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Imagine you’re driving to the airport for a big business trip. You encounter a traffic jam as you approach. Another hurried driver rides the shoulder to cut ahead, but accidentally slams into your rear bumper. You miss your flight (potentially incurring re-booking fees), and your car is on the way to the shop. The other party’s insurance may cover the accident, but you’ll still need to navigate a complex web of processes to obtain reimbursement for your bills.
It can take weeks to get back to normal, including dozens of hours on the phone with agents, adjusters, repair shops, car rental agencies, and a host of others. Why do complex processes like insurance claims involve so many intermediaries? Quite simply, it’s because participants in the process have no implicit reason to trust each other, so they turn to the trusted services of intermediaries, who also happen to add friction, inefficiencies and costs. What if there was a way for these participants to safely interact directly with each other?
That’s where blockchain comes in. It has the potential to address these types of coordination problems by reducing the need for intermediaries in complex processes like insurance claims. The result can be substantially beneficial to both consumers and insurers.
Blockchain and Insurance
Bitcoin introduced the world to blockchain’s capabilities. Governed by programmatic rules on a public computer network, Bitcoin made it possible to send digital currency in near-real-time, eliminating governments and banks as intermediaries. Blockchain technology made this possible; the platform’s ledgers can digitally hold and transfer assets between parties in any transaction. Technologists quickly realized the opportunity to apply blockchain technology in business processes handling complex data. Once we treat the data representing insurable assets, policies, claims and all kinds of supporting documents as digital assets, they too can be held, transferred and tracked on a blockchain.
Although we’re very much still in the read and react phase, you can feel the blockchain buzz across the global insurance industry. According to a recent report from research firm Strategy Meets Action, about half of property and casualty (P&C) insurers are aware of blockchain, compared to 20 percent of life and annuity insurers. About one in eight P&C insurers is actively developing blockchain strategies or beginning pilot projects.
Awareness will continue to increase as more insurers work with their technology partners to develop and test blockchain capabilities in their business.
With this in mind, let’s consider some practical applications in the near-term:
- Asset tracking and proof of ownership: Consumers need to establish ownership of property before they can obtain insurance for it. And insurers need a way to track ownership after subsequent sales. Blockchain technology can be used to automatically track any asset through its transaction history, removing barriers to proving ownership.
- Smart contracts: Blockchain programs called smart contracts can autonomously execute underwriting, issuance, claims, verification and settlement processes based on well-established rules. Smart contracts could enable a wide range of innovative products, detect fraud before it occurs, and decrease administrative costs for insurers.
- Product innovation: Efficiencies realized from blockchain automation could enable insurers to provide new products and services reaching untapped markets. For instance, microinsurance may be offered to insure property otherwise too expensive to cover. Likewise, the combination of smart devices and self-executing blockchain smart contracts could allow devices to insure themselves (think: a home utility appliance could renew its own warranty when the old one expires).
These are just a few ways that blockchain could impact the insurance business over the next few years. Blockchain is a potentially disruptive technology that could fundamentally change the way insurers and customers interact. In the short term, insurers should keep an eye on technology developments and think about how a foundational technology shift would impact business processes, human resources and finance departments. Blockchain could also have further implications across the entire insurance landscape, from underwriting to companies’ internal administrative processes to managing risk capital.
Some insurers may not be quite ready to flip the switch on blockchain, but given the potential benefits, I expect that will change before long. Business leaders should keep a watchful eye and open mind.