The disruptive application of blockchain in the insurance value chain
Abstract: The insurance industry as always is at the forefront of any economy’s success typically measured by the premium it produces and the scale of assets it’s manages not to discard the fundamental element of the industry’s very existence which is covering risks for individuals and businesses. Although the industry has witnessed some rising restructurings in its model, operationally, it has broadly remained conservative following a middlemen delivery model rather than a customer focused delivery model which in a way has invited numerous challenges and uncontrollable business losses in past decade or so. Historically, the industry remained to function in a way that is dominated by the middlemen sucking out a lot of capital in between and inviting losses through fraudulent claims which otherwise was impossible to spot. In the United States alone, non-health related loss is reported at more than $40 billion annually due to fraudulent insurance claims. Such economical pain points can be managed through Blockchain technology which is although is in its trigger phase, the insurance industry needs to make some hard decisions in its application separating the hype from real time implications benefiting the end of user of the industry. Here we further to discover how the insurance sector can get benefitted from Blockchain technology without any objective judgements.
Introduction: Blockchain technology have received increasing attention from global industrial players as well academia in recent days. Although the expectations were considered inflated due to its evolving dynamics and prevailing enthusiasm among potential users, the technology is set to create some breakthroughs in bringing transparency and trust in industrial system which in true sense is the need of the hour for the insurance sector. To understand more, the insurance value chain starts with onboarding customers which is also called as “Know-your-customer” process and passes through marketing and distribution to underwriting and claims process to reinsurance and customer service. This entire cycle remains vulnerable to frauds and mismanagement of funds which makes it more inevitable for a possible implementation of blockchain which currently is in the exploratory phase by the insurance players as they compare, wait and check its real value addition. Today, industry and government bodies are realizing the importance of technologies like artificial intelligence, big data, cloud computing, robotics as a force that will reshape the coming days of global businesses and in these blockchain stands tall as the most disruptive and unique among all.
To touch upon blockchain as a technology, the concept is not new which earlier came from cryptography, but the underlying technology is something that is creating waves in the industrial fraternity particularly with the distributed ledger technology and its application not just in insurance but in other sectors as well like supply-chain and financial services. A blockchain as a distribute ledger, functions, through maintaining a series of digital ledger systems just like a booking keeping system in accounting where transactions are recorded digital and each new transactions get noted as the following one with reference to the previous one with the help of ‘hash’. These transactions are policed by computer nodes or participants in a transaction. These transactions when new are auto approved by rules pre-set as an electronic agreement through ledgers. That minimized any physical approval process and digital agreements helps in bringing trust and transparency in the system. Additionally, since no transactions can occur without the approval from the nodes, be it new of modifications, this brings immutability to the system. In a nutshell, no information in a blockchain system can be erased or changed without alerting all the participants or nodes which essentially protects the entire transactional cycle and its users.
Application: Blockchain technology was first witnessed in 2008 through the debut of Bitcoin where the prime idea was to transfer digital money from one point to another without the need of any intermediaries. In this case, blockchain with its digital ledger technology was keeping the record of the Bitcoin transaction while keeping it safe through cryptographic measures which made the transfer authentic. Even though, Bitcoin became the single most important case of blockchain, their started numerous trials of industrial blockchain applications which is by far, a whole new avenue for blockchain other than cryptocurrencies. The four core areas of blockchain technology can be summarized as below:
Transaction: This is transfer of any digital money or document from one point to another. This is not a physical method neither a software related movement but rather the result of digital asset movement. Blocks: These are nothing but the grouping of transactions. These blocks essentially holds transactions of a particular time, event and nodes with a reference to the previous blocks that creates the link and builds the connection of the transactions. This is how the chain is formed.
Nodes: Since blockchain by definition is a distributed system and not centralised, nodes are the spread-out network computers or participants that holds a copy of the blockchain locally. Each transaction provides a trigger to the nodes and if fulfils the digital agreement, an auto approval is provided by these nodes to complete a transaction.
Consensus: Since blockchain do not agree with a centralised authority concept, decisions in the network are made through consensus agreements between nodes which alters its local blockchain copy to match with majority of the network participants.
To understand how the blockchain network works, it is worth considering the below process:
Blockchain Application in Insurance: Insurance in its true sense means the transfer of risk for any financial losses occurred due to any unpredicted events which is otherwise specified and conditioned to any insurer in return for a premium. This is therefore a means to reduce any future uncertainty against building a pool of premiums and spreading across groups instead of putting the burden on a single party or individual.
The insurance sector, historically, is being very slow in adopting new technologies. However, the emerging new ways. technologies and innovative strategies have been in the forefront to address some of the key challenges that the industry is facing with key considerations given to pricing, elimination of fraud, improving profitability and maintain better customer relations. Smart contracts as part of the blockchain ecosystem, is helping to streamline various process flows instead of letting it built on more than one unprotected databases. Besides, blockchain is supporting the function in building a shared database that serves as a unique and protected for all its users. The role of smart contracts here, can broadly be defined as the technology to automate and authenticate transactions through algorithms and computational powers to reduce any vulnerabilities in the system. Thus, this process can bring a profound change in the insurance value chain as the insurance policies which is the single most important document in an insurance transaction can be translated into codes and recorded digitally, making it free from any abuse and keeping it safe than ever before.
Blockchain area of focus in the insurance value chain
SWOT analysis of the adoption of blockchain:
- Quicker and safer money transfers
- Eradicating intermediaries
- Process automation through smart contracts
- Worldwide accessibility
- No loss of data or modifications
- Still at a nascent stage
- High energy consumption specially for crypto transactions
- User privacy can be reduced
- Dependency on oracles like IoT
- No intermediary in case of any network issues
- Cryptocurrencies volatility
- Competitive advantage
- Great possibility to address varied and new markets
- Increase of amount data across industries
- Digital innovations
- Perception issues still prevails
- Lack of proper used cases
- Regulators are still unsure of the benefits
- Not applicable for all types of processes
Conclusion: Being in between a series of ambiguity, blockchain is still in the receiving end of ever growing industrial and media attention. The upsurge in enthusiasm and possible and potential benefits are creating a hype among the users keeping in mind a silent bias prevails when it comes to investment in the sector. The major risk which is underlying the widespread hype, is the real understanding of the industrial maturity of blockchain application which must not be embraced otherwise due to the element of fascination. The insurance industry, being in the conservative radar since its inception, it slow in adoption due to the wait and watch attribute where the industry is slowing checking the waters to evaluate the real outcome and risk of adoption. Additionally, the most significant part, is the innovation that the insurance players specially the insurtech firms are bringing on board to not just seeking to trial its own adoption but coming out with ways to help cover risk for other industries who are keen on applying blockchain in their daily operational activities. The SWOT presented above, provides a brief standpoint on blockchain technology and its adaptability not just in insurance but other sectors as well. The insurance industry, was in focus, of this piece as the industry is the only part of the financial services sector where blockchain is not fully explored and where blockchain can bring the most benefit to the players or users.
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Author - Surya Narayan Saha
Blockchain & fintech expert
This article was originally published in “CREACTOS Journal of Knowledge and Innovation Management”.