In our fast-moving world, innovative technologies have always affected the way businesses approach their operations by creating challenges and opportunities. Blockchain technology is no exception and insurance companies must adapt to take advantage of it before ending up as dinosaurs. The question is, how can insurance companies benefit from this opportunity?
To understand how blockchain can transform the insurance world, let us have a look at how insurance companies operate today.
Insurance companies offer insurance contracts to anyone willing to be hedged against a specific risk. Insurance contracts imply that the insurance company commits to compensating their clients for the damage they suffered as long as their clients pay an insurance premium. The insurance premium is computed by the insurance company considering a wide number of variables impacting the probability of the damage occurring.
Therefore, in case of damage, clients must provide proof of the occurrence and context of the damage while the insurer needs help from specialists in order to investigate the veracity of the compensation request. The entire process can be cumbersome, time-consuming, and expensive. This is a perfect example of where blockchain technology can bring solutions to improve the operations of insurance companies.
However, in order to exploit the technology at its fullest, companies must understand five of the key concepts of blockchain:
- Blockchain is a digital distributed ledger[1] that stores the same data across different locations instead of one central database.
- Blockchain is a peer-to-peer network which is a decentralized network created when two or more participants connect and share the resources enabling the facilitation of transactions without intermediaries.
- Blockchain uses cryptography (i.e. hashing and encryption) which is a method of protecting information using codes so that only those for whom the information is intended can read and process it.
- Blockchain uses consensus mechanisms which are algorithms used for the authentication and validation of new transactions on the distributed ledger.
- Blockchain allows the use of smart contracts, self-executing software programs which automatically perform some functions when certain variables are met.
For smart contracts to be usable in the insurance sector, the risks must be quantifiable, and contracts must contain parameters or thresholds at which contracts will execute themselves. Once the thresholds and parameters have been determined, to enable the contract to be executed, smart contracts on the blockchain need oracles[2] to retrieve data from the real world and incorporate it into the blockchain. Oracles can be softwares that will collect data mainly from websites or hardware like a movement sensor, a chip, etc. Once the oracles provide real-world data to the blockchain and thresholds are reached or parameters are met, smart contracts will self-execute and trigger a money transfer directly to the client.
Now let us imagine your flight to Bali for your summer holidays is canceled at the last minute. If you took a flight insurance from an insurance company that does not use smart contracts, you will need to call the insurance, the insurance will have to check if what you say is true, etc. This process could take multiple days or weeks before you receive your money back. On the contrary, if the insurance company uses smart contracts, as soon as the flight is canceled, the oracle will directly provide the information to the blockchain that will trigger the smart contract and directly transfer the money to your account. Blockchain technology adoption is becoming a must-have for insurers as the benefits of the technology are numerous. Firstly, it will allow insurance companies to be more agile with a faster response time when it comes to compensation. Secondly, this type of contract will reduce fraud from clients as they are based on facts and the technology eliminates human error. Thirdly, as no third parties are needed to fulfill the contract, this technology will cut costs on the insurance side which can lead to lower insurance premiums for their clients. Overall, the use of smart contracts’ will increase customer satisfaction and give insurers a competitive advantage over other insurance companies.
[1] Database
[2] Third-party services or softwares that provide external data to a smart contract on the blockchain
Assurances DeFi et décentralisées : tout savoir sur ces nouveaux types d’assurances (cryptoast.fr)
Smart Contracts in Insurance: A Complete Guide | ScienceSoft (scnsoft.com)
Smart Contracts In The Insurance Industry – Deltec Bank & Trust