The banking and insurance industries are embracing blockchain with open arms. According to the SAP Digital Transformation Executive Study, executives in banking and insurance plan to more than double their investments in blockchain by 2019.
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Challenges within the insurance industry
The insurance industry in particular understands that it must evolve to stay competitive, which means streamlining processes and meeting the demands of digitally savvy customers. Blockchain technology can help insurance companies overcome today’s challenges and create transparent operations built on trust and stability. In order to fully understand the current insurance industry landscape, we will outline some of the challenges organizations face and how blockchain can mitigate these issues below.
Insurance companies face a number of challenges as it relates to complex compliance issues, limited growth in mature markets, fraudulent claims activity, third party payment transactions and handling huge amounts of data. With the onset of connected devices and the ever-growing amount of data generated by the Internet of Things (IoT), insurers have to sift through the data that matters in order to deliver tailored services and products.
Insurers must also evolve from a focus on purely financial-loss compensation to a mode of physical-risk prevention in order to compete effectively with disruptors in the space. This can only be achieved if they have visibility into their data.
Additionally, the move to digital transactions has left many insurers wondering how to streamline processes and secure sensitive information. The sheer cost and security of moving money digitally is a growing concern. In fact, the report from McKinsey & Company, “Blockchain in Insurance – Opportunity or Threat?,” states that five to 10 percent of all insurance claims are fraudulent, which makes securing data even more crucial for insurers.
While blockchain might not be the end-all-be-all to problems faced by insurers, it does provide foundational technology that promotes trust, transparency and stability. Blockchain is in the early stages of adoption, but there are already a handful of ways that insurers are leveraging the technology to mitigate the above mentioned challenges:
Fraud detection and risk prevention
Thanks to its ability to provide a public ledger across multiple untrusted parties, blockchain has the potential to eliminate errors and detect fraudulent activity. A decentralized digital repository can independently verify the authenticity of customers, policies and transactions (such as claims) by providing a complete historical record. As such, insurers would be able to identify duplicate transactions or those involving suspicious parties. First-moving insurers (including some outside of P&C) are already exploring the use of blockchain to reduce fraud and risks associated with payments across borders and transactions involving multiple currencies.
In specialty insurance and reinsurance markets, where insurers are often removed from the end clients, blockchain may be used to address the considerable inefficiencies, gaps and errors caused by poor data quality in both front and back offices. Health insurers and regulators in the US view blockchain as a powerful tool for combating Medicare fraud. Validation and verification, which can add value to many insurance processes, form the heart of the blockchain business case.
Claims prevention and management
Alongside big data, mobile and digital technologies, blockchain is essential to establishing an efficient, transparent and customer-focused claims model based on higher degrees of trust. Within claims prevention, new data streams can enhance the risk selection process by combining location, external risk and analytics.
A distributed ledger can enable the insurer and various third parties to easily and instantly access and update relevant information (e.g., claim forms, evidence, police reports and third-party review reports). The use of data from a mobile phone or sensors can streamline claims submission, reduce loss adjuster costs and increase customer satisfaction, with blockchain systems facilitating communications and coordination among all parties. Consider how sensors can trigger alerts to insurers that a crash has occurred (thereby initiating a new claim), and then route secure and relevant data to pre-approved and conveniently located medical teams, towing services and/or repair garages. Here again, blockchain is the network connecting and ordering data from the multiple devices and apps involved in the multidimensional process. Similarly, the combination of sensor data, satellite imagery, mobile technologies and blockchain could be used to facilitate claims payments and rescue services when natural disasters occur in remote areas. Data from weather stations could determine claims amounts based on actual weather readings, with blockchain enabling greater automation, more efficient data sharing and stronger safeguards against fraud.
Internet of Things (IoT) and product development
As more devices and objects are connected to the IoT, the amount of data that will be created and collected will increase significantly. This data will be hugely valuable to insurers as they look to develop more accurate actuarial models, or new products such as usage-based insurance (UBI) models. In the auto insurance market, for example, consider how encrypted data gathered about driving times and distances, acceleration and braking patterns, and other behaviors can be used to identify high-risk drivers, validate information included on applications and give consumers more control over their premiums. The challenge in this future state, however, is how to manage the sheer volume of data and logic as thousands or millions of devices are communicating with each other. With blockchain, you can manage large, complex networks by having the devices communicate and manage each other on a peer-to-peer basis, securely, instead of building an expensive data center to handle the processing and storage load. Having these devices manage themselves is significantly cheaper than the data center model.
New distribution and payment models
A number of global insurers are developing alliances and exploring new payment business models (and bitcoin technologies) to achieve capital efficiencies through single global ledgers. Increased automation to capture risk data in contracts also offers new opportunities to build market knowledge, streamline payments and attract financing risk. At minimum, global insurers can use blockchain to cut asset management costs by reducing the hedging fees they pay to protect themselves from currency fluctuations in international transactions. Mobile wallets are another potential use case. Insurers developing these offerings typically restrict consumers’ options and limit the data that can be included. With blockchain, wallets can achieve customer engagement on a much greater scale, with tailored functionalities and more integrated data. Consumers could have all their identities and insurance information available instantly.
P&C insurers seeking clearer visibility into their reinsurance contracts and risk exposures may gain it through blockchain. Consider the case of an insurer seeking to offload an equal amount of risk to two separate reinsurers. A blockchain ledger could provide insight and notification if one of those reinsurers then tried to offload some of its portion to a subsidiary of the other reinsurer. It also would help insurers gain confidence that, as they pay out claims, they are appropriately rebalancing their capital exposures against specific risks. Within reinsurance, the benefits of blockchain include more accurate reserve calculations based on actual participating contracts and automatic calculation updates once underlying data is updated. Plus, insurers gain more flexibility in moving capital and enhanced transparency into known risks, capital efficiency and capital requirements for compliance. Practically speaking, audit trails become easier to follow, modeling requirements are greatly reduced and there is less need for coordination between finance and IT.
Early steps on a long road
Though we can expect to see more POCs and use case development across the insurance industry in coming months, blockchain integration is clearly only one part of the larger move toward a digital first operating model. As experimentation continues, we should expect to see greater blockchain-related activity especially in areas strong in Fintech and RegTech.
For insurers looking to tackle challenges such as poor customer experience, costly manual administrative processes, and privacy and data security risks, blockchain may well be part of the solution.