Welcome to the sixth article in PYMNTS’ Blockchain in Action Series.
Most people at least know that blockchain is the technology that Bitcoin and other cryptocurrencies are built on, but a digital ledger that timestamps and orders transactions in an easily trackable and immutable way has a lot more uses.
In this Blockchain in Action Series article, we’ll look at how distributed ledger technology can make the massive, multiheaded insurance business faster, smarter and more accurate.
While the combination of legal complexity and the caution of a very traditional industry have made insurance firms slow adopters of blockchain technology, companies in the field have seen the potential benefits for a long time.
In the past two years, these projects have begun to make it out of the pilot stage.
Last January, the auto insurance divisions of State Farm and USAA launched a blockchain-based claims-settlement project to automate what they called “the time-consuming and paper-heavy processing of subrogation claims” — meaning the process of an insurer paying a customer’s insurance claim and then seeking reimbursement from the at-fault driver’s insurer.
The two companies deal with about 75,000 subrogation claims every year, State Farm said in a statement at the time.
“Carrier-to-carrier claims payments will be almost completely automated in the future, saving time and money,” said Sean Burgess, USAA’s chief claims officer. “Utilizing blockchain technology helps us securely improve and automate a manual process and ultimately gets money back to our members and customers faster.”
Speed is just one of the benefits, and probably not the biggest. Blockchain-based self-executing smart contracts that could pay damage claims between two insurers as soon as liability is determined and agreed upon to a shared, immutable — unchangeable — record could also drastically reduce the incidence of inaccuracies, improve record-checking and reconciliation, catch fraud, and use automation to ease the burden of checking and proving regulatory compliance.
Many of these problems are an inescapable byproduct of the staggering complexity of the industry, which makes errors, disagreements and delays a constant source of trouble and a staggering financial burden.
The ability of blockchain to provide a trusted source of information that can be checked, updated and shared in real time on a blockchain makes insurance a prime beneficiary of the technology.
Ripe for Change
“While blockchain technology has been subject to waves of extreme hype … its true killer applications are likely to be in some of the most antiquated fields out there,” research firm CB Insights wrote in an August 2021 research brief, “How Blockchain Is Disrupting Insurance.”
The key to this is twofold. First, once written onto a blockchain, information cannot be changed or deleted. Second, self-executing smart contracts that pay claims and complete other transactions take a lot of the processing middlemen out of the occasion, making the process faster and cheaper.
See more: DeFi Series: What Is a Smart Contract?
“Policies are often processed on paper contracts, which means claims and payments are error-prone and often require human supervision,” CB Insights said. “Compounding this is the inherent complexity of insurance, which involves consumers, brokers, insurers, and reinsurers, as well as insurance’s main product — risk. Each step in this collaborative process represents a potential point of failure in the overall system, where information can be lost, policies misinterpreted, and settlement times lengthened.”
Among the areas of the insurance industry that ripe for automation and disintermediation are:
Fraud detection and risk prevention. Putting claims on an immutable ledger can help reduce a prime source of fraud, which thrives on the complexity and confidentiality of insurance, and is estimated to cost more than $40 billion annually.
Property-and-casualty (P&C) insurance. A shared ledger and smart-contract-executed policies “can bring an order of magnitude improvement in efficiency to property and casualty insurance” including processing claims three to five times faster. Just automating claims processing with smart contracts could save $200 billion annually in a sector of insurance that brought in $1.6 trillion in premiums, according to McKinsey.
Reinsurance. Smart contracts can simplify and speed the flow of information and payments between insurers and reinsurers in an “extremely complex and notoriously inefficient,” process that often includes multiple reinsurers for each contract.
Health insurance. Medical records can be protected with cryptography and shared between health providers, improving patient outcomes without risking the loss or exposure of patient data. Among other things, blockchain can limit the sharing of specific data to specific groups. And lack of data causes insurance denials that cost hospitals more than $260 billion annually, CB Insights said.
A Milestone for Re
On April 6, one of the world’s largest insurers, Allianz, announced what it says is the world’s first legally binding reinsurance contract on the Blockchain Insurance Industry Initiative’s reinsurance network.
The placement of the catastrophe excess-of-loss (CatXoL) reinsurance policy with reinsurer Swiss Re is the culmination of a project that began in 2016 as an experimental blockchain project between a few insurers and grew into a company, B3i, owned by 21 insurance and reinsurance firms on five continents. Other members include Axa and Zurich Insurance— which like Allianz are top 10 insurance firms — as well as Munich Re, Liberty Mutual and China Pacific.
Reinsurance is the business of insuring insurers against massive losses — for example Hurricane Katrina, which caused $170 billion in damages when it struck New Orleans in 2005 — that no single company could absorb.
Calling the policy “a step into the future for Allianz,” Jan Stoermann, chief underwriting officer of Allianz Re, said, “We will explore how to further integrate B3i’s platform into our transactional processes such as accounting and claims management.”
And while the B3i Re network — one of five product lines — is built on the distributed-ledger technology (DLT) that is the foundation of blockchain, it is a milestone in the technology’s move into the mainstream business world.
It is, like the global shipping industry’s TradeLens platform, an enterprise blockchain, meaning unlike public blockchains, including Bitcoin and Ethereum, it requires permission to join.
Aside from meeting a stack of legal, regulatory and security requirements, the “participants can also recreate the contract directly from counterparties’ nodes, safe in the knowledge it cannot be changed, building the necessary resilience into their corporate systems,” B3i said in a release.
Accuracy in Action
Another is blockchain’s ability to get accurate data using oracles that provide data from a mutually agreeable trusted source that smart contracts can rely upon to execute.
Chainlink, the leading provider of oracle data — which is used extensively in decentralized finance, or DeFi, projects — recently gave the example of weather data from its AccuWeather feed being used to cause crop insurance to pay out to farmers if temperatures drop below a set level that would cause crop damage.
The biggest benefit of this use of blockchain technology in the insurance business is improved transparency, Chainlink said in December, arguing that it can “level the playing field for all stakeholders.”