When talking about blockchain technology, the first thing one thinks of is cryptocurrencies and banking and financial services, but the truth is that this technology could have great weight in many other sectors in the near future.
One of these sectors is, as we will see below, Cryptocurrency Insurance.
To understand the repercussion and impact that blockchain technology can have for insurers, we must first understand how it works and what its main characteristics are.
Explained in a simple and general way, a chain of blocks or blockchain is a distributed database of transactions – the information is validated, stored and replicated in several decentralized nodes simultaneously – and in which only information can be consulted and added. That is to say, in the blockchain you cannot modify or delete the data previously uploaded and validated.
Any user or entity can write and read information in the database. The information base that is saved in this database is the transaction that can be validated by anyone. These transactions are grouped into blocks and these blocks link with the previous blocks, thus generating the chain of blocks or Blockchain in English.
In this way, blockchain allows access without entry barrier, transparent and secure to the information that is in the stored transactions. As it is a decentralized system, it is very difficult for it to fall under a cyber-attack or suffer service interruptions since it does not have a single central point of failure. In addition, as we have seen, the information cannot be manipulated or modified, which makes it a more reliable system than traditional databases that depend on a third party .
Blockchain and the insurance industry
As we can see, blockchain technology has a series of qualities ( security, transparency, reliability, auditability, decentralization… ) that make it very attractive for use in a sector such as insurance, in which a lot of information is handled and in which The veracity and reliability of the data is very important. If we also use a public network with native cryptocurrency (Ethereum for example). We have “money” programmed into the network itself so that it can be integrated with any insurtech application.
According to a report by blockchain technology will move around 1.4 billion dollars in the Cryptocurrency Insurance market in 2023.
In fact, there have already been large movements among companies in the sector. In 2016, B3i (Blockchain Insurance Industry Initiative) emerged, a group of insurance companies united in order to collaboratively explore the uses they could give to blockchain technology.
In the same way, The Institutes RiskStream Collaborative has been created, another group made up of 34 insurers that have come together to find blockchain-based solutions to specific problems in the industry, such as fraud detection, access to different information flows or in the risk calculation.
Let’s see some specific applications in which blockchain technology for insurers can improve their benefits and results.
Blockchain for insurers: Smart contracts, fraud prevention and risk forecasting
Blockchain technology can be very useful to insurance companies of all kinds (life, home, car insurance…) when it comes to estimating the risk and establishing the price of their policies. Having reliable, up-to-date and accessible information is essential in this regard.
In addition, the application of blockchain for insurers allows the automation of insurance contracting processes, as well as their renewals or the payment of compensation through the so-called smart contracts. Based on the previous definition of Blockchain as a database of transactions, these transactions can also store code that is stored in all the computers on the network, cannot be modified once it is written (like transactions) and is guaranteed. of execution, this is known as unstoppable programs.
We can define an intelligent contract or smart contract as a computer program that is self-executing through a transaction. This program usually has business logic to automate transactions or perform certain specific operations based on rules or conditions.
That is to say, at the moment in which a series of requirements are met (such as, for example, those that are requested to be able to formalize insurance or collect compensation after an accident) autonomously and without the participation of any human intermediary (lawyers). , notaries, insurance brokers, experts, etc) the planned actions would be triggered, in this case, the contracting of insurance or the collection of compensation.
On the other hand, no one can manipulate the code once it is registered and the blockchain’s own verification system makes it difficult for false documents or erroneous information to be considered valid, which could lead to fraudulent compensation payments, due to the auditability of the system.
In short, smart contracts can significantly improve the processes of current insurers since they are safer, more agile and cheaper while preventing fraud.
This could result in greater benefits for insurers but also in better conditions for insurance beneficiaries who could see their premiums reduced in addition to benefiting from more agile processes without errors or human subjectivities involved.
Another use case could be insurance between individuals as a collaborative network without intermediaries. In these new models that disintermediate, insurers could generate token-based businesses that would add value to all parts of the community and that would automate most of the operations that currently exist in a much more efficient, secure and transparent way.
Benefits and advantages
This new business model has benefits for insurers, investors and, of course, their clients.
Benefits for insurers:
- The capital needed to insure client’s remains with investors, so the insurer can stay capital-light.
- Similar models in the P2P lending business do not need full legislation, or in many cases, no legislation at all.
- As for employment within traditional branches, technological change does not change the regulation to be complied with.
- Platform development is outsourced to third parties on a pay-per-use basis, making the company more agile with capital.
Advantages for investors:
- New opportunities with greater return potential.
- Opportunities for private investors with less capital through crowdfunding.
- Clear vision of maximum exposure to financial risk.
Advantages for customers:
- The new contracting/underwriting model and the low operational cost model make the insurance cheaper than traditional insurance.
- It gives the user the possibility to publish the demand for specific insurances in an easy way.
- In case the event or hiring takes place, the insurance payment is guaranteed due to smart contracts.
Guarantee of data access and privacy
In the case of health insurance, blockchain technology would allow, for example, to improve the flow of information between medical and hospital centers and the insurers themselves. In blockchain, the user is the custodian of their data and can choose what information they share with whom securely through cryptography (sovereign digital identity systems and attribute-based credentials). In this system, patient confidentiality would be guaranteed. In addition, the fact that the data cannot be manipulated would increase confidence and prevent fraud attempts.
On the other hand, we have the case of reinsurers. These types of companies offer insurance to insurance companies. Moreover, insurers often hire several reinsurers for the same risk. The idea is to guarantee the subsistence and liquidity of insurance companies in the event of natural catastrophes or situations in which claims and compensation skyrocket.
In situations of this type, with so many agents involved and with a high volume of incidents, the exchange of information between all the agents is not always easy. They tend to be processes that are still in many cases manual and therefore slow, subjective and inefficient.
With blockchain all this flow of information would be much simpler and even payments and collections could be automated as we have seen through the execution of smart contracts.
On the other hand, blockchain technology allows insurers to explore new business avenues such as micro insurance or new markets.
Administrative tasks have also been automated to reduce errors and costs. For example, compensation to farmers in case of floods or droughts is regular and instantaneous. It is not necessary that there be a claim on your part before. From IBISA, periodic evaluations of the situation of the insured fields are carried out thanks to the information provided by the satellites.