Blockchain Insurance - New Opportunities or Threat

Hi, Geektimes! Global trends suggest that blockchain technology attracts not only individual companies, but also entire business sectors. The developers of the Wirex blockchain service came across the report of the consulting company McKinsey, devoted to the possibilities and problems of using the blockchain in the insurance industry. For us, this report is doubly relevant due to the imminent launch of our new solution - the decentralized insurance platform Inchain, which operates on the basis of smart contracts Ethereum. Inchain allows users to insure their cryptoactive assets that are in the account, for example, some exchange. At the same time, the insurance fund is controlled by the holders of the Inchain tokens.

The stability of the platform is provided by the DAO-like management of the insurance fund, when Inchain token holders vote for decisions and can make their proposals. Everyone knows the bad experience of The DAO, which led to the Ethereum hard forks. At Inchain, we intend to take this experience into account and implement the DAO mechanism so that, on the one hand, we provide participants with an effective voting tool, and on the other hand, we can exclude the possibility of withdrawing funds from Inchain DAO. You can learn more about technology from our Whitepaper and in the Pre-annonce post on bitcointalk.org .

Further, on the basis of the report of the consulting company McKinsey, we suggest understanding the prospects of blockchain technology in the insurance industry.

Possible scenarios for using blockchain in insurance

Representatives of the banking industry are currently attempting to practically implement several blockchain use scenarios: from developing the technology of direct customer interaction with the payment system to launching trading systems on the exchange and currency exchange. Despite the fact that the insurance industry is lagging behind the banking industry in terms of technology, it is, nevertheless, in a unique position, allowing it to feel the full benefits of the blockchain. The new technology can help many industry players to cope with competitive challenges, including such as weak customer interest in insurance products, limited growth in developed markets, and the tendency of a general transition to digital technology. Below is a general description of the most promising scenarios for blockchain use in terms of insurance. We divide them into three categories: ensuring growth, increasing efficiency and reducing costs by automating key processes.
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Growth opportunities through product and service upgrades

There are at least three ways to use the blockchain, opening up new growth opportunities for insurance companies: improving customer interest, offering new cost-effective products for emerging markets, and developing insurance products related to the “Internet of things”. The key to success lies in the creation of a reliable distributed platform based on the new technology for direct work of clients with their personal data, collective insurance policies and smart contracts.

Increase customer interest . An important tool for influencing customers to increase their interest in the company's services will be to take advantage of the blockchain for working with their personal information. Fear of customers losing control over their personal data at the time of their transfer to the company and dissatisfaction with the need to regularly respond to the same questions can be eliminated using a separate blockchain to verify customer data directly managed by them.

It is not necessary to store personal information in the blockchain itself. It will remain on user devices. In the registry, however, only confirmation of its authenticity will be preserved, for example, a doctor’s report or other related transactions (medical examination with date). The scale of the system in such cases allows you to extract maximum benefit from the blockchain, since the new technology allows a large number of participants to access the data at any time convenient for them.

"Accelerating and simplifying the procedure for accepting new customers" - an example from practice in the field of checking customer loyalty

Startups like Tradle are working on blockchain solutions to verify customer data (know your client (KYC) for authenticity and reliability). This procedure requires the customer to agree to all necessary data checks to close the contract. As soon as the customer profile has been verified, it is able to send verified identification data to other companies for signing new contracts using the same tool, avoiding the need to re-run the entire verification process. magnifies the effectiveness of the process of accepting new customers.

“Each bank can use this network to eliminate a number of customer checks performed today. But even before the emergence of a network as such, each bank practices customer checks between different products, departments and branches. Useful information on the results of these checks remains closed to other departments and divisions of the bank. At the same time, the cost of carrying out such procedures is very high, ”said Tradle founder Gene Wayngrib in an interview with IBTimes.

Wayngrib proposed a blockchain system capable of storing client check data and simplifying work with them. The capabilities of the system can be extended to test clients for compliance with anti-money laundering legislation. The company's solution also supports the use of smart contracts that process the data.

“Instead of having to send the regulator the entire set of customer data, banks will have the opportunity to show the regulator that they have automated anti-money laundering checks that notify the bank of all suspicious transactions,” says Wayngrib. - This method of conducting an audit allows you to maximally respect the rights of a bank’s client for personal integrity. That is, regulators receive all the necessary information about suspicious transactions, and banks, in turn, get rid of the need to send a large amount of raw personal information to customers. ”

Another way to improve customer interest is to increase transparency, as well as providing consumer-friendly pricing schemes and insurance payment mechanisms. For example, the InsureETH startup demonstrated a blockchain-based aviation insurance scheme for passengers using smart contracts. Smart contracts automatically initiate insurance payments in case of cancellation or delay of flights. Flight information comes from confirmed sources and is processed using so-called oracles, which adapt data from external sources for their subsequent use in the blockchain. Despite the fact that collective insurance as a business model has long been widespread and high-quality implementation using standard technologies, the blockchain, thanks to its decentralized nature, will make it even more transparent and understandable for consumers. As for insurance service providers, for them the benefit of the blockchain is in automating workflows.

Regardless of the context of application of smart contracts, in conjunction with the blockchain, they offer a number of advantages: they allow you to automate the satisfaction of claims for insurance payments, offer a reliable and transparent payment organization mechanism for all parties and can be used to individually and fine-tune the conditions of each individual contract. For example, in the case of a car accident, a smart contract can guarantee that the payment will be made only if the car is repaired at a service station that was chosen in advance by the insurer or more convenient for it. Despite the possibility of implementing such programs without the use of blockchain, the platform of smart contracts based on new technology can provide unique advantages. It not only guarantees increased customer transparency and trust by decentralizing and automating data verification and validation, but also provides a tangible network effect that is not available with centralized platforms.

"Automating the assessment of customer solvency and claims settlement" - an example from the practice in the field of smart contracts

Dynamis provides collective insurance services through smart contracts based on the Ethereum platform. The company's main service is subsidiary unemployment insurance, which uses LinkedIn as a reputation system. Applicants for a new policy can use LinkedIn to verify their identity and employment information. Presenters can use their LinkedIn links to confirm that they are looking for a job. The use of social capital in the framework of the social network allows participants to get a new policy or satisfy insurance requirements.

Emerging markets . In developing countries, blockchains and smart contracts can be applied in the field of microinsurance, allowing you to automate the process of signing policies and satisfying claims for insurance payments based on certain rules and the availability of reliable information sources. Payments to insured farmers, for example, can be initiated when drought information is received from authoritative weather or climate databases.

Internet of things . This application of decentralized technology will allow machines, electronic devices or home appliances to get their own insurance policies, recorded and managed through smart contracts in the blockchain network. This will automatically determine the amount of damage caused to them and initiate the process of repair and insurance payments.

Improved cost-effectiveness and improved fraud detection

By some estimates, from 5 to 10% of claims for insurance payments are fraud attempts. According to the FBI, these cases cost insurance companies (with the exception of medical insurers) more than $ 40 billion a year. To improve the detection of cases of fraud, falsification of information about bodily harm or property damage, the possibility of creating a special blockchain database that will serve as a single distributed register for the entire industry, containing both external data and customer information, is being considered. This will allow:

• Verify the identity of customers, the authenticity of their documents (medical records), ownership and verify the origin of funds in their account.
• Check for applications of theft and other similar documents to the police, detect fraudulent inclinations of individuals.
• Confirm the date and time of issue of policies or purchases of products and assets.
• Confirm data on the change of ownership of the property or change its location.

In any case, in order to feel all the benefits of using blockchain applications instead of traditional solutions and existing forms of cooperation, such as industry associations, will require intensive cooperation between insurers, producers, consumers and other interested parties. An example of a car connected to the blockchain base is an early demonstration of a new emerging ecosystem today, whose existence goes beyond the traditional insurance industry.

“Simplification of fraud detection mechanisms” - an example of using in the field of checking the originality of goods and consumer products

Blockverify is one of the startups working on solutions designed to combat fraud. The tool created by the company allows users to check products for fraud, deviations from the delivery route, theft or fraudulent transactions. According to information posted on the official website, the development of Blockverify has already been tested on electronics, pharmaceutical products and luxury goods. Protection of originality is achieved by sticking special labels on goods, which allow to place information about the product and its position in the logistic blockchain chain and read it from there.

In the light of the conversation about the Internet of Things and mentioning the company, whose activity is based on the principles of the economy of mutual aid (Uber, Airbnb), it is worth noting the recently popular “insurance upon use” and “insurance based on sensor readings”. Especially great momentum gained auto insurance, based on data on the mileage of the car. This shows that the blockchain can be successfully applied in applications that register the right to use this or that property or monitor information about the health of the policy holder, allowing smart contracts to calculate or update tariffs. Again, a key advantage of such an approach would be the ability to store clients' personal information available on their side to verify and provide access to it to third-party companies only with their personal consent.

Reduced administrative costs

The blockchain can be useful for reducing administrative or operational costs due to automated verification of the policy holder’s identity and the validity of the contract with him, registration of claims for insurance payments, verification of data from third parties (for example, an encrypted transmission of data between a doctor and an injured person). confirmation of the need to pay) using blockchain-based payment infrastructure and smart contracts. For example, providing reinsurers with controlled access to data on insurance claims and payment history recorded in the blockchain will make the process of working with them transparent for all parties and at the same time fully manageable.

Conditions and factors limiting the use of blockchain

The expediency of practical use of the blockchain depends on certain conditions. If current transactions involve a large number of parties and require not only confidence in the intermediary, but also accurate and not amenable to subsequent changes in the records, the blockchain will allow to exclude the intermediary. It can also be useful in situations where the parties involved in a transaction are competitors. Retrospective interference with data creates risks when the same asset is used simultaneously by several participants or in the absence of a single trusted control center.

However, there are also conditions under which the blockchain is almost certainly an inappropriate solution. For example, such situations when only a limited number of parties participate in a transaction and they either do not need an intermediary or an authoritative and reliable intermediary already exists. In this case, insurance companies can continue to work within the framework of current operating models.

Before taking any specific actions, companies need to familiarize themselves with the limitations imposed by the new technology in terms of scalability, security, and standardization capabilities.

Scalable . Due to the use of a consensus mechanism for authentication and regular replication, as well as an infinitely growing amount of data not subject to any change, the scalability of blockchain systems is not an easy task. Even with the latest improvements in the blockchain scheme, which have significantly improved its performance, the technology still remains unsuitable for solving such tasks as working with high-speed or volumetric operations, the need to capture information in real time or store large amounts of data.

Safety Recent incidents have shown that in the blockchain ecosystem there is a constant risk of new types of attacks. This aspect of the issue has been studied much worse than any other aspects of the new technology and therefore there are far fewer ways offered to reduce the associated risks than in the case of traditional database architectures.

Standardization . Standards are key to assessing the long-term benefits of using open, collective or distributed systems. The lack of standards or proven, successfully applied in practice basic implementations of technology, suggests that it is still in the early stages of its development. Thus, in the case of blockchain, there is an increased risk that the implemented solution will be ineffective. The need for preliminary preparation of basic examples of use by defining and legally setting industry standards will also be high. In view of the foregoing, appropriate investment decisions should be made with great care.

Indicative forecasts for the industry and individual insurance companies

In general, the blockchain technology in its present form is quite suitable for study and research by insurance companies. However, its full operation is still far away. This is due to the fact that the blockchain is a distributed system, and therefore its value largely depends on the effective cooperation of players with competitors, suppliers and other parties. In fact, the blockchain is an investment in information technology with the prospect of full realization of all its advantages within five years. In some applications that do not have such an acute need for distributed blockchain mechanisms, there are alternative solutions that can provide similar benefits much faster. On the other hand, even despite the lack of reference examples of technology implementation, the blockchain opens unique perspectives for those industry players who can meet the needs of emerging markets with the help of collective microlending, develop solutions for the Internet of things market or participate productively in sharing data with other stakeholders The goal is to improve the fraud detection system or automate the processing of insurance claims.

For the industry as a whole, this means that the time has come to establish a consortium, whose participants should be technology experts, start-ups, regulators and other market participants. The purpose of this association should be to identify the challenges that the blockchain and its open and decentralized nature throws to the insurance industry. Other challenges include technological constraints, as well as market, legal, regulatory (who will be subject to regulation in the absence of a middleman or boundaries between markets) and operational requirements for, for example, data protection and standardization.

Individual insurance companies should start with a holistic view of the real needs of customers and their own vulnerabilities. This will allow us to assess exactly where the application of the new technology can bring them real benefits. Being an innovative technology, blockchain is a threat to many market players, because it creates opportunities for the emergence of new revolutionary business models and / or a significant reduction in operating costs for those companies that will successfully achieve its practical application. Nevertheless, there are a number of possibilities to eliminate this threat. Adopting start-ups' working methods, concluding partnership agreements with them or acquiring them can help in the fight for innovation. The key to shaping the future of blockchain-ecosystem insurance will be the early participation of companies in partnership projects and industry associations.

Blockchain is a digital conversion technology of strategic interest to insurance market players. The biggest obstacles to the widespread use of technology in the insurance industry are the need to stimulate cooperation between market participants and technology leaders, the need for successful operational transformations and the creation of a favorable regulatory environment. Laying the foundation for solving these problems today will allow insurance companies to realize full-scale scenarios of their own practical application of technology and to profit from its advantages over the next five years.

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