Innovating The Insurance Landscape Using Blockchain
Manoj brings more than 15 years of experience in Risk & Security, IT & Business Management, Operations, and Claims & Data management. He is presently designated at Prudent Insurance Brokers as CIO and is responsible for developing the risk-based information security strategy and driving it across the enterprise.
Blockchain technology is actively being used since 2008 to create a permanent, public and transparent ledger system for compiling data. A blockchain records the data across a peer-to-peer network where each participant can see this data, verify or reject it. This is dependent on the consensus algorithm. The approved data is entered into a ledger in the form of a collection of ‘blocks’ and is stored in an immutable chronological ‘chain’.
While the insurance industry is still boarding steam trains, its analogue and traditional processes are getting rusted within the era of the digital economy. This is one of the major reasons for blockchain and distributed ledger technology to garner much interest across the insurance industry. The core problem within the insurance industry is the lack of an entrusting body that can prevent the vicious cycle of each entity within the industry going through the same process of validation and transaction.
After the technology being put to practice, the industry has become aware of its capabilities and benefits to the insurance industry. In a recent report from Goldman Sachs, it has been estimated that the consistent use of blockchain in the process of KYC/AML checks, an astounding USD 2.5bn of the USD 10bn global processing costs in the insurance industry can be saved. Following the adoption of blockchain technology, the insurance industry is actively adapting to newer methodologies including peer-to-peer insurance, parametric insurance as well as microinsurance.
With the Blockchain technology, a significant improvement in the operational efficiency has been
observed as well. It not only ensures efficiency in the operational processes but also, acts as a booster to the business which in turn, propels the revenue growth. While it leads to a reduction in capital requirements, the technology helps the wholesale insurance sector to discharge its responsibilities for the common good.
Since blockchain technology mandates its use for multiple parties across the chain, it benefits stakeholders including customers and regulators. Once the validation, approval, time stamping, locking down of a document is done, it serves as validation proof for all parties at the same time to be relied upon. The technology involves an automated and instant process, there is no requirement for parties to repeat the process. The task will be done at once and is shared by everyone.
With the blockchain technology, a significant improvement in the operational efficiency has been observed
Payment and reconciliation of insurance policies are manual processes that are prone to human error. The current process for acquiring information involves the communication flow from client to broker to the insurer. While issuing the policy, this flow gets reversed and then bank is informed which in turn, responds to the insurer. Since this flow involves number of parties, the gap between the two parties leads to inefficiency with piles of paperwork, reconfirmation which ultimately leads to confusion.
Blockchain has the massive potential to detect and prevent fraud. According to the FBI, in the U.S., an estimated 5-10 percent of all the claims are fraudulent, which costs the state’s on-health insurers more than USD 40 billion annually. Insurance fraud affects existing customers between USD 400 and USD 700 in the form of increased premiums. Since validation is the fundamental functionality of the blockchain technology, it verifies customers, policies, and transactions. The technology counters fraud by sharing the details of fraudulent claims to help identify erratic behavioural patterns. With better data sharing, blockchain technology saves insurers from paying the expense for public and subscription data to prevent fraud.
Insurance policies are generally processed on paper contracts, meaning claims and payments are erroneous and require human involvement. This enhances on the gravitas of the complexity of the insurance sector’s workflow which includes consumers, brokers, insurers as well as reinsurers. Allowing policyholders and insurers to track and digitally manage physical assets, the technology can codify business rules as well as automate the claim processing while providing a permanent audit trail.
While the insurance industry is still struggling with streamline processes within its workflow, the deeply rooted fear within the customers is also a major concern for the sector. A sense of fear has been found in customers for losing control over their personal data. Blockchain is the solution for enhancing security that allows individuals to control personal data while verification is being registered on the blockchain. The technology’s capability to provide transparency has increased the influx of customers within the insurance industry by building up the trust of consumers. A cryptographically secured blockchain maintains the privacy of customers while creating an industry wide repository of their data.