the industry players can use to improve their systems.
The second level of adoption of blockchain insurance in the industry is happening outside the traditional ecosystem. This is where protocols and smart contracts are replacing centralized companies. In this case, insurance becomes part of decentralized finance (DeFi).
On decentralized blockchain insurance, the premiums are sent into a liquidity pool managed by a smart contract. The claims are also processed by the same smart contract using data it receives from oracle networks.
For example, farmers can set up a mutual fund on the blockchain to which they contribute monthly. If some farmers lose their crops to drought, the smart contract disperses to them funds they can use to start all over again in the next season.
Indeed, the farmers do not need to notify anyone about the drought or make any claims. The oracles connected to the smart contract collect relevant data in real-time and deliver it to the smart contract that runs the mutual fund.
The smart contract automatically processes settlements whenever predetermined conditions are met, such as a particular rain amount is not reached within a defined period.
Decentralized insurance is the most disruptive, especially on a public blockchain. It bypasses most regulations and also does not respect physical boundaries. A policy on a smart contract on a public blockchain is accessible to anyone online.
In both the centralized and decentralized insurance models, the blockchain offers a long list of use cases that can make the experience better for the end consumer and the investors in the space.
The following are the notable use cases of blockchain in the insurance industry:
Data is the backbone of the insurance industry. How it is collected, stored, and used determines whether the customers are satisfied and whether the enterprises in the space get a viable ROI.
The blockchain offers a secure mechanism for storing and using digital data while preserving stakeholders' privacy. While the data might not be stored on the blockchain in particular due to cost, it can be secured on the blockchain using hash functions, cryptography, timestamps, and decentralization. This can be especially useful in the health insurance sector with the digital storage of medical records.
The fact that data on the blockchain can only be changed through a consensus process on a peer-to-peer network of computers means the data cannot be arbitrarily changed.
Blockchain use in the insurance industry becomes even more useful with other emerging technologies. For example, it helps with collecting, processing, and using data in conjunction with the Internet of Things (IoT) and Artificial Intelligence (AI).
Fraudulent claims can be a major cost item in the insurance industry. According to the Federal Bureau of Investigation (FBI), insurance fraud costs the average American family between $400 and $700 annually in the form of increased premiums.
Blockchain alone cannot stop fraud in insurance. However, it can serve as the backend of the other technologies that can help fix the problem.
For example, instead of relying on people to manually make claims and report facts about it, the insurance company can rely on the IoT networks and AI to collect and process data on its own and determine due claims even before the customer makes a formal application.
In motor vehicle insurance, sensors on and in cars can collect data and send it to an AI processor. The insurance company can get notifications and detailed reports about accidents, including the possible cause, the extent of damage, and who is responsible.
In such arrangements, the blockchain offers a secure and private mechanism for storing and processing collected data.
The insurance industry is still hugely based on paperwork, leaving room for cases of human error.. That slows down service delivery, such as processing claims. The blockchain offers mechanisms for securely automating most processes and systems.
In particular, data collected from IoT systems can be fed into smart contracts, automatically determining outcomes such as approving or declining claims.
Meanwhile, smart contracts can be used to structure and guide the interactions between various players in the industry, including in the reinsurance arrangements.
The blockchain offers benefits of different kinds to customers as well as to investors in the space. The following are the most notable benefits of blockchain insurance:
Through cryptography, hash functions, immutability, and peer-to-peer network that process information through consensus mechanisms, blockchain improves the security of insurance systems, including those involving claim processing and risk prevention.
Blockchain and, in particular, the smart contracts applications can serve as part of the backend to AI and IoT, and this makes it possible that claims can be processed faster than when humans have to collect and process the data.
Through blockchain, all stakeholders have a shared source of truth that no one amongst them can tamper with for their selfish benefit. Customers can easily audit how the insurance company processes their claims, and reinsurance partners can be sure of their partners' actions.
The security of data determines how efficient insurance processes become. The blockchain offers the mechanism to securely store and process data. This is achieved through immutability, cryptography, hash functions, and decentralization.
With more secure and transparent data collection and processing, it is easier to administer insurance policies. The entire ecosystem is further improved through automation using smart contracts.
The Casper Network has been designed with the capacity to serve the insurance industry. It offers tools for improving the traditional models and designing and building completely new models.
Using the Casper Network, developers can create dynamic smart contracts to be the foundation of their systems and processes. The smart contracts on the Casper Network are dynamic through oracles and future course correction capacity (see also common use cases for blockchain technology or this guide for industries using blockchain technology.
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