November 2, 2016
Last year, >$1.2 billion was invested in InsurTech startups – six times the amount invested in 2010, making the insurance industry one of the most exciting areas of innovation with the highest disruption potential for tech-powered startups. According to a 2015 report from WEF, The most imminent effects of disruption will be felt in the banking sector; however, the greatest impact of disruption is likely to be felt in the insurance sector.
But what does disruption in the insurance industry mean and how will it occur? The answer may be contained in the understanding of the role of blockchain technology in the future of insurance. The range of benefits that distributed ledger could carry for the insurance industry is vast and is being actively explored by industry professionals in order to capitalize on emerging opportunities.
Blockchain has been recently emphasized by the Institute of International Finance as one of the emerging technologies in the insurance industry due to the capability to increase automation and lower the cost of providing insurance. And since there is a whole ecosystem of InsurTech supporters and blockchain doesn't lack financial attention (among the 15 largest VC FinTech deals of 2016 so far, three went to blockchain startups), the inevitable shift towards tech-powered insurance may become a reality soon down the road.
One of the ways distributed ledger is expected to increase efficiency is by automating identity validation. As IFF explained, this would help address a key concern facing insurers when providing microinsurance in emerging markets — the lack of reliable ID papers among the population.
Moreover, IFF research also implies that by providing a universal source of truth that is tamper-proof, blockchain could also lead to increased efficiency — resulting from a reduction in human error, fraud, data duplication, processing delays, transaction and administrative costs and opaqueness — ultimately benefiting the end-consumer with better service and lower premiums.
Another aspect we have been emphasizing before is related to smart contracts, which – in conjunction with real-time data capture and recording – can be applied to automate the claims settlement. Claims can be verified by insurance agents and recorded on blockchain in order to trigger the right contract execution. Blockchain-powered automation can significantly reduce the time of settlement and streamline the operations in an efficient manner. Customers, in that case, would be the ones to benefit the most as the waiting time for payments would drop drastically.
A similar application has been noted by IFF, which suggests that smart contracts can enable individuals to purchase smart insurance contract products on their mobile phones that automatically deliver claim payouts when a predetermined condition is verified by an external data source.
There is a range of other important ways distributed ledger technology is believed to have a transformative effect on the insurance industry. Willis Towers Watson, a multinational risk management, insurance brokerage and advisory company, has recently summarized floating ideas on blockchain-powered revolution in the insurance industry in one chart:
Source: Willis Towers Watson Blog
The most important part of this chart explains the opportunity to reach the underserved. Although microinsurance by design was aimed to make insurance products more accessible for underserved, it has certain hurdles reaching that group of the world’s population.
Some of the challenges include the lack of reliable data and identification documents from the target population, the need for simple products that can be quickly bought on mobile devices, and the huge acquisition and administration costs associated with very low customer loyalty and a high volume of policy cancellations, as explained by WTW. Most of these issues can be mastered with completely mobile platforms that use smart contracts, as we have discussed before.
One of all six ways blockchain could disrupt, insurance has probably the most far-reaching implication – disintermediation. Professionals from WTW suggest that a decentralized consortium network of insurance carriers, which manages all of its transactions online, could eliminate the need for intermediaries for less complex coverages, e.g., auto insurance and mass-market products. Disintermediation in the insurance industry means structural transformation of the industry, its curation from mediators that may have a significant impact on end pricing and reach.
Automated identity validation across the network would significantly reduce the time and cost of providing the service and allow every insurer in the network to boost operational efficiency. In addition, compliance programmed into the blockchain would allow to automatically verify policyholders, service providers and claims.
While we have been looking at distributed ledger technology properties through the lens of the insurance industry, the same six ways can be applied to a broad spectrum of industries mainly because of three hallmarks of the blockchain technology – its decentralized, believed to be incorruptible and safe.