Is blockchain finally coming for the insurance industry?
Blockchain has the potential to create an environment of trust for insurers by providing a network of controlled access and a way to securely share valuable information, according to Marlene Dailey (pictured), senior financial services analyst at RSM US, a tax, audit and consulting firm.
“The great thing about blockchain is that it can have a transformative impact on the insurance industry,” Dailey said.
“So many insurance companies today are still slow to adopt this technology, but we’re starting to see more and more companies creating different proofs of concept and starting to leverage blockchain in different ways.”
Dailey, who has 20 years of experience in the insurance industry, said the main use of blockchain so far has been around parametric triggers.
“If you have a flood or strong winds, a policy can be triggered via a smart contract without any human involvement,” she said.
“If you meet all the parameters, you can be paid immediately through the blockchain.”
Smart contracts are self-executing programs stored on a blockchain that run when predetermined conditions are met, making them valuable for parametric insurance products.
What are the benefits of using blockchain in insurance?
Many insurance companies are interested in blockchain technology to leverage real-time data to provide faster, cheaper solutions, according to Dailey, who said there could be significant benefits to using blockchain:
- Transparency
Due to the decentralized and open nature of the blockchain, anyone can see any transaction logged into the database. When claims are moved to a blockchain-based ledger shared between carriers within a peer-to-peer network, they cannot be easily changed. Insurers in the connected network can quickly and accurately access historical claims information.
“Using a blockchain, insurance companies share a trusted, single source of truth that can ultimately reduce fraud and make handling claims much easier,” Dailey said.
- Accurate risk assessment
Insurance and reinsurance companies that share access to the blockchain can access data related to policies, premiums and loss history, helping to simplify the underwriting process.
- Task automation
All smart contract-related processes can be automated and rendered securely using a blockchain, eliminating the need for human intervention in a claim. This efficiency can lead to cost savings for the insurance company, which can lead to lower premiums over time. On the claims side, blockchain can provide justice through processing and initiate faster payouts for policyholders.
What are the challenges of using blockchain in insurance?
The core challenge for companies adopting blockchain technology is getting clean data.
“I always say data is like oil — unless it’s refined, it has no value,” Dailey said.
“That’s where I think a lot of insurers are going to find challenges, because while they understand the technology and they’re making these investments in blockchain, it can become risky to clean data or extract data from multiple legacy systems.”
The insurance companies also risk regulatory uncertainty. Understanding how regulation might affect the legality of smart contracts remains unclear.
Finally, cyber security is a significant concern. Although blockchain can provide many security benefits, it is not completely secure by default. Closed or private blockchain networks are considered more secure compared to public blockchain networks that allow any user to join.
But threat actors can send phishing emails to obtain the parties’ private encryption keys, which allow them to create illegal transactions on a closed blockchain. They may also exploit weak endpoint security to gain access to data stored on the parties’ devices.
“As companies expand their digital footprint, cybersecurity will always be an issue,” Dailey said.
How can insurance companies leverage blockchain technology?
Companies looking to incorporate blockchain into their growth strategy may want to look to third-party vendors that specialize in implementing new technologies.
“The most important thing I would say to insurance companies is that they don’t have to go it alone,” Dailey said. “It starts with the data cleansing – that’s probably the hardest part when it comes to insurance.
“A lot of companies still have multiple legacy systems. It’s always a challenge to figure out how to extract that data without impacting any of the financials, as well as complying with regulations.”
Adopting new innovations always comes with risks. But Dailey believes the time is ripe for more acceptance of blockchain in insurance.
“I think the customers’ demands are changing. Everybody wants things at their fingertips,” Dailey said. “Insurance is no longer competing with other insurance companies, they’re competing with dealers who are able to provide 24-hour service and instant payments, so I think you’re going to see more and more growth in leveraging smart technology.”
Do you think the industry will see higher blockchain adoption this year? Leave your thoughts in the comments below.
