What is Blockchain?
Blockchain in Insurance
- Ways to implement Blockchain in insurance
- Benefits of blockchain in insurance sector
- Challenges of implementing Blockchain in the insurance industry
Final Thoughts on Blockchain in Insurance
The global blockchain insurance market stands at a whopping $1393 billion dollars. This is one of the leading factors of large investments in the blockchain insurance and BFSI sector. The traditional ways of maintaining centralized information have proven to be inefficient, especially since the advent of revolutionary technologies such as Blockchain and Artificial Intelligence, amongst others. Blockchain, or distributed ledger technology, is proving to be a game-changer.
Let us have a look at what blockchain technology is and all the advantages it can deliver to insurance enterprises.
What is Blockchain?
Blockchain technology refers to a digital, decentralized public ledger that is connected to each other through a peer-to-peer network. These nodes or blocs are linked to each other via cryptography. Blockchain has multiple uses, but the most popular one is as a ledger. The decentralized character of the network also keeps control of the data for everyone; no single entity holds control over it. This enhances the security of data, protecting it from multiple cyber threats.
Blockchain networks are effective as each ‘block’ of information is ‘chained’ to the previous one in an immutable sequence through cryptography. If someone does try to access the blocks without proper authentication, The network rejects it and leaves a record of the breach.
Blockchain in Insurance
There were many applications of Blockchain in the financial markets, especially in banking and BFSI markets. The most recent trend, which is catching on like wildfire lately, is Blockchain in insurance. Blockchain development services in insurance are proving to be revolutionary in its wake.
With a single source of all information, transparency in business decisions and processes is more important than ever. Smart contracts, automated DLT networks, blockchain-led bfsi solutions and purchase history are some of how Blockchain can be implemented in the insurance sector.
Ways to implement Blockchain in insurance
Insurance, claims, and finance are the sectors that can benefit the most from blockchain technology.
Smart contracts and automated claims are one of the most efficient ways to digitize the financial industry. Smart contracts are digital contracts that execute on their own when certain conditions are met. Such contracts are gaining popularity.
They remove the requirement for middlemen to manage these contracts and are much more secure and reliable than traditional pen-and-paper contracts. Smart contracts are stored on the blockchain network, which is why they are immutable and cannot be manipulated, which maintains the integrity of the data.
Another notable industry is the reinsurance industry. Reinsurance is insurance that is availed and purchased by the insurance company to protect itself from big claims and major events. In layman’s terms, with reinsurance, an insurance company insures itself through a different company.
In the reinsurance industry, Blockchain allows primary insurers, reinsurers, brokers, and regulators to share high-value data and assets securely. It also helps automate many menial tasks such as modeling, audits, and compliance reports.
Peer-to-peer(P2P) insurance is a risk-sharing network for individuals who pool insurance premiums together to insure a risk. Peer-to-peer insurance further reduces the risk that accompanies traditional insurers and policyholders. This type of insurance is also called” social insurance” and allows insurance parties to pool their capital and administer their own insurance.
Automated Underwriting and KYC/AML Processes
The banking and insurance sectors deal with high-value transactions, which is why it becomes very important to have the right measures in place to verify customers’ identities. There are many regulations and checks that are designed to verify the identity of customers. KYC/AML, aka Know-Your-customer/Anti-money laundering processes, is one of them. Automating such processes simplifies the verification processes and provides an added layer of authentication for insurance transactions. It can be instrumental in verifying bank accounts and validating multiple records.
Benefits of blockchain in insurance sector
There are many pros to integrating blockchain technology in insurance companies. They are:
Transparency and trust-building
First and foremost, Blockchain delivers a transparent and decentralized ledger that is accessible to all involved parties. This transparency helps in building trust between the various stakeholders of a blockchain transaction. The network provides consistent, immutable access to the data.
Blockchain’s immutability ensures that once data is recorded, it cannot be altered or deleted. This feature can help prevent fraud by providing a reliable and tamper-proof record of transactions and policy details.
Blockchain is instrumental in reducing the need for manpower and is a great advantage in the era of skilled labor. Claim processing, policy enforcement, and premium payments are some processes that are being automated with this technology.
Efficiency and cost reduction
Automating various administrative tasks and reducing paperwork and manual processes increase efficiency while reducing costs by a fraction. Cost savings further help insurance companies provide competitive pricing to their customers.
When an application is implemented with Blockchain, its data is secured via cryptographic techniques. Decentralization, accompanied by encryption, protects all data from hacking and cyber-attacks.
Quicker processing of claims and better customer experience
The Blockchain’s automation and openness can greatly expedite the claims process. The time and administrative strain involved in processing traditional claims can be decreased by using smart contracts, which can initiate automated reimbursements based on predetermined parameters.
Blockchain offers an auditable and transparent transaction record, which can help with regulatory compliance. This can lower the possibility of regulatory fines and streamline compliance reporting.
Immutable Audit Trail
On a blockchain, each transaction is permanently and sequentially recorded. In the process, an audit trail is created that may be helpful for internal inquiries, regulatory audits, or dispute settlement.
While Blockchain presents significant advantages, it’s essential to consider the challenges and complexities associated with its implementation, such as regulatory hurdles, interoperability, and industry-wide adoption.
Challenges of implementing Blockchain in the insurance industry
Many technologies, when implemented into an industry, are often accompanied by risks. These risks come from different avenues such as regulations, business, technical, and social. Let us have a look at them.
Social factors are one of the biggest challenges to blockchain implementation in external environments. There are many social factors, such as gender, age, educational level, demographic needs, etc, that contribute to deterrence in the implementation of Blockchain in the insurance industry. These factors play a key role in the adoption of blockchain technology. There is a lot of skepticism associated with the transition to Blockchain-led insurance services. Special attention to mitigating these fears and ensuring data privacy and security is crucial to reinstating clients’ faith in this.
There are many architectural and design limitations when it comes to implementing blockchain insurance. These limitations differ for each industry and range from infrastructural needs to tech skill requirements. Similar to many new technologies, widespread solutions to these limitations are still in their infancy. Integration with legacy systems is another big challenge when it comes to integrating Blockchain within insurance businesses.
Economic trends also greatly contribute to the success of the integration of Blockchain in the insurance industry. Market liquidity, business models, and various economic regulations are dynamic and keep changing. It becomes difficult to keep track of these changing market scenarios and make sure the technology is in accordance with them.
There are also environmental aspects to consider when implementing Blockchain in this industry. Industry status, organizational considerations, and energy consumption are a few environmental factors to consider once a business’s insurance services are integrated with Blockchain.
Allianz and Accenture are excellent blockchain in insurance use cases that have recognized this challenge and dealt with it in a unique way. Accenture has developed a blockchain-based proof of concept that leverages data from sensors and allows vineyard insurance. Allianz, on the other hand, has reinvented the contract management process with smart contracts and has shifted to digital contracts.
Costs and ROI Concerns
Implementing blockchain technology involves significant upfront costs. Small and medium-sized companies are often hesitant to invest without a clear understanding of the return on investment (ROI) and the long-term benefits. Though initial costs are high, returns are worth the investment. However, this fact is harder to believe as the industry is still in its infancy and lacks reliable records of its success.
Final Thoughts on Blockchain in Insurance
While many industries are digitally transforming themselves with Blockchain, the insurance sector is one of the first companies to do so. The benefits of blockchains outweigh their challenges, which is a big motivation for insurance companies to invest in them. The demand for a reliable fintech blockchain development provider has also gone up, with fewer companies providing trustworthy services.
OpenXcell, on the other hand, is an excellent example of a fintech development company specializing in blockchain services. The company boasts of a rich portfolio of blockchain products delivered to clients globally. The blockchain products created by the company have been a success and have become standard for robustness and versatility.