An Overview of How Blockchain Operates in the Insurance Industry and Leading Companies in this Field
Despite its well-established presence and value, the insurance industry still faces numerous challenges, including inefficiency, fraud, human errors, and most importantly, cyberattacks. However, by leveraging blockchain technology within the insurance sector, insurance systems can be made more sustainable and secure.
How is Blockchain Technology Utilized in Insurance?
With blockchain technology, insurance companies can create smart contracts to track insurance claims, automate outdated paperwork processes, and secure sensitive information.
Blockchain technology optimizes the efficiency, security, and transparency of the insurance industry. Distributed ledger technology finds valuable applications in streamlining insurance claim processing, enhancing cybersecurity protocols, and even expediting payment times.
Alongside artificial intelligence and big data, the potential of blockchain in insurance is especially focused on three unique attributes: smart contracts, automation, and enhanced cybersecurity.
Examples of Blockchain in the Insurance Industry
Blockchain Smart Contracts for Insurance
Smart contracts allow blockchain users to transfer anything of value transparently, without intermediary involvement. Like physical contracts, smart contracts define the rules between two parties. However, unlike physical contracts, smart contracts can track insurance claims and enforce accountability for maintaining commitments.
Insurance policies can be coded and decentralized as smart contracts, where an individual agrees to pay a company in exchange for the insurer’s future medical cost coverage obligations. Blockchain smart contracts create immutable records based on the insured person’s history, which can instantly verify or deny any insurance claim submitted to the company.
If any fraudulent or false claims are made by the policyholder (or if the insurer no longer agrees to cover pre-agreed terms), the smart contract is immediately terminated, and the premium payments are returned to the individual. This process builds mutual trust between the parties for two reasons: all data is transparently displayed, and any deviation from the contract results in compensation for the aggrieved party.
Chainlink
Chainlink is a decentralized Oracle network capable of sending and receiving off-chain data and applying it to smart contracts, thereby keeping insurance agreements current and tamper-proof. For instance, in the event of a catastrophic weather event, Chainlink can pull weather data for smart contract deployment by an insurer, facilitating automated claim payment processes.
Deloitte
Deloitte, in collaboration with its clients, endeavors to implement new technologies like blockchain within workplace insurance groups. A study on life and health insurance led them to conclude that blockchain could be used to secure health records, complete contracts via smart contracts, and discover fraud. Insurance entities can deploy Deloitte’s blockchain strategies to forge stronger relationships with patients and their clients.
The Lemonade Foundation is a non-profit organization operating under the Lemonade brand. In 2022, it launched the Lemonade Crypto Climate Coalition. This blockchain-based system enables subsistence farmers in Africa to insure their crops against actual costs, evaluating climate change risks and using smart contracts to automate insurance claims based on rainfall data, thereby protecting farmers from climate events such as droughts and floods.
By 2023, more than 7,000 farmers across Kenya had benefited from this project. They paid their premiums and insured their crops through this initiative, making it a notable example where blockchain applications in the insurance industry help solve real-world challenges while addressing broader issues like climate change and limited access to traditional insurance.
Blockchain Automation for the Insurance Industry
Due to the vast number of policyholders, healthcare providers, and patients, the insurance industry is prone to issues like wasting time and money. These issues stem from massive amounts of forms, human errors, and weak communication between parties, leading to inefficiencies that ultimately drive up costs and extend insurance processes’ durations.
Digital ledger systems like blockchain can significantly automate outdated and inefficient processes and help reduce billions of hours spent on paperwork. These systems can also substantially reduce human error since all forms and data are securely stored across the chain, and no information is easily tampered with or lost.
Another key area where blockchain can help is improving communication between significant parties in an insurance case. With distributed ledger technology, if a patient’s medical history is stored on the blockchain, this information becomes securely and transparently accessible to doctors and insurers, who can then accurately define necessary policies and actions. This feature helps prevent common mistakes and misunderstandings, accelerating decision-making processes.
Allianz is an insurance and asset management company offering property, life, and health insurance services. Blockchain is a specialty area used by its European subsidiaries to streamline international automotive insurance claims processes. Allianz has stated that this technology reduces the time and costs associated with case management and speeds up claim settlements for customers.
IBM
Through its blockchain initiative, IBM is simplifying various aspects of the insurance industry. This research area has assisted insurance groups in automating policy issuance and claim processing. These changes can simplify documentation and prevent fraud, thereby enabling insurers to gain more trust from their customers and provide more effective and consistent services.
Etherisc is a decentralized insurance protocol designed to aid in building insurance applications. Its blockchain platform offers ready-made modules for businesses to create parametric insurance products (based on specific parameters). Etherisc uses distributed ledger technology to automate claim processing, reduce operating costs, and enhance insurance transparency.
Blockchain Cybersecurity for Insurance
Blockchain’s ability to protect sensitive information is particularly appealing for an industry that heavily relies on data—consistently dealing with personal, employment, and health matters, making data protection essential and imperative.
Blockchain ledgers are decentralized and therefore cannot be manipulated or corrupted by a single authority. Instead, all data is recorded chronologically and accurately, ensuring everything is transparent. This feature ensures data on the blockchain is always traceable and reviewable.
While blockchain data is encrypted, it remains fully transparent to chain members, meaning all members can observe an individual’s actions while their true identity stays concealed. This system allows blockchains to quickly identify aberrant behaviors and resolve issues before they become critical and deep-seated.
Currently, several companies are using blockchain to protect insurance data and reduce fraud, which helps prevent the falsification of information and reduce misconduct in the insurance industry.
Consensys
Consensys provides cyber insurance solutions for blockchain programs through Consensys Diligence. These services include smart contract audits and testing, security analysis, threat modeling, and more to ensure blockchain security. Consensys claims their blockchain solutions can be applied across various industries, including insurance.
With blockchain solutions from Kaleido, insurance companies can store information and insurance reports in an immutable and secure database. This technology helps insurers detect fraudulent identities, automate claim workflows, and ensure compliance with security standards. For customers, this means their information remains safe from natural disasters and entirely private until their insurance policies change or a new policy is established.
Consensys Diligence
Drawbacks of Using Blockchain Solutions in the Insurance Industry include:
- Potential Data Disclosure or Privacy Violations: Although blockchain data is encrypted, the transparency feature may lead to the unintended disclosure of sensitive information. Since every member of the blockchain network can access data, hackers might access confidential information if security measures are not fully implemented.
- Blockchain Scalability Limitations: One of the significant challenges of blockchain is its scalability constraints. The number of transactions that can be processed per second (TPS) on blockchain networks, especially public blockchains, is limited. This issue can lead to significant delays and increased costs in large industries like insurance, which manage high volumes of data and transactions.
- Lack of Compatibility and Interoperability Among Different Blockchains: Currently, many blockchains have their own specific standards and limited capacity for interaction and interoperability. This challenge creates significant obstacles in implementing blockchain solutions across various industries, including insurance. If different blockchains cannot effectively interact, the efficiency and benefits of this technology may diminish.
- Difficulty in Integrating Blockchain Technology with Existing or Legacy Systems: Many insurance companies rely on old and existing information systems, making their transition to blockchain potentially costly and time-consuming. Furthermore, these systems may not be designed for effective communication with blockchains and new technologies, complicating blockchain implementation.
- Ensuring Regulatory and Insurance Standard Compliance: Insurance laws and regulations are intricately set in many countries. Utilizing blockchain in the insurance industry needs to conform to these laws, which can present challenges. In particular, monitoring activities and ensuring compliance with governance requirements in the decentralized world of blockchain can be difficult.
- Limited Scale of Use and Instability in the Industry: Blockchain is not yet widely used in the insurance industry, with many companies still in experimental or research stages. This limited scale of general and widespread use might lead to technological instability in the long run. Additionally, concerns about blockchain’s longevity and its continuity in the insurance industry remain prevalent.
