Blockchain and Innovation: The Customer Story
The traditional insurance maxim is that insurance is bought, not sold. However, as the internet, mobility, and social media transforms economies and the way we relate to each other, consumers may well buy insurance policies depending on the speed, transparency, and ease of the process.
Trust is also a vital ingredient that powers all insurance solutions, especially because such transactions are characterized by multiple stakeholders at different stages of the transaction.
In a globalized world, maintaining institutionalized trust between multiple organizations and people spread in different cities and towns, countries, and organizations entails complex bureaucracy, multiple and different levels of regulations, and processes.
Blockchain and customer centricity
A new technology, the “blockchain”, has the potential to provide the different stakeholders of the insurance industry an institutional means of trusting each other to carry out a transaction.
Given its unique characteristics, this technology may also lead to an improvement in transparency, reduction in the time lag between the different processes of an insurance chain, and shorten the claims process.
In an insurance transaction, contract certainty is an important factor for policy holders and prospective customers. The blockchain may enable contract certainty for policy holders for insurances that are parametric in nature, i.e., which are based on underlying factors. Such claims can in fact be credited automatically to the policy holder’s account if a particular event occurs.
For instance, claims for crop insurance can be paid automatically to a policy holders account if there is a shortage of rainfall in a particular year or season, depending on the terms and conditions of the contract.
The blockchain technology by connecting the end customer to the other stakeholders, including insurance companies, may help in the mitigation of niche risks and improve customization. In a world of ever changing and complex risks, the provision for customized risk solutions, which is also flexible, fast, efficient, and cost effective, is vital.
What is blockchain?
Blockchain is a public ledger open to the entire world if desired or to a closed group of people. According to the Celent and Oliver Wyman report, “Blockchain in Insurance: Use cases”, a block is a record distributed across a group where data or information once added cannot be deleted. The ledger offers an unchangeable, transparent, and efficient record of information and transactions visible to everyone in the block.
It is unique, because it does not need a central authority, whether a regulator or a commercial entity, to safeguard the security and authenticity of any information added to the ledger.
Frauds are also minimized, as transactions are secured with mathematics or a means of identification, such as biometric parameters; although, the means of identification for the stakeholder to gain access to the block are still being developed.
As the internet of things becomes a reality, with many connected devices, data will become ubiquitous and information sharing will reach new heights. Blockchain can provide the connectivity that is needed to make data more useful.
Blockchain can transform the insurance industry
The blockchain technology has the ability to change the insurance industry, just as the internet changed the information and communication industry, and made possible the instantaneous flow of information around the world. Currently, the internet of things enables machines to talk to each other and helps to harvest mountains of data. This data can be analyzed and used in innumerable ways from customized playlists to parameter- driven motor insurance in certain parts of the world.
The blockchain technology, especially when taken together with smart contracts, which are digitally-enabled agreements that enforce terms and conditions automatically, can probably transform the insurance industry to suit the needs of a post-digital world.
Take for instance, a smart contract to buy a car on a loan. If the buyer reneges on his contractual agreement to pay regular installments for his loan, he may potentially lose access to his car, as the doors may become locked automatically.
Blockchain and tailored risk solutions
As the insurance industry changes, and regulators and other authorities reemphasize the need for customer centricity, the blockchain technology, if it finds wide acceptance, can play a pivotal role. However, it is still early to foresee the path that blockchain technology will take. The technology, process, and regulatory issues that will allow an immutable public ledger to operate across communities and nations will have to become operational and be fool proof.
The blockchain technology can, however, lead to an improvement in customer centricity through many factors, including by:
Improving valuation of assets and provenance, especially helpful for high-valued items, such as property: The technology will help establish the origin of an item and track its custody and ownership throughout its existence. Result: This will help reduce costs of ascertaining and acquiring proof of ownership, including historical ownership as well as establish an audit trail. The transparency thus obtained will substantially lower frauds in property transactions and insurance claims.
Helping in the settlement of claims for reinsurance and multi-layer participation policies: A shared central ledger helps in keeping track of the stakeholders and also enables improved settlement of claims.
Results: Decreased time required for settlement and reconciliation across all participants. Greater capital efficiency resulting from decreased time to settlement and resultant release of unrequired reserves; Decreased likelihood of fraud through ability to identify multiple claims for the same loss.
Providing an alternative marketplace: Blockchain technology provides a shared environment for placing insurance risk, which is transparent and visible to all stakeholders, and for all aspects of the transaction, including exposure, risk share, and policy conditions. Smart contracts are then used to ensure collection and disbursement of premium. Results: This lowers processing costs and time required to check coverage and participants. Also premium collection is faster for all the participants, besides being transparent.
Source: Celent and Oliver Wyman (Blockchain in Insurance: Use cases)
Conclusion
As consumers’ demand for fast, transparent, and efficient transactions increase in tandem with the rapid use of mobile and internet applications, a possible solution is the blockchain technology, which if effectively used can propel the Indian insurance industry to the post-digital era.
As we come to the end of 2016, the insurance story is again about policy holders. In India, the insurance industry is changing, given new regulations, consolidation, and entrants in the market, and perhaps most important, the nascent efforts to digitize the market and reach new customers. In such a scenario, the blockchain technology, if it develops further, has the potential to make the insurance industry more aligned with customer needs.
Reference:
- Blockchain in Insurance: Use cases, Celent and Oliver Wyman.
- Blockchain: Democratized Trust, Eric Piscini, Joe Guastella, Alex Rojman, and Tom Nassim, Deloitte
- Blockchain: More than just Bitcoins, Munich Re, Blockchain – More than just bitcoins | Topics Online 2016 | Munich Re