Insurance Industry & Blockchain Technology
Insurance consists of risk holders’ demand, the supply of provider of capital and data analysis connecting them. Experts predict that current Insurance market will undergo significant changes and rapid growth during the next decade, and both supply and demand will be excessive with the main deterrent being lack of understanding of how to model new risks. However, solutions for this have already been found: Integration of Big Data and Blockchain to Insurance.
Chapter 1. Current Insurance market situation analysis
According to Annual Sigma report from Swiss Re Institute, the growth rate of the global insurance market slowed down from 2.2% in 2016 to 1.5% in 2018. We can observe long-term trends below.
Trends and numbers
Fig. 1 shows zigzag, but steady fall of growth curves for life and non-life premium in advanced markets on the left and in emerging markets on the right. The growth rate is more considerable and stable on the right.
Fig. 2 shows curves of insurance penetration (Premium\GDP). General insurance penetration in advanced markets has practically stopped on the left and life insurance penetration is tend to decrease, while insurance penetration in emerging markets is constantly growing on the right side.
Reasons behind the current situation
The basis of the Insurance market is risk modeling . Regulators use it to evaluate the sufficiency of insurance companies’ capital. Risk holders use it to compare external threats with insurance cost. Capital uses it to compare the chances to lose or to multiply its investment.
During 25 very successful for insurance market years, these models reached an almost perfect level and compounding effect was achieved. In other words, successful risk management reduced the demand for existing traditional risk products in developed countries. Majority of insurance products encourage caution and wariness of its customers. Typical example: insurance provider offers discounts for having fire-fighting equipment. As a matter of fact, during all the time of its existence insurance market helped the society to become safer (Fig. 3-5).
What opportunities for growth on stagnating market insurance companies see for themselves? According to Deloitte survey majority of the companies still pays attention to 2 opportunities: increasing sales (in essence stealing customers from competitors) and increasing economic efficiency (costs reduction). However, the number of those who stake on the integration of new technologies keeps increasing. This is the only really game-changing tendency, with which AON agrees, and this world’s leading insurance broker emphasizes not the fact that new technologies will improve traditional insurance products (See ch. 2), but that they will allow providing completely new services. For example, insure cyber-risks, sharing economy, brand reputation on a large scale.
Chapter 2: Incoming Transformation of the Insurance Industry
The Current process of getting insurance is extremely complex and inefficient. As per PricewaterhouseCoopers assessment, Blockchain can reduce expenditures by $5-10 billion through increased operating efficiency.
Fight against Fraud
Blockchain technology allows improving coordination between Insurance agents. Companies will be able to register regular transactions in a distributed ledger with decentralized access control for data protection. Storage of information about claims in a common registry will help insurers to cooperate and detect suspicious actions in the whole ecosystem and also increase the validity of the used data and the level of participant’s trust in this sphere.
Attempts based on the blockchain to fight against fraud could start from the exchange of fraudulent claims that will help to reveal a pattern in illegal actions and to improve the quality of used data. All of this provides 3 key advantages:
- Eliminate double insurance, due to which the expenditures on paperwork and staff payments will be minimized throughout the whole industry;
- Establish ownership right with digital certificates;
- Reduce the number of forgeries and falsifications.
The fight against fraud is one of the most conclusive reasons to start using the blockchain. It is able to provide the insurers with the permanent audit log of data required for claims assessment. But audit log on the blockchain is useful not only to prevent fraud but also to provide automation and improve the efficiency of the claims processing system, which you face when the company experiments with property and casualty insurance.
The main difficulty connected with property and casualty insurance lies in the collecting of the necessary data to assess and process the claim. Today this process is exposed to errors and includes lots of manual input of data and coordination between various parties, costs of which are rather high. By allowing insurance holders and insurers tracking and managing of physical assets in a digital form, Blockchain technology can codify business-rules and automate claims processing via smart contracts providing permanent control of the data at the same time. You can consider the insurance as a contract that provides for insurance premium paid by the insurer and also conditions, under which the insurer is liable for damage. The thing is that the “damage” can be rather subjective and insurance is all about verification of the fact that conditions for each policy are met. And to pay the damages you have to file a claim in your insurance company. Let’s take a car accident as an example. Your insurer has to review your claim and then recover the claim for the insurance company (with a completely different system and claims processing) of the driver that made a mistake. That is why Property and casualty insurance is a good example of using blockchain technology, because it could change the way of managing, tracking and insuring physical assets in a digital form and also change the whole model of interactions in the industry which ultimately will help to eliminate intermediaries, improve the quality of the provided data and increase the level of trust between involved parties.
New User Experience
Smart contracts on the blockchain can turn paper contracts into a piece of programmable code that helps to automate the processing of claims and calculating insurance obligations for all involved parties. For example, When a claim is filed by a customer, smart contract can automatically confirm the coverage and initiate request to manually review the damages that match certain criteria. For flight insurance smart contact can be connected with an air traffic control database and can automatically initiate payout when the flight is delayed or canceled. For example, system records all updates in the blocks, such as premium payout, claims processing in the blockchain simplifying the flow of transactions between involved parties. Automated processing of data replaces a great number of human resources. Blockchain can not only increase the performance of insurance companies, but also lead to the satisfying user experience for the customers, as it simplifies the insurance process, so it is beneficial for every party involved. Each interaction, from the car choice to the choice of insurance plan and its payment, is recorded, updated and verified on the blockchain. Due to the fact that data is transferred to the immutable distributed ledger, insurance companies are better prepared to distribute capital for claims virtually in a real-time mode that allows them quicker processing and satisfying claims without relying on primary insurers for acquiring data on each claim.
Chapter 3. Credits blockchain products
Credits offer a range of products that allows solving current problems of the insurance industry and carrying out its transit from the traditional business model to a model built on blockchain technology and on Credits platform, in particular.
Making a decision about an insured event by a smart contract
Credits offers using automated, decentralized decision-making about the occurrence of the insured event. Smart contract automates decision-making about the occurrence of the insured event based on the data from the external sources. Thus, a smart contract excludes the human factor in insurance transactions. Smart contracts take the role of insurance company experts that assess provided documents and make the decision about the payout. The smart contract is a code that describes the logic of decision-making open for an audit. Objectivity of the insured event review and guarantee of the payout can attract be attractive for the customer. The insurer can be sure that no party will be able to affect the final decision.
Communication through smart contract
Decentralized process of communication with a data source through a smart contract. Insurance company receives data about the occurrence of the insured event through a smart contract. External data is used directly in the smart contract and not in the IT system of the insurance company.
The current model of insurance companies operations supposes using centralized processes for obtaining the data about the occurrence of the insured event that leads to insurance companies having an opportunity to reduce the payouts. Lack of documentation, them being incomplete or incorrect filling, all this can serve as a reason for the decline of compensation payment.
Credits solution suggests using the data from external sources coming through the smart contracts based on the company’s blockchain. The main feature of a blockchain is decentralization. When the obtaining of data is implemented on the blockchain, the data is stored and processed on the network of nodes independently from separate market participants. Open community launches and maintains the nodes, so they are not owned by any of the organizations which mean none can affect the process of obtaining the data.
Smart contract receives the data from external sources not controlled by insurance companies with the help of an oracle. It’s possible to implement obtaining of data from several sources to verify if they match. The sources of data are airports websites, airlines, independent services. The aim of obtaining this data is its further transfer to the smart contract, which is a program deployed on the blockchain with open source code, consequently, anyone can audit the code of a smart contract. Openness is an obvious advantage of a smart contract before closed software of the insurance company.
One should also take into consideration that insurance payout occurs via bank payment that has both benefits and drawbacks of cash and non-cash payment. Bank payment can take up to several days of time to be finished and, moreover, it can be limited by the national borders. To eliminate these drawbacks Credits offer for the payouts to occur with cryptocurrency.
The accumulated insurance premium is stored on a special technical account. Once Smart contract on Credits finishes processing data, it makes a decision for payout and its amount. The payout is done with cryptocurrency from the technical account of the insurer and sent directly to the wallet of the insurance holder without any intermediaries. Insured person can easily verify this fact via platform’s Monitor.
Thus, Credits solutions distinguish themselves by flexible advantages that able to satisfy most needs of the insurance industry and transform it as a whole. Considering Credits platform performance, smart contracts on the platform will be able to process claims constantly and decisions about insured events will be made twenty-four-seven
- Firefighters record that the house was completely burned down, report it in their system, this data immediately goes to the smart contract through the oracle and serves as a trigger for the payout.
- The contractor broke terms of an agreement by not transferring the specified amount of money in time. The oracles connected to the bank’s ERM detect it and trigger smart contracts that calculate appropriate payout and transfer it.
By cutting jobs and by excluding paper documentation flow and by speeding up processing of claims to mere seconds, the insurance industry can significantly reduce its administrative expenditures. Insurance holders are free from the necessity to provide certificates and other documents.
Moreover, the level of trust between the insurers and their customers will increase to the maximum level, because a smart contract is a piece of code that transparently describes the logic of decision-making and that is open for audit. It works in a distributed environment, completely independent and decentralized. The data in a smart contract is processed according to the embedded logic, which results in the accuracy of used data and ultimately we have a decision independent from external factors about a payout and its amount. None of the interested parties is able to affect the decision or delay its execution.