In this article, we will discuss the potential benefits of implementing blockchain and Distributed Ledger Technologies (DLTs) in the insurance industry. We will explore how these new technologies can help the insurance industry create efficiencies both for itself and its participants, by automating various phases in the life cycle of a simple insurance contract. Automation of the different processes can be accomplished through the use of smart contracts and oracles (oracles are third-party data sources that supply unbiased and critical decision-making information to blockchains).
Project in Insurance/Reinsurance
The purpose of my initial research was to identify use-cases and applications for Atlas 3T’s blockchain/DLT solution, smart contracts and associated wallet - within the property & casualty insurance sector. To further support the go-to-market strategy, it was imperative to understand and map out existing blockchain/DLT offerings and current industry processes.
The insurance value chain was separated into three distinct phases for the purpose of the research, starting at the underwriting and policy issuance stage; then moving into phase 2 — during which the insurer would either reinsure itself, invest the funds generated or create collateralised securities using a Special Purpose Vehicle (SPV). The 3rd and final phase of the process dealt with the claim filing, processing and settlement stage of a simple insurance policy.
We further identified for each of these phases, the current pain points, use-cases for processes within these phases, benefits of blockchain along with what capacity it is currently being used in, key actors, important oracles, regulations and any ICOs conducted for the identified use-case.
Prioritisation & results
We developed key strategic and tactical criteria, based on input from the senior management at Atlas 3T, which we used to assess and prioritize the business case areas.
Tactical Criteria — identify standard processes which can be uniformly automated, across a wide variety of insurance contracts using smart contracts and identifiable oracles for rules-based processes.
E.g. initial insurance or quote request know your customer/anti-money laundering, lifecycle documentation, policy issuance, premium calculations/collections and presenting proof of insurance.
Strategic Criteria — identify processes which can produce tangible benefits for the industry and stakeholders but have a large enough market size, clearly defined regulation and ample partnership opportunities.
The following areas present the biggest opportunity for Atlas 3T:
- - KYC/AML process (know your customer & anti-money laundering)
- - Proof of insurance
- - Claim submission and loss assessment
- - Claim approval and processing
The areas identified were then ranked according to the strategic and tactical criteria, relative to each other, and an action plan was created. This was then supplemented with additional data gathered from strategic partners.
Recommendations & Rationale
KYC/AML — Although KYC/AML seemed like an attractive area for deployment, the additional complexity was the legal framework involved in the process. Without legal expertise, this area would be difficult to enter without a partner for Atlas 3T on a stand-alone basis. It would be prudent to find a law firm with expertise in this area to partner with.
Proof of insurance — This is a straightforward application and ideal use case for blockchain. Being able to present proof of a valid policy can help reduce risk, increase processing speed and can even lead to savings in administrative areas.
Claim submission & loss settlement — Although the entire process would be challenging to automate due to complexities in the assessment of loss, certain parts of the process could be improved drastically through the implementation of blockchain.
Claim approval & processing — This was another process which could be easily automated and keep all the stakeholders of a claim up-to-date in real-time. This could generate huge efficiencies for insurance companies.
Supplementing the outcome
After the high-level recommendations were made, we scheduled additional follow up interviews with experts in the industry. Primary data was collected from various professionals at companies providing models for probabilities of a catastrophe occurring (oracles), as well as loss assessment services. The data provided by oracles is then used by insurance companies to price their primary policies as well as reinsurance policies. Due to the neutral nature of the oracle provider, we were able to gather some valuable information about the general trends in this sector which was then used to further refine the approach to entering the insurance sector.
In addition to talking to potential partners and suppliers, surveys were sent to a diverse group of existing policyholders to gauge the level of interest in the market. The final step of the process entailed design thinking style interviews with end-users of these insurance products, to ensure ease of use. Once all of this data was collected, the initial action plan was revisited and updated to ensure it reflected the feedback from the additional layers of due-diligence.
How would an insurance contract on blockchain work? What are the benefits?
For a simple insurance contract like a flight delay policy, which is based on a simple rules-based model — automation through the use of blockchain and smart contracts works well. If an insured flight is delayed, the contract simply pays-out. This logic can be used for more complex contracts as well, as long as they are rules-based (or parametric insurance policies). Certain insurance providers are already offering these services on blockchain and insurtech remains a growth area globally.
The benefits of implementing smart contracts and blockchain extend across the lifecycle of a contract. It reduces administrative costs, reduces processing times and creates transparency. It also improves communication among all the stakeholders. Based on this, it is safe to say that with improvements in technology we can expect to see greater adoption of blockchain across the insurance industry.
And that’s all for now. I want to thank my good friend and colleague at the time — Maria Kovalenko for her contribution.