4 Ways Blockchain May Benefit Insurance
What’s blockchain? According to Haden Kirkpatrick at IoT Agenda, it’s just a “relatively new concept making waves across the tech scene,” which “could revolutionize the way we buy and pay for insurance.”
We tend to agree. Let’s explore the possibilities.
How does blockchain work?
Blockchain is powered by something called distributed ledger technology. Ledgers are (quite literally) as old as history. The earliest written records known to humankind were invented to track goods in, goods out. They were written on clay. They recorded transactions and inventories. They were ledgers.
Fast-forward several thousands of years, and you’ve got distributed ledgers, which use digital technology to record transactions “in multiple places at the same time,” with “no central data store or administration functionality,” according to Sue Troy and Mary K. Pratt at TechTarget. Every node of a digital ledger processes every datum, building a decentralized consensus on its veracity.
This is a major shift from how ledgers have historically worked. They’ve always required some central authority to review and validate the data they contain. Distributed ledger technology tosses that model to the curb, using “cryptography, advanced algorithms … and near-ubiquitous computational power” to store, process, and validate records in a decentralized way.
Which brings us to blockchain, “probably the best-known type of distributed ledger technology,” Troy and Pratt said. It got its name for bundling transactions into blocks, chaining those together, and broadcasting them to the ledger’s nodes, where they can be processed and verified.
Why does it matter?
Blockchain holds a ton of potential for the insurance industry.
By removing the need for centralized data storage and verification, it speeds up transactions and reduces their cost. It also improves security: in order to manipulate it, cybercriminals would have to hack every node of a vast network. “Most importantly, these ledgers are changing the way we communicate and gather information,” Kirkpatrick said.
It’s doing so by replacing traditional contracts with smart ones. “A smart contract … is a computer program that directly controls the transfer of digital currencies or assets between parties under certain conditions,” said Francesca Sales at TechTarget.
Just as a traditional contract does, a smart contract defines all the terms and penalties of an agreement between the insurer and the insured. The difference is that a smart contract can actually detect when those rules are met (or not) and automate the actions that follow. Late payment? Late fee. Great driving score? Premium discount. No administration necessary.
The benefits follow from there.
- Transparency, efficiency. Blockchain houses smart contracts on many ledgers, where any authorized party can access, evaluate, and make changes to an agreement on the fly.
- Claims speed & automation. A smart contract can be configured to verify a valid claim automatically, speeding up the process.
- Fraud prevention. It can also detect fraudulent activity. For example, if multiple claims are filed for one incident, it can catch that. It can also authenticate police reports and purchases, Kirkpatrick said.
- Usage-based insurance (UBI). Because smart contracts are designed to perform automated actions in response to defined events, it’s a great fit for UBI. Connect the contract to a policyholder’s telematics device, and their behavior will directly impact their perks according to the terms you’ve created – no delay, no hands-on.
Worth a look? Absolutely. As we’ve told you before, insurance is poised to change more in the next three years than it has in the previous 30. Blockchain is just one more example. Of course, an agile policy administration system is essential for adapting to all the emerging trends. Request a demo to learn more about Silvervine.