Long predicated on trusted relationships between people, the insurance industry is ripe for disruption. However, innovations like blockchain technology are not necessarily bad for insurance workers. Blockchain in particular represents an amazing opportunity for the insurance industry at large to redefine the value it delivers to customers – the essence of any worthwhile transformation.
Non-traditional startups are eyeing blockchain as a driver for new business models. Established insurers and re-insurers are attracted to anything that promises to improve operations for greater efficiencies and reduced costs, boosting customer satisfaction along with the bottom line. Here is how Stefan Schmidt, solution manager at SAP for Insurance, recently summarized the industry’s situation:
“Digital transformation changes customer relationships as people can go online and use their mobile devices to select and accept insurance contracts without the direct involvement of a person. This transforms how insurance companies compete, the role of insurance representatives, and operational costs. Using the right technology, insurers can provide the same contract at a lower price for customers and higher margin for the company.”
According to Schmidt, blockchain has the potential to streamline processes like automatic payments, claim initiation and management, risk transfer, and micro insurance across a trusted network of participants – whether public or private. One of the biggest promises this technology offers insurers is the opportunity to lower the cost per contract.
“Every member of the network has the same tamper-proof information at the same time, and can trust that it’s accurate and approved automatically by the built-in algorithms,” Schmidt explained. “It’s not possible to easily destroy or change data in a distributed ledger, so people can be sure that the stored information is correct without any manual review required.”
Schmidt described one scenario of a farmer with a smart contract for crop insurance. The blockchain technology triggers a fully automated claim and payment process. Algorithms automatically check GPS and weather station data based on the location of the farmer’s fields, allowing the insurance company to cost-effectively calculate risk and contract terms initially, and manage claims over time. Eliminating what was a labor-intensive process saves the insurer time and money, and not only because it’s faster. Automation mitigates the risk of human error. This has the potential to reduce fraud while streamlining claim payments.
Like any disruptive technology, the cascading impact on standards, data governance,and regulatory compliance is huge. “Blockchain can only work if a group of insurers and customers standardize and simplify contracts,” said Schmidt. “We’ll need new processes, governance and standards.”
Near term, Schmidt sees the blockchain most applicable in less complex insurance contracts like crop, transport, or hurricane insurance, which typically have more known data around risk variables (e.g., IoT, GPS, weather conditions).
“Blockchain doesn’t change the insurance business completely. It’s a new element in the future architecture of insurance companies,” he said. “Blockchain is likeliest best for a certain kind of contract and transaction – a piece of the process. You cannot use it for storage and selection of a huge amount of data.”
Will the blockchain redefine the entire insurance industry? Probably not right away, but it has strong potential to redefine what customers can expect, opening up opportunities for entirely new industry players and workers with higher value skills. At the very least, companies and their policyholders can look forward to digital handshakes powering more efficient protection behind the scenes.
For more on how blockchain is poised to shape the future of fintech, see Blockchain: Time To Get Your Feet Wet.