Along with the Internet-of-Things and Artificial Intelligence, Distributed Ledger Technologies (DLTs) are forecasted to be the disruptive x-factor of the 21st Century. In this article, we look at how a specific DLT, blockchain, is the perfect fit for insurance-based use cases.
Among other benefits, blockchain allows the deployment of an alternative, more secure and immutable database, that will open opportunities of developing untapped businesses models in industries from proptech to healthcare which are built on data.
This article was written in consultancy with Clément Bihorel, blockchain analyst at NBT.
Distributed Ledger Technology
A distributed ledger is an immutable database or network that is consensually shared and synchronized across multiple sites, institutions or geographies. It allows transactions to have public "witnesses," thereby making a cyberattack more difficult. Network participants can access the recordings shared across that network and can own an identical copy of it. Further, any alterations or additions made to the ledger are reflected and copied to all participants in a matter of seconds or minutes.
Due to its decentralized nature and security-by-design characteristics, DLTs have great potential to revolutionize the way governments, institutions, and corporates work. For instance it can assist institutions in the public sector in tax collection, issuance of passports, record land registries, licenses and outlay of social security benefits as well as voting procedures.
Now the technology is making its way to the insurance industry. From broker and consumer to the insurer’s main product, each risk and each step of the collaborative process “represents a potential point of failure in the overall system, where information can be lost, policies misinterpreted, and settlement times lengthened.” (CB Insights)
Enter the blockchain, a cryptographically secured form of shared record-keeping. In the insurance space specifically, it is set to be a “transformative force” as it requires the coordination and cooperation of many different intermediaries and agents with different incentives. Currently the technology is being adopted more and more across industries; Deloitte’s 2019 Global Blockchain Survey reported that about 80% of all executives responded that they see compelling business case.
With some blockchain-based projects being (at least) crazy, ICOs being associated with Ponzi schemes, and the resulting crypto bull run crashing soon after, it is fair to say that skepticism has risen around the technology. However, remind yourself that blockchain solves a trust and transparency problem; isn’t this exactly what insurers are looking for?
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Blockchain-based Insurance Use Cases
For the most part, insurance companies are huge data silos containing customer data. Retrieving and managing such data from one insurer to another is very resource consuming. While blockchain technology is still at an early stage, the question is not if they will adopt it, but rather how.
The following subsections look at the challenges faced by insurances in which decentralized ledger technology approaches offer solutions.
Fraud detection and risk prevention
The present: According to the FBI, the total cost of insurance fraud in the US (excluding health insurance) is estimated to be more than $40 billion per year. For the average U.S. family, insurance fraud costs between $400 and $700 per year in the form of increased premiums.
The sheer complexity of the insurance system, creates a number of loopholes that can be exploited. Arguably, from insurees to insurers, the industry functions through strong bureaucratic institutions and paperwork-driven processes. Here, fraudulent opportunities arise whereby brokers can sell insurance packages and pocket premiums, or for criminals to make multiple claims at different insurers for a single loss.
The future: Blockchain technology can enable coordination and transparency between insurers to combat fraud. For a thorough analysis of the use case of blockchain in fraud detection, refer to CB Insights.
DLTs allow for keeping track of transaction history and the authenticated identity of insurance process participants. That is, each agent of the insurance process “works” along the blockchain and his/her actions are identifiable. Moreover, poor back- and front-office management can be avoided with a decentralized database and a shared-history. Cross-border blockchain settlement can also help with the management of multiple currencies.
The present: Maersk reported that $4 trillion in goods are shipped each year, and more than 80 percent of the goods consumers use daily are carried by the ocean shipping industry. However, the ship transport industry has seen little innovation since the container was invented in the 1950s. Cross-border trading still leaves an enormous trail of paperwork and bureaucracy which can be bridged through innovation.
The future: The major players are already at it: Maersk and IBM launched their project TradeLens, “a digital platform that empowers businesses and authorities along the supply chain with a single, secure source of shipping data, enabling more efficient global trade.” Simultaneously, NBT’s venture Evertrace is working on a Machine Learning-based platform for real-time cargo tracking, risk prediction and damage prevention, that benefits all stakeholders in global supply chains. On top of this platform, by deploying smart contracts, the offering can be expanded to accommodate the needs of freight transporters and insurers.
In the freight transportation industry, blockchain-based applications lend themselves to people or organizations who wish to develop insurance cases that can for instance, manage tariffs and hand-written contracts through trust-based systems or smart contracts, track assets across the supply chain, keep tabs on autonomous vehicles, etc...
The present: In the automobile industry, insurers offer customers the option for usage-based insurance models (ie. pay-as-you-drive or pay-how-you-drive), whereby the costs are dependant on the vehicle used, measured against distance, time, behavior and place of usage. Often IoT/sensor based, the data generated by the vehicles can then be used for other purposes such as gamification, telematic usage-based insurance, etc.
Essentially, these insurance models allow customers that do not use their car often to save costs or incentivize them to act more socially and environmentally responsible by giving rewards. On top of these models, gamification of data can also play a role in encouraging drivers to perform better than their friends.
The future: Blockchain lends itself to usage-based insurance models. Using an advanced crypto economic model, insurers can incentivize customers with reward schemes that benefit drivers with a better performance on fixed factors such as driving time, distance, style, etc. As the usage-based insurance market is forecasted to be worth up to $123 billion by the year 2022, blockchain models are set to be the next big thing.
The information flow in international trade is high in complexity and involves many agents. As the entire flow is inherently documentation heavy, achieving excellence in logistics involves “working collaboratively with others to optimize the flow of physical goods as well as the complex flow of information and financial transactions” (DHL).
In this process, blockchain technology can enable data transparency and access among relevant supply chain stakeholders through a private network, creating a single source of truth. Ultimately, it can achieve “cost savings by powering leaner, more automated, and error-free processes.”
Blockchain in Insurance
While DLTs might be the solution to many issues in the insurance space, in particular when it comes to risk prevention and freight management, the adoption rate of highly technical solutions is rather low. Typically the insurance space moves at a slow pace and is careful in developing new business models. Blockchain is the opposite. With venture capital funding for blockchain startups hitting $3.9 billion in the first three quarters of 2018, the ecosystem, along with corporations and startups alike, are moving at a fast pace.
Since Satochi released the Bitcoin whitepaper, the tale of blockchain has undergone numerous twists. The rise, fall and rise of decentralized ledgers left scars as large organizations are still reluctant to embrace the disruptive potential of the technology. Even though companies such as Facebook and their token Libra are making big moves in FinTech, admittedly, blockchain has to overcome industry stigma surrounding the crypto crash while blockchain developers have the insurmountable task to solve the blockchain trilemma.
However, the Harvard Business Review released a clear statement to all executives: “There is a strong possibility that blockchain will affect your business. The very big question is when.”
Deloitte’s 2019 Global Blockchain Survey supports this claim with a clear message as the story of blockchain continues: “the questions executives are asking [today] are tougher, more granular, more grounded, and more pragmatic. They are questions that show an emerging awareness that the technology seems ready for prime time. It works. Now executives must figure out how to make the technology work for them – how to leverage innovation created by emerging disruptors and how to align with the ecosystem."
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