Blockchain isn’t just about Bitcoin and cryptocurrency issues. It’s more about the technology for storing and distributing files. Putting it in a nutshell, Blockchain is a distributed database system in which records and transactions can be signed, exchanged and verified without the control of a central unit. Blockchain for the insurance industry will change our representation of some regular processes.
Thus, Blockchain provides a single source of the truth that is updated in real or near-real-time. And that’s what insurance organizations need for their work and to make it less bulky. Insurance and startups are using blockchain technology to prevent fraud, track the records, and more. Let’s find out how Blockchain and smart contracts are reshaping the insurance industry.
Short Intro to the World of Blockchain
Within the insurance industry, the claims and finance functions are high-value areas where Blockchain can come in handy. Blockchain has, indeed, many use cases for insurance. And the most practical one is a smart contract. According to the recent data the global smart contracts market will reach around $300k million by the end of 2023. It sounds impressive, doesn’t it?
Smart contracts are blockchain-enabled documents that have already changed the business world. In other words, smart contracts, as well as Blockchain itself, deliver bespoke digital opportunities that insurance companies must get right.
To find out what smart contracts stand for, we should understand the role of the blockchain first. Even though Bitcoin is the first thing that pops your mind when you hear Blockchain, there are other ways to use the technology and benefit from implementing it.
Blockchain is all about data distribution. This means that all transactions and document changes are automatically operated through the code without third-party mediators.
The blockchain technologies ensure that every transaction is executed and cannot be changed single-handedly. Each chain follows after the previous one to carry out the transaction and record any changes. Today, smart contracts aren’t built on Blockchain, they use Ethereum i.e. a distributed public blockchain-based network.
What Is a Smart Contract?
- A smart contract is a digital agreement between two or more people in the form of a computer code stored in a public database and cannot be modified or changed.
- The transactions are automatically processed and registered by the blockchain. This means there isn’t any third party to rely on.
- Since there is no intermediary, the transactions happen only when the conditions of the agreement are met.
Read more about blockchain.
Blockchain and Smart Contracts for the Insurance Industry
Let’s have a look at the common situation happening nearly to everyone who gets their homes insured. Sandra owns a house equipped with modern IoT devices, and she has got a smart contract with her insurance company. Yesterday she came back home and found out that there was a fire in her dining room that was stopped in time by firefighters.
What goes next? Thanks to smart contracts, all data from IoT devices is recorded on the Blockchain and can be automatically analyzed by the insurance company. It turns out that repair works on the street caused a massive gas leak in Sandra’s house. So there is no Sandra’s fault.
Thanks to smart contracts and IoT devices, the situation is clear as a day and no additional analysis of the case is needed since it’s clear that there’s no Sandra’s fault. Sandra automatically gets the money from the insurer to cover her damage caused by an accidental fire.
Perhaps, it’s a too simple case, but it illustrates the advantages of smart contracts without flaw:
- Precise risk evaluation thanks to detailed clients’ records
- Lower admin costs as there’s no need for the throng of underwriters
- Precise pricing when insurance companies know the risks, they know how to charge their clients
- Automated claims submission and processing
- Precise assessment and calculation of damage cost
- No more manual reviews are required
- Automatic payments in the case of an accident
Let’s have a look at a life insurance case. Life insurance smart contracts can be created and put into action between the insured and the insurer that will pay death benefits to the beneficiary when the insured passes away. Smart contracts can be connected to the death registries. In other words, the smart contract can automatically receive a notification on a person’s death and verify if the person is covered, initiate and settle the claim payment to the beneficiary.
Nowadays, in most cases, beneficiaries are not aware, if the person who kicked the bucket had insurance and hence they do not file a claim or file it too late. But smart contracts eliminates the need for claim submission as they can automatically process and settle payments.
In this case, blockchain technologies could make sure that beneficiaries get the payouts. With smart contracts, everything gets so simple – once the death is confirmed, the payment is made.
Benefits of Using Smart Contracts in the Insurance Industry
New technologies are prompting every insurance company to jump onto the bandwagon of new technologies and take advantage of new opportunities. Though smart contracts have recently entered the market, they’ve been already put to use. Let’s have a look at their benefits.
- More transparency, less fraud
- Saved time
- Protected policy documents
- Improved risk assessment
Since blockchain is a decentralized and open network, it offers a high level of transparency. Everyone can check the transaction recorded in a blockchain database. All parties will see if the contracts are changed or modified.
Thanks to the blockchain technologies, all smart contract claims are automated and rendered securely. Smart contract eliminates the need for human input and mediators bringing down the risk of manipulation and fraud by third-party participants. Moreover, when utilizing smart contracts, insurance companies can review processes and procedures much faster and more transparent.
Smart contracts are completely replacing the claims process in the insurance industry. No other documents are needed. Faster claiming procedures, increased efficiency, and lower costs.
The insurance companies can store policy documents in secure ledgers making it nearly possible to lose them. As a result, smart contracts prevent data damage and loss.
The blockchain technologies allow for adding risk assessment models into their smart contracts. Such models take advantage of ID systems based on Blockchain. Then IDs are instantly checked and supplemented with new data eliminating the need for conventional ID verification.
Blockchain has great potential within the insurance industry. The best thing about implementing blockchain and smart contracts into the insurance industry is having no middlemen. Eliminating the need for mediators saves a lot of money. Not only that, but the companies don’t have to trust their valuable data to anyone else.
With smart contracts, insurance companies can automate their policies and services, reduce admin and claim processing cost, increase transparency as well as credibility, and prevent fraud.
Feel free to contact us and be the first to implement new technologies in your insurance business!