Blockchain and the future of insurance: Two emerging use cases

Blockchain in insurance will grow by over 10X times between 2019 and 2025. Leading global carriers, including America's second-largest health insurance company and the Chineses Ping An, are some of them who are leading from the front. So, what are the use cases of blockchain across the insurance value chain? We explore two potential areas of application.

Distributed ledger technology, better known as the blockchain, first shot into prominence with Bitcoin – a cryptocurrency that promised secure and transparent financial transactions. Given its origins in the BFSI sector, the use of blockchain for insurance operations makes perfect sense. No wonder experts recommend that the global blockchain market in the insurance segment will cross $12.9 billion by 2025, up from just $1.1 billion in 2019 – that's an uptick of over 10X times!

So, what are the prime candidates for blockchain transformation in insurance? Interestingly, its impact goes well beyond only payments.

What is Blockchain and Why it Belongs on Insurers' Radar

Blockchain creates a decentralized chain of records, with each data point stored in an independent node called a "block." Every block has a cryptographic hash of the previous block, creating an uninterrupted flow of information. Its USP is that the data can only be expanded and not modified, which means that stakeholders cannot go back to alter datasets in line with a new scenario, thereby maintaining transparency and preventing fraud.

Expectedly, there is an immense potential for blockchain across the entire insurance value chain, starting from blockchain-based marketing technology to sell policies, up to automated claims approval by looking at the transactions stored on blockchain.

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In the last one year, leading carriers have hopped onto the blockchain bandwagon. One of them is the second-largest health insurance company in the US, which announced plans to utilize blockchain for medical data security across its 40 million members. Chinese insurance giant Ping An has made deep inroads into blockchain, with a dedicated subsidiary called OneConnect Financial Technology. In 2019, Ping An announced that the company would go public on the New York Stock Exchange.

These are some of the instances of how blockchain is now part of the mainstream insurance lexicon. This trend owes to the extreme versatility of distributed ledger technologies at multiple points of the insurance value chain.

Two Use Cases of Blockchain that Carriers Should Consider

Blockchain research firm, ConsenSys, highlighted the incredible value of this technology for insurers in its 2019 report. 46% of companies expect to adopt blockchain in the next two years if they haven't done so already.

Use cases covering blockchain range from the optimization of existing processes like KYC, underwriting, fraud mitigation, reinsurance, and compliance audits, to the introduction of new business models such as index-based insurance (where the claims amount factors in indices like temperature, rainfall, wind speed, etc., without assigning a pure loss indemnification) and peer-to-peer insurance.

Let's take a look at two use cases in greater detail:

Use case I: Distributed ledger for policy pricing

Consider a scenario where a carrier is unable to assess the previous loss to property (a car or a house) because it fell under the jurisdiction of a different insurance company. Traditionally, this would lead to an incomplete/inaccurate underwriting process and the risk of pricing inaccuracy.

Distributed ledger technology can connect data from all major insurers in the region on a single blockchain. It enables real-time access to prior loss data, leading to smarter risk assessment; and has several compelling benefits. On the insurer's side, it would be able to gain from a higher price point in case the prior loss data indicates risk. The policyholder also enjoys a faster quote timeline, making it a hassle-free purchase process.

Use case II: Blockchain for insurance audits

The risk undertaken by commercial carrier covers a plethora of variables. Workers' compensation is a great one such example. Typically, worker's compensation is impacted by class codes, payroll numbers, employee groups, etc. – data that is complex and difficult to capture. A blockchain consolidates this information on a single network, operated by either the carrier or the policyholder. There is no need to enlist a separate broker to conduct audits, saving both parties vast amounts of costs.

The policyholder is confident in the audit's accuracy and can pay the premiums without any worry. And on the carrier's side, there is end-to-end visibility into an employee's movements, eliminating the chance of fraud. Given that worker's compensation insurance accounted for over $48 billion in 2018, accurate audits are central to the industry.

The Road Ahead

The first step to adopting blockchain is analyzing the insurance value chain to identify possible use cases. The technology landscape is fast maturing, and very soon, we can expect every leading carrier to leverage blockchain in some way or the other. Optimization of existing processes like policy pricing and insurance audits are an excellent starting line, paving the way for value-generating opportunities like index-based and P2P offerings.

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