Blockchain has the potential to create an environment of trust for insurers by providing a network with controlled access and a way to share valuable information securely, according to Marlene Dailey (pictured), a senior financial services analyst at RSM US, a specialist in tax, audit and consulting company.
“The great thing about blockchain is that it can have a transformative impact for the insurance industry,” Dailey said.
“Many insurers today are still slow to adopt this technology, but we are starting to see more and more companies create different proofs of concept and start leveraging blockchain in different ways.”
Dailey, who has 20 years of experience in the insurance industry, said the biggest application of blockchain so far has been around parametric triggers.
“If you have a flood or strong wind, a policy could be activated through a smart contract without any human involvement,” he said.
“If you meet all the parameters, then you could be paid immediately via the blockchain.”
Smart contracts are self-executing programs stored on a blockchain that are executed when predetermined conditions are met, making them valuable for parametric insurance products.
What are the benefits of using blockchain in insurance?
Many insurers are turning to blockchain technology to leverage real-time data to provide faster and cheaper solutions, according to Dailey, who said there could be significant benefits to using blockchain:
- Transparency
Due to the open and decentralized nature of the blockchain, anyone can view any transaction recorded in the database. When claims are moved to a blockchain-based ledger shared between operators within a peer-to-peer network, they cannot be easily changed. Insurers in the linked network can access historical claims information quickly and accurately.
“By using a blockchain, insurance companies share a single, trusted source of truth that can eventually reduce fraud and make claims management much easier,” Dailey said.
- Accurate risk score
Insurers and reinsurers that share access to the blockchain ledger can access data related to policies, premiums, and loss history, helping to simplify the underwriting process.
- Task automation
All processes related to smart contracts can be automated and processed securely using a blockchain, eliminating the need for human intervention in a claim. This efficiency could lead to cost savings for the insurer, which could translate into lower premiums over time. On the claims side, blockchain can power direct processing and initiate faster payments for policyholders.
What are the challenges with using blockchain in insurance?
The main challenge for companies adopting blockchain technology is obtaining clean data.
“I always say that data is like oil: unless it’s refined, it’s worthless,” Dailey said.
“That’s where I think a lot of insurers will find challenges, because even though they understand the technology and are making those investments in blockchain, cleaning data or pulling data from multiple legacy systems can become risky.”
Insurers are also at risk from regulatory uncertainty. It is not yet clear how regulation might affect the legality of smart contracts.
Finally, cybersecurity is a major concern. Although the blockchain can provide many security benefits, it is not completely secure by default. Closed or private blockchain networks are considered more secure compared to public blockchain networks that allow any user to join.
But threat actors could send phishing emails to obtain the parties’ private encryption keys, allowing them to create illegal transactions on a closed blockchain. They could also exploit weak endpoint security to access data stored on parties’ devices.
“As companies expand their digital footprint, cybersecurity will always be an issue,” Dailey said.
How can insurers take advantage of blockchain technology?
Companies that want to incorporate blockchain into their growth strategy can look to third-party vendors that specialize in implementing emerging technologies.
“The first thing I would say to insurers is that they don’t have to do it alone,” Dailey said. “It starts with data cleansing; That’s probably the hardest part when it comes to insurance.
“Many companies still have multiple legacy systems. Figuring out how to extract that data without impacting finances, as well as meet regulatory compliance, is always a challenge.”
Embracing new innovations always carries risks. But Dailey believes that the time has come for greater acceptance of blockchain within insurance.
“I think customer demands are changing. Everyone wants to have things at their fingertips,” Dailey said. “Insurance is no longer competing with other insurance companies, they are competing with retailers that can provide 24-hour service and immediate payments, so I think you will see more and more growth in leveraging smart technology.”
Do you think the industry will see more blockchain adoption this year? Leave your thoughts in the comments below.
