A look at blockchain technology in the insurance industry and how claims can be processed using this technology.

Insurance is an industry, like many others, that has been plagued by ongoing issues that can be solved through the use of blockchain technology. Some of the key issues in the insurance industry include insurance fraud, contract complexity, human error, inefficient information flows in reinsurance, and slow and difficult claims processing[i]. These issues combined result in inefficiencies and increased difficulties in insurance claims processing, impacting insurers, policy holders, and all parties to a claim.

In this article, we’re taking a look at how insurance claims can be processed on the blockchain and how this will benefit key stakeholders in the insurance value chain. The key stakeholders in the insurance value chain, for the purposes of this article, are insurance providers, policy holders, and investors.

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What are the benefits of processing insurance claims on the blockchain?

With insurance claims processed on the blockchain, insurance fraud can be minimised and efficiencies in claims processing can be realised. Insurance fraud currently results in higher premiums for policy holders and increased operating costs for insurers who need to implement technology to minimise insurance fraud. This is due to the resources involved in detecting insurance fraud and the distance between product design and policy holders in traditional insurance channels.

The parties and processes between insurance brokers and policy holders results in inefficiencies in how insurance products are introduced and administered. By issuing insurance policies and processing insurance claims on the blockchain, with a platform like Black, a permanent insurance audit trail is created that can later be used to automate and increase efficiency in the claims process[ii].

For example, one of the most difficult types of insurance for claims processing is Property and Casualty (P&C) Insurance[iii]. This is due to the amount of data necessary to analyse and process claims[iv]. P&C insurance covers items like houses and personal vehicles and covers you in the event that you’re found liable for an accident that causes injury or damage to someone else’s property[v]. With P&C insurance on the blockchain, smart contracts can be established when the policy is started. These smart contracts can include rules that trigger the contracts for quick and easy claims processing, while establishing an immutable audit trail.

How can insurance claims be processed on the blockchain?

Insurance claims on the blockchain can be processed using smart contracts. In practice, this would mean all parties to an insurance claim could access the distributed insurance ledger to view the relevant policy details[vi]. Information such as proof of insurance, claim forms, and evidence to support claims can all be added to the distributed ledger by a policy holder when a claim is made.

For insurers processing claims, productivity gains would be realised through the increased ability to minimise disputes and detect fraud faster than fraud detection technology in traditional channels. Once a claim is processed, payment is automatic and accurate through smart contracts.

On the Black platform, for example, policy holders will interact directly with claims processors. All of this interaction will be recorded on a private blockchain with smart contracts driving the workflow for a claim. Insurance products and rate schedules will also be tracked on blockchain. For policy holders, the active policy and smart contracts with pre-determined claims conditions will be stored on the blockchain. This means payments can be processed without the need for human intervention which also decreases the likelihood of human processing errors.

How does the insurance claim smart contract work?

When a person takes out an insurance policy, the insurance provider’s blockchain will have agreements built into the blockchain so payments can be auto-triggered based on specific conditions[vii].

These processes would allow policy holders’ claims to be processed efficiently by having each party to the transaction execute its necessary processing activities using pre-established smart contracts[viii]. At this stage, this would be most easily built into insurance policies where payment conditions are clear such as P&C insurance. It’s important to note, however, that the functionality of these smart contracts will only be as robust as the blockchain networks of other associated entities. For example, in P&C insurance this would mean the blockchain of a jewellery store would be used to record the purchase of valuable assets and form part of the policy holder’s record of insured items.

To provide an idea of the information flow for insurance claims on the blockchain, the image below details how an insurance claim for damage to a personal vehicle would be processed.

Source: Capgemini Consulting Analysis. Smart Contracts in Financial Services: Getting from Hype to Reality. 2016. p.12 URL: https://www.capgemini.com/wp-content/uploads/2017/07/smart_contracts_in_fs.pdf.

To build rule-based settlement terms into an insurance contract on the blockchain, authenticated incidents that trigger a payout can be identified and payment terms can be determined[ix]. For other insurance, such as life insurance, a smart contract can be established to trigger an automated payout to nominees once a policyholder’s death is officially registered. In any policy, if triggered, the smart contract would trigger the payout out of the pre-determined settlement amount to the policy holder or nominee.

The future of insurance on the blockchain

Blockchain technology will transform the way the insurance industry operates. With a platform like Black, insurance brokers are connected directly with capital. This enables people to launch their own insurance syndicates, removing the need for insurance companies in the insurance value chain.

Black is a licensed insurance company providing the capacity for insurance Agents, Brokers and MGAs to launch their own virtual insurance companies. Structured as a Private Cell Company (PCC), Black’s platform provides an environment for direct-to-consumer innovation without the overheads associated with traditional insurance channels.

The Black platform directly connects ideas to capital. This is done through enabling crowdfunding of insurance products on the platform. Giving innovators and retail investors a platform to realise their ideas and earn a return on their investment, Black has a lean business model that gives more autonomy to insurance brokers with the products they develop and sell.

What does this mean for the insurance value chain?

Processing insurance claims using smart contracts on the blockchain has a range of benefits for all parties across the insurance value chain. For policy holders, claims can be processed in a timely matter by reducing the need for broker intervention with storage of all information in the distributed insurance ledger. The benefits for insurers include increased productivity, fewer disputes and minimised risk for insurance fraud. With these benefits realised for policy holders and insurers, better quality data and industry processes would result in lower premiums and a fundamental shift to how insurance transactions are completed in the wider market.

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[i] CB Insights. How Blockchain Could Disrupt Insurance. 21 March 2018. URL: https://www.cbinsights.com/research/blockchain-insurance-disruption/.

[ii] CB Insights. How Blockchain Could Disrupt Insurance. 21 March 2018.

[iii] Ernst and Young LLP (EY). Blockchain in Insurance. 2017. URL: http://www.ey.com/Publication/vwLUAssets/EY-blockhain-in-insurance/$FILE/EY-blockhain-in-insurance.pdf.

[iv] CB Insights. How Blockchain Could Disrupt Insurance. 21 March 2018.

[v] Allstate Insurance Company. What is Property and Casualty Insurance? May 2017. URL: https://www.allstate.com/tools-and-resources/insurance-basics/property-and-casualty-insurance.aspx.

[vi] Loyakk. Transforming Customer Experience across the Insurance Value Chain using Blockchain Technology. 26 February 2018. URL: https://medium.com/loyakk-vega-blog/transforming-customer-experience-across-the-insurance-value-chain-using-blockchain-technology-3b89d1407f85.

[vii] WNS. Blockchain in Insurance: Guaranteed Coverage and Benefits. 2018. URL: https://www.wns.com/insights/articles/articledetail/533/blockchain-in-insurance-guaranteed-coverage--benefits.

[viii] Loyakk. Transforming Customer Experience across the Insurance Value Chain using Blockchain Technology. 26 February 2018.

[ix] WNS. Blockchain in Insurance: Guaranteed Coverage and Benefits. 2018.