How to implement Blockchain in Insurance – Use Cases and Applications

In this article, we’ll discuss how to implement Blockchain in Insurance sector, its use cases and applications. For years, applications of blockchain technology in the insurance industry has remained just in theory for years. But today, companies are leveraging blockchain technology for practical applications that offer many benefits such as fraud-proof claims processing, PII data protection, etc. In this article, we’ll see how blockchain technology is transforming the insurance sector.

Blockchain technology was invented in 2008, to serve as the backbone of the cryptocurrency named bitcoin. Ten years later, it was one of the most searched technology words on Google. The hype spread across different sectors rapidly and the technology underwent major modifications when technologists and business experts realized the potential applications of blockchain in different business sectors.

Today, there are different types of blockchain—  categorized into the public blockchain, private blockchain & consortium blockchain. At a very basic level, Blockchain is just a database of transactional data. It can also be defined as a distributed, encrypted peer-to-peer ledger. The major benefits offered by the technology are;

1. Tamperproof data storage
2. Transparency in transactions
3. Incorruptible record keeping
4. Immutable infrastructure
5. Easily auditable records

The benefits offered by blockchain in insurance are ideal for solving many of the pain points faced in the sector. This is why blockchain in insurance has the potential to change the way we share insurance data, process claims and prevent fraudulent practices. As a result, impacting business models and creating greater trust and transparency.

Major pain points faced in the insurance industry

Now, many of you may wonder how blockchain in insurance can be useful to the industry. The rise in insurance interest rates, increased levels of insurance investments, have contributed a lot for insurance companies in recent years. But still, the profit levels are on the far side of the business due to the lack of the right technological solution to prevent the losses caused due to frauds in the insurance industry. Recent studies indicate that insurance frauds estimate to about to $7.55 billion in monetary loss annually. Even for global economic leaders like the UK, losses due to insurance fraud account for £2.5 billion annually. In a birdseye view, the major challenges faced by insurance companies are;

• Fraudulent claims
• Compliance issues
• Handling claims
• Data Security 
• Third-party payment transactions
• Policy Renewals

Blockchain technology can help insurance companies in overcoming some of these challenges they are facing in the current market. 

Overview of the present scenario

1. Claim processing

Billing for most insurance claims had always been a complex process. Many customers usually get confused with the insurance premium they need to pay. This is due to the fact that each plan is a combination of deductibles, payment exclusions, maximum payments, coverage areas, etc. It is almost impossible to recognize entirely the areas that come under one’s insurance plan. In most cases, one needs to have a direct call with the representative to get a clear idea of the coverage areas. Some representatives may confuse you even further. So you need to practically keep a record of the claim papers & insurance coverage documents with you all the time.

2. Fraud detection & mitigation

As a result of digitization, there is a rise in data stored in the cloud network. This has prompted insurers to keep stringent measures to keep customer data more safe & secure. The lack of dedication of the support level staff is again a matter of concern for the insurers. Compared to this, the fraud practices in the sector are much more advanced, as they always target the weakest link to get into the system. The co-operation of the insurers & the customers is always at the far end. Moreover, outdated internal security systems are also a matter of concern for the private insurance companies. 

3. Data protection

Insurance companies collect large amounts of personal data from the policyholders. Moreover, significant data processing is done by insurers, re-insurers & service providers based on the data collected. The bulk amount of data transfer could always leave access levels vulnerable across global borders. This makes the system more prone to hacking and data losses. This situation could be particularly risky for the personal line of business. The non-compliance with the data protection regulation could even impose huge levels of fines on companies.

The necessity of blockchain in insurance industry

Why do we need blockchain in insurance? Insurance fraud is usually classified into two —soft fraud & hard fraud. Soft fraud happens due to the over-exaggeration of facts of otherwise legitimate claims to the sum of insurance coverage amounts. Soft fraud is also known as opportunistic fraud. While hard fraud happens when the insurance policies’ terms and conditions are deliberately twisted. Such scenarios include self-invented damage, collisions & destruction to facilities or infrastructure so that claims for insurance payment could be made. In fact, all such situations exist due to the lack of a proper system to analyze insurance claims & documentation procedures. Incapable technologies are what make it possible for fraudulent activities.

1. Better Claims Process

Using smart contracts, the insured and the insurer would benefit from managing claims in a quick and transparent way. On submission of claims, the blockchain would verify contracts and ensure that only valid claims are paid. Multiple claims submitted for the same eventuality can be tracked in the network. On meeting the required criteria, the contract could trigger payment of the claim without any human intervention. It thereby helps in improving the speed of resolution for claims. Claims data stored in a shared ledger will help insurers to collaborate and identify suspicious activities across the ecosystem.

       2.Fraud detection, mitigation, and prevention

It is estimated that between 5 to 10% of all insurance claims are fraudulent. The total cost of insurance fraud is in excess of $40 billion a year. This is not only just about insurance companies losing money, but also about the effect of increased premiums for the customers. Smart Contracts and the immutability of Blockchain-enabled solutions to help in the prevention of fraud. A smart contract is a computerized transaction protocol that can digitally facilitate, verify, execute, and enforce the performance of an agreement. These transactions are trackable and irreversible. This process is automated and can act as a compliment for legal contracts. Smart contracts help in the management of claims in a highly transparent and responsive manner. Moreover, the benefit of a smart contract is that it promises accuracy, transparency, higher speed, trust, and data storage.

       3.Securing Private Data

Customers have a fear of losing control over their personal data. The application of blockchain in insurance serves as a reliable solution to drive efficiency and security. Blockchain technology allows personal data to be controlled by the individual, while the verification is registered on the blockchain. Customers’ personal data could be stored on a distributed ledger, with the consumer being in control of who has access. Insurance companies are also looking at blockchain to enhance their identity-based solutions. It provides validated data about an individual customer. As a result, it makes it easier to use privacy based data, especially in KYC / AML transactions.

Protecting data/asset provenance, and enabling data portability and audibility is possible through its time stamping and immutability attributes. Blockchain in insurance helps all players, from agents and brokers to distributors and underwriters. By using the same source of data to underwrite risks and make decisions. The shared ledger enables the elimination of errors thus increasing the overall efficiency and transparency across the entire value chain. Thus, it can indirectly reduce costs in data management too.

       4.Ease of Reinsurance

A blockchain ledger can easily provide insights and notifications involving an insurer. In case an insurer is seeking to offload the risk between two separate re-insurers. In addition Blockchain technology even supports the reinsurance processes. It streamlines the flow of information on a shared ledger ( distributed ledger technologies ) between insurers and reinsurers. Blockchain network enables detailed transactions of premiums to existing on both insurer and reinsurers systems at the same time. For instance, the use of blockchain in insurance eliminates the need to reconcile books for each individual claim.

How to implement Blockchain in insurance

Since blockchain is relatively recent technology, most companies don’t know how to adapt the technical capability of blockchain in their business operations. Many companies might be confused about the steps they need to follow for the proper implementation of blockchain in insurance. The technological terms & processes in blockchain are even more confusing for enterprise businesses. 

1. Discovery

Firstly, the discovery stage begins with the realization of problems & issues in the existing system. In some cases, the cause of the problem or issue might be the mismanagement of records, improper resource allocation, the existence of unchecked data or even personal errors. In particular, the solution to the problem is the proper installation of a reliable system.

2. Consultation

The consultation stage involves consultation with an expert to discuss the technical feasibility of the implementation of the solution. Here, the existing issues & problems in the present system are discussed. Then the technologies to be implemented into the system are discussed. In addition, the cost of installation and the infrastructure costs of setting up are calculated. The potential benefits that accompany the discussed technology are also discussed.

3. Potential Solutions Analysis

In the potential solutions analysis stage, both parties come into an agreement on the type of technology and solution. Also, the project requirement of the company is even discussed at this stage. The estimated time for the installation, completion & testing of the system is also discussed ( ETA ).

4. Impact Analysis

In the Impact analysis stage, a thorough analysis of the system is carried out. Then an implementation strategy is prepared based on it. In this stage, each dependency involved are analyzed such as server requirements, the configuration of the devices & potential impact of the solution on the existing system are listed. Altogether, these are then listed as a proper impact strategy for easy understanding for the business.

5. Proof of Concept (POC) Development

Proof of concept stage is when the solution is implemented into the business premises. Here a team of development experts verifies the operation capability of the solution in the business premises. POC development delivers a precise insight into the areas where the solution was effective. It also shows insight into the areas that require improvement too.

6. Solution Deployment

In the solution deployment stage, after proper analysis of business functionalities, the actual solution is successfully deployed into the business system for practical use.

7. Post Deployment Modification

In the post-deployment modification stage, where the business areas that need to be fine-tuned for better performance are found. Then such business areas are fine-tuned for better performance of the solution. Fine-tuning of the solution requires the need to work closely with the business representative. Addition of entirely new functionalities other than that discussed at the beginning of the deployment may even incur additional costs.

8. Solution Impact Analysis

Lastly, in the solution impact analysis stage, the performance of the solution in the business premises are calculated. This is when the benefits of blockchain in insurance is evident. 

Blockchain in insurance has the potential to change how companies operate. It can help insurers to save time, cut costs, improve transparency, comply with regulations, and build better products.