Insurance

In recent years, insurance companies large and small from around the world have made great strides in digitizing their businesses. This has resulted in efficiency savings that have led these companies to look for more opportunities in this area.

Blockchain, and the different technologies it encompasses, are the next step for insurers who have embraced the benefits of digitization already. It enables them to not only continue their efficiency gains but also to solve collaboration and coordination issues, and even transform entire insurance business models.

To do all of this, it’s important to understand the most important elements of blockchain and the benefits provided.

The digital ledger is where data is stored when it relates to accounts of transactions and a digital ledger that is distributed amongst a network of computers is often referred to as Distributed Ledger Technology or DLT.

Blockchains are a design choice when it comes to storing this transactional data in a distributed way. In the case of most blockchains, transactions are broadcast to the network, bundled up into blocks, which are linked in a chain and confirmed as part of a consensus mechanism. Two of the best-known consensus mechanisms are Proof-of-Work and Proof-of-Stake.

A trustless exchange of value occurs when two parties are able to exchange value within a network without going through a centralized and trusted party to confirm the transaction. 

In many networks, such as those operated by large corporations across technology and finance today, nodes know they can trust one another because they are operated by the same centralized entity. Blockchain technology was developed as an alternative to these systems, so nodes that are not connected and do not know each other could transact and be sure that the transaction is agreed by all.

The type of data that a blockchain records is transactional data and these transactions involve digital assets or tokens moving from one address to another. A blockchain usually has a native token, such as bitcoin for Bitcoin or ether for Ethereum, and may have non-native tokens, such as stablecoins.

A smart contract can be thought of as a simple application built on a blockchain. It is lines of code that are included in one of the digital transactions that blockchains are used to record. When multiple smart contracts interact with each other to provide a valuable service, this is usually referred to as a decentralized application.

Public blockchains, such as Ethereum, are permissionless in the sense that anyone can take part in the transaction processes described above, including moving tokens, confirming transactions and recording data on the blockchain.

Private blockchains are different in the sense that access to these processes are not open to everyone. With a private blockchain, there will be some level of control by a centralized entity or by a number of entities that means the blockchain is not public or permissionless. 

Blockchain can be used to solve coordination and collaboration issues across various insurance categories.

• Property & Casualty Insurance
• Fraud Detection 
• Health Insurance 
• Life Insurance 
• Travel Insurance 
• Reinsurance 
• Insuring Digital Assets 

Property and Casualty (P&C) insurance plays a critical role in providing cover on assets such as real estate, equipment and infrastructure, as well as liability insurance for accidents and injuries. 

These types of insurance usually involve gathering data to evaluate the validity and applicability of claims. Insurers must determine whether the conditions in the policy have been met and that damages are due. This can involve manual data entry, examination and coordination between several different parties.

Smart contracts can automate various steps in the claims process. For example, when a claim is submitted to an insurer, a smart contract can automatically confirm the customer has valid coverage and send this confirmation to the entity responsible for calculating damages liability. 

One notable example of where blockchain has already helped within this category is the system built by State Farm and USAA for settling auto subrogation claims. The companies share a digital ledger that keeps a record of what is owed, then this record is used to net out payments and enable a single payment on a regular basis.

The complexity of the insurance industry practically guarantees oversight gaps, which bad actors can exploit to commit fraud. The connections between insurees, insurers and reinsurers can involve a lot of paperwork and the slowness in coordinating this information sharing can be taken advantage of. Such issues include filing the same claim with multiple insurers in a scheme known as double-dipping.

One of blockchain’s main strengths is enabling better coordination among stakeholders about what the single source of truth should be. This would go a long way to reducing the existing attacks that take advantage of oversight gaps because blockchain can provide a highly secure, transparent and traceable record of claims that can be verified easily by different parties. 

Also, blockchain-based systems have the potential to protect Personal Identifying Information (PII) through the use of zero-knowledge proofs. Zero-knowledge proofs solve the problem of PII being vulnerable to hacks when stored in centralized databases by eliminating the need to reveal information to prove the validity of claims. 

The health insurance industry faces two main problems: keeping secure medical records with personal identifying information (PII) and coordinating this information among disparate stakeholders who require access.

As patient confidentiality is key, insurance providers may not even be able to access patients' medical history. This lack of data can contribute to claims being denied initially. While many of these initially-declined claims are recoverable, a lot of time and money can be lost in appeals-related administrative costs. Also, siloed data can cause extra friction between patients, providers and insurance companies during many healthcare procedures. 

Blockchain and zero knowledge proofs can provide a transparent, traceable and secure network for sensitive information like PII. Additionally, blockchain-based systems facilitate granular access to data and even allow control of medical data to reside with patients.

There have already been a number of blockchain implementations within health insurance, with MetLife’s Vitana solution being one of them. It aims ​​to assist patients with Gestational Diabetes Mellitus (GDM), a form of diabetes that develops in pregnancy, via a mobile app and blockchain back-end, which serves as a single source of truth for all parties.

This category of insurance involves the insurer agreeing to pay a lump sum in the event of someone’s death to whoever the policyholder chooses. This is obviously a traumatic process for the bereaved person’s friends or family but they must make the claim as quickly as possible, so the insurer can confirm the circumstances, access the government-issued death certificate and validate the claim.

When you consider the number of parties that might be involved at the moment when an individual dies, from hospitals to care homes and workplaces or commercial businesses, confirming the details of a death can be complex.

Blockchain technology and smart contracts in particular can help to streamline this process, coordinating the claim registration process and providing all parties with a single source of truth about the events that occurred.

Claims have always been a pain point within travel insurance, with consumers feeling frustrated by the requirements for evidence to back up their case and the time they can wait to hear a response. On the insurer's side, investigating and proving the validity of a claim is often not easy, as they need to coordinate evidence gathering with different parties.

Blockchain can help to streamline all of these processes by providing an immutable ledger where information can be accessed and trusted by all parties. When data related to a specific claim can be accessed via APIs, smart contracts can be used to speed up or completely automate payouts.

One of the best known blockchain-enabled travel insurance solutions to have been developed in recent years was Fizzy, which was backed by Axa. It was an automated and secure platform for parametric insurance against delayed flights, which used a smart contract to receive up-to-date flight information and payout automatically if a flight was delayed by more than two hours. 

Reinsurance is insurance for insurers. It becomes important when an insurer starts to write a lot of policies and increases their exposure to potential payouts. If an unforeseen event hits and the insurer needs to payout more than it expected in a short period of time, reinsuring the insurance premiums they have written can be an important protection.

Data sharing among insurers and reinsurance companies is complex, time consuming and involves inefficient manual work. The root causes of friction within this process are risk underwriting, policy and premium management, claims handling and financial settlement.

Blockchain can be used to streamline the flow of information within the reinsurance market, providing an immutable ledger that serves as a single source of truth for all parties, which can be used by smart contracts to reconcile contracts between insurers. 

Insurance for Bitcoin, Ethereum and other assets that exist on blockchain networks might include straightforward agreements around how assets are custodied and whether policyholders are paid out if custody breaks down. 

Alternatively, they could also be crypto-native solutions that use blockchain technology to pool capital, agree policy contracts and implement claims processes to operate ‘on chain’. This can involve insuring digital assets themselves or the technologies and processes that are inherent to blockchain networks and applications.

There are now a growing number of these ‘crypto-native’ insurance solutions in place. One of the best-known is Nexus Mutual, which describes itself as a decentralized alternative to insurance. It enables users to buy insurance to cover against risks and bugs in smart contracts, which have caused token holders to lose millions of dollars of value in the past.