Smart Contracts in Insurance: a New Opportunity for Greater Efficiency

blockchain-smart-contract

Everyone wants to feel sure.One way to make sure any potential preventable risk can be reduced is insurance. It can play an important role in helping you manage your financial risk if something goes wrong or proceeds in an unpredictable way. Another way to feel safe is to use smart contracts on the blockchain;- they provide transparency, autonomy, accuracy, and other important advantages.

Both ways are good and give you some benefits. But can we combine them to get more benefits for you and your business? Is there a way to attain higher efficiency? Yes, there is such a way; and we can already feel its advantages. This way is using smart contracts in insurance. Nowadays, it is one of the smartest instruments for managing your risks and letting you feel sure about your future. Are you curious about how it works? Let’s go deeper into it and find out more about the insurance industry, smart contracts, blockchain technology, and the use of smart contracts in insurance.

The Insurance Industry in the Global Economy

The development of the insurance industry is deeply connected with the development of the world economy. Insurance companies are among the largest collective investors in the global economy. They occupy an active investment position. This kind of activity depends directly on the dynamics of the insurance market as a whole. As trade and production take on an international character, there is a growing need for global insurance protection, which activates the processes of globalization in the insurance market. The growth of direct investment also indicates the intensification of business processes, opening up new horizons for the development of world insurance.
Smart contracts in insurance
The current leaders of insurance services are transnational insurance companies and groups. From their point of view, the world insurance market is on the verge of creating a homogeneous insurance market.
These transnational insurance companies act as an engine of integration. Their interests focus upon expanding the geographical scope of activities, reaching regional markets by eliminating barriers to entry, cutting costs and enhancing competitiveness as a result.

Insurance for Business Protection

The insurance industry has a great influence on both the global economy and business security. A business owner risks his own capital, so one of his main tasks is to minimize risks. Under these circumstances, it makes sense to manage risk and reduce it. That’s why it is important to have the right insurance in place.

Fortunately, there are a lot of insurance types to protect businesses against various dangers. A business owner can buy an insurance policy to protect his business from interruption, and insure product liability, property, workers’ compensation, professional liability, and home-based businesses.In addition, the law demands that businesses with employees carry certain types of insurance. It depends on the state where the business is located.

Different policies can protect different types of businesses against unexpected dangers. Replacement costs for individual business are much higher, and this makes the purchase of business insurance a wise decision for many business owners, whether it is a large or small business.
insurance reduces risks We can see how important insurance is for business.

Insurance policies can protect a business from different unexpected circumstances and unforeseen dangers. These contracts, in their traditional version do a great job. But now we have the chance to improve our insurance experience and make it much more clear and transparent: smart contracts in insurance. This combines the experience of the insurance industry with all the benefits inherent to smart contracts. We have every reason to believe that this represents a new big step for mankind.

What is a Smart Contract?

To consider the advantages of smart contract in insurance, let’s find out more about smart contracts on the blockchain.

Today, we are witnessing the development and implementation of completely new technologies that can change the world,just as the internet did in its time. One of these technologies is blockchain technology.
Smart contract in insurance
Figuratively speaking, if the internet has reduced distances between people, blockchain technology aims to minimize mistrust between people. It is of a great importance, because the very existence of notaries, registers, banks, guarantors, and many other institutions of modern civilized society is based precisely on the lack of trust between people.

Though blockchain is usually associated with Bitcoin, the technology has many other options for use. In fact, Bitcoin is only one of the applications using blockchain technology today.

Blockchain is a type of distributed database that stores records of digital transactions. Instead of having a central administrator like traditional databases (banks, government, and accounting), it has a network of replicable databases. This network is synchronized over the internet, and is visible to all users on the network.

When a digital transaction is carried out in the blockchain system, it is grouped in a cryptographically protected block with other transactions that have occurred in the last few minutes, and is distributed throughout the network.

The confirmed transaction block is then dated and attached to the chain in linear, chronological order. New blocks of trusted transactions are associated with older blocks. They form a chain of blocks that show each transaction achieved in the history of this blockchain. This brings unprecedented security benefits. For example, if someone wants to break a particular block in the blockchain, the hacker will not only have to break that particular block, but all the output blocks in the history of the blockchain…and there may be millions of them.

We can see that blockchain is a decentralized, open cryptographic technology that allows people to trust each other, making intermediaries obsolete.

Undoubtedly, this technology will not be able to completely rid the world of intermediaries, but it is already clear that it will significantly simplify economic turnover. As a result, modern business models will become more efficient, and transaction costs will be significantly reduced.
blockchain in insurance
Thanks to the existence of blockchain technology, ideas and concepts that were previously difficult to realize have been developed now. Among them are the Internet of Things, the economy of joint consumption (shareconomy), and smart contracts.

Smart contracts are not contracts in a traditional sense, as we used to know them. To make a comparison, let’s imagine how many attempts it usually takes to conclude a contract between two parties in the real world. On the one hand, it is necessary to use the service of a legal representative. This person must draw up a contract; than two parties must agree to its terms. On the other hand, the government has to provide the currency of the transaction. Also, the government must provide a legal basis and intervene in the case of disputes. And if the parties would like to gain access to their finances, it is necessary to involve a great number of financial institutions in this process. So we can see how many middlemen are involved. In the case of conflict, the situation would be even more complicated; and even then, all of these parties can not guarantee that the result will be successful.

Smart contracts make this process much easier and safer for all parties involved, ensure transparency of the relationship, and guarantee payment. The concept of smart contracts was described for the first time by Nick Szabo in 1996. Nick Szabo is a computer scientist and cryptographer who works at the junction of economics, law, and computer science. He described a smart contract as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”

The idea was to allow computers to regulate the ownership,management and operation of property to which the computer can have direct access. The rules of regulation themselves were proposed to be written in a language understandable to machines – a programming language. Less than 20 years have passed, and Nick Szabo’s concept is becoming a reality.

A smart contract is a computer algorithm. Its goal is to conclude and support the phased implementation of commercial contracts in blockchain technology. In this case, the action algorithm is reflected in blockchain. The terms of such a contract can only be interpreted by the system unambiguously, as they are implemented by the system.

Benefits of Using Smart Contracts

What benefits can we gain from using smart contracts? There are a lot of them, but the main benefits are:

  • Independence. Blockсhain is a completely independent technology that does not require any brokerage operations. It is important that for the conclusion of an agreement, there is no need for any third party in the person of intermediaries or lawyers. Consequently, the potential risk of manipulation by third parties is reduced to zero since contract management is automated through the network. In this case, the human factor is excluded; therefore, the fulfillment of the contract does not depend upon subjective moments.
  • High Speed. Unlike the manual processing of documents, smart contracts provide automation of tasks through program code. This saves a huge amount of time that would otherwise be spent on the endless manual processing of information.
  • Transparency. It is impossible to lose any documents, because they are stored in encrypted form on a common account, which is accessible to all parties to the contract.
  • Saving Backups. Blockchain solves this problem. The contract will have a lot of duplicates, in case your accounts are lost due to the fault of the other party.
  • Security. Smart contracts provide an unrivaled level of security through the use of encrypted web sites. This is the essence of cryptography. Your documents are securely protected, because in order to understand your code, hackers would require exceptional abilities. Therefore, your documents will remain safe.
  • Economy. Due to the absence of intermediaries, smart contracts can save a lot of money, because you do not need to hire a lawyer to control the execution of your transactions.
  • Accuracy. Internal automation of the smart contract helps to reduce the number of errors. It also helps to ensure low cost and high speed in comparison with manually filling out a multitude of forms.

It is clear from these observations that smart contracts have unique advantages that can resolve a lot of problems in different fields. We can use smart contracts in varying areas and in numerous industries, because they provide transparency, independence, high speed, economy, accuracy, security, and other benefits. It is very important for the insurance industry to have these benefits, and to use them. There is no doubt that they can optimize the insurance industry. Let’s see how that works.

Blockchain Smart Contracts in the Insurance Industry

It is a fact that blockchain will become commonplace in the insurance industry. The use of blockchain smart contracts could give it a new level of development. The reason for this is that blockchain can make the insurance industry more efficient and solve specific problems inherent to this industry. In spite of all the money involved in insurance, these issues still cause pain.

Among them are problems such as fraud, customer interaction, manual claim review, workforce, distribution channel, inefficient data sharing, and fragmented data sources. All of these are of great importance, but fraud is the most important of all. It affects every type of insurance, and the outcome of is an unfair costs for the honest policyholder. So what can the insurance industry do to combat fraud and other problems? One of the best ways to solve them is to use blockchain smart contracts in insurance.

Using blockchain technology for creating smart contracts in insurance

Blockchain technology has the ability to improve existing processes, so it could have an equally transformative impact upon the insurance market. Insurance industry investments in blockchain-type technologies focus upon this ability.

How Using Smart Contract Improve the Insurance Industry

According to the professional services giant Deloitte, the insurance sector will see the most significant changes from the adoption of blockchain technology. The benefits of using smart contracts in insurance are clear.
Today, even non-contested claims payments can take weeks or months to be paid. As a result of using smart contracts and automated claims payment processes, policyholders will get paid more quickly in comparison with today’s manual processes. In addition, smart contracts will reduce claims administration costs and the risk of fraudulent claims.

Using blockchain smart contracts in insurance can:

  • reduce fraud through transparency
  • help protect policy documents
  • develop a system in which some claims can be verified and handled very quickly
  • reduce paperwork
  • allow the storage of policy documents on numerous ledgers, so it will be impossible to lose them;
  • improve the quality of data used during underwriting
  • remove administrative barriers
  • improve the claims process by developing a system for quick verification of the claims
  • generally improve the efficiency of the insurance industry

Smart contracts have the potential to play an immensely helpful role in the insurance industry. Blockchain does not create a new market; it changes the existing one.

Examples of Using Blockchain Smart Contracts in Insurance

The Blockchain Insurance Industry Initiative (B3i) is a collaboration of insurance giants like Allianz, Aegon, Zurich,Munich RE,RGA, and others. It develops a partnership of insurers and reinsurers. The aim of it is to explore opportunities in distributed ledger technologies in the insurance industry. This organization was established in 2016, and now has 15 participants.The Blockchain Insurance Industry Initiative makes insurance risks more tradeable.
example of using blockchain in insurance b3
SafeShare, in partnership with Vrumi, created a new product to protect property owners from losses related to damage and theft caused by commercial tenants. This fantastic insurance solution offered by SafeShare over blockchain provides their customers with a 24-hours’ claims hotline and coverage processed in real time. In addition,the use of blockchain technology will help insurance companies keep their costs low. One more benefit for the insurer is the opportunity to provide a new market of needs-based insurance solutions. SafeShare is a really great blockchain based insurance solution for startups.

In Ukraine, Vladimir Shevchenko, Director of the Motor Transport Insurance Bureau of Ukraine,is planning to implement blockchain technology in some of the business processes of the bureau.

Vladimir Shevchenko declared that globally, the use of blockchain would largely solve the problem of lack of trust. The reason is that contracts on the blockchain are safe, clear, and transparent. After signing a contract, there is no possibility to make any changes in it, or to say that there is no such a contract.

When data is put into the blockchain, it is assigned a time and date field. The technical features of the distributed registries prevent it from changing. When the time comes for editing information, a new date and time are assigned, and the cryptographic parameters of the record are changed. Blockchain functions as an “independent witness” of the conclusion of a contract, and cannot be bribed.

The expectation exists that even the first steps in the use of blockchain technology will lend a powerful impetus to the integration of various databases that can be used in motor insurance, Vladimir Shevchenko said.

The Rega Risk Platform uses the Ethereum blockchain system to create decentralized autonomous organizations that operate as mutual insurance clubs without intermediaries in the form of insurance companies. The company ReGa Risk Sharing has created a service for the mutual insurance of domestic animals called Lexi Club. It refunds about 80% of the amount spent on veterinary services.

Using Blockchain technology for pet insurance
Before the conclusion of a smart contract, the owner sends a photo of his or her pet to a bot. The animal is then assigned a certain risk group. Then the owner receives an offer, and can conclude the contract. Every member of the club receives a virtual Lexi Card. It identifies the smart contract managing the account of the club member in the Ethereum blockchain.

If the pet visits the veterinarian, the service analyzes the user’s check, compares it with the information of the vet clinic, and returns part of the funds from the general fund to the pet owner. The service will be monetized at the expense of a commission from membership fees of approximately 20%. In addition to insurance, the bot will allow the finding of a pet in case of loss, using neural network analyses of photos in social networks.

In the near future insurance blockchain services Rega gadget protection (insurance for gadgets) and Drone Insurance (insurance for drones) will be launched.

A new flight delay insurance product by the French insurance giant AXA has also been launched. The product is called Fizzy. It uses the public Ethereum blockchain to store and process payouts.

If a flight is delayed by two hours or more, flyers can use the “smart insurance” tool Fizzy to insure their trips. The use of smart contracts, which are self-executing pieces of code that trigger once certain conditions are met on the blockchain, makes this insurance tool efficient and useful.
using blockchain by fizzy
According to AXA, Fizzy offers direct, automatic compensation to policyholders whose flights are delayed. If a plane is more than two hours late, Fizzy will reimburse the policyholder immediately.

We can see that the Ethereum public blockchain plays two key roles here. On the one hand, it serves as the mechanism for triggering a payment to the client once the two-hour mark has passed. On the other hand, it maintains an accessible record of the insurance contract itself within a smart contract. Ultimately, this product is a way to build more transparency into the insurance process for AXA and the insurance industry in general.

Allianz from Germany, with the investment Partner Nephelia, shows us another example of using blockchain smart contracts in the insurance industry to handle Catastrophe Swaps and Bonds. An insurer uses Catastrophe Swaps and Bonds as tradable financial instruments to protect against major catastrophic losses. These are based on catastrophe-triggering events like hurricanes or typhoons. Payout can be initiated between the investor and the insurer.Today, it may take weeks or even months to settle such payment transactions after the catastrophic event has happened. Using blockchain smart contracts, the insurer can get the payment in hours after the catastrophic event.

Everledger is a global, digital ledger that tracks and protects diamonds, fine art, and other valuable items. Everledger insures buyers of diamonds against fraud.
diamond insurance blockchain
It does it through the digitization of stones – each stone is assigned a serial number. Now there are already more than 300,000 diamonds in the register. With the use of blockchain technology, nobody can change the information in the register. To assert transparency, Everledger builds on both the public blockchain and private blockchains, thereby reaching a hybrid technical model. In this case, it has value for consumers, insurers, and intermediaries alike.

“If insurance, then blockchain,” says Dynamis. Dynamis is an insurance company, built on the Ethereum decentralized blockchain platform. Dynamis insures customers against unemployment. According to the CEO and founder of Dynamis, Joshua Davis, Dynamis is a smart contract for peer-to-peer insurance that provides supplementary unemployment coverage. This platform uses keybase.io to establish the customer’s identity by using the customer’s social media profiles. Applicants for a new policy can use LinkedIn to verify their identity and employment status. Claimants can use their LinkedIn connections to validate that they are looking for a job. Participants can obtain a new policy or open a new claim by exercising their social capital within their social networks.

The request for the conclusion of an insurance contract and the decision on insurance payments are accepted by the remaining participants of collective insurance.

Spanish online reputation startup Traity in partnership with the largest Australian insurance conglomerate Suncorp launched a chatbot called Kevin. Kevin provides micro-insurance for peer-to-peer transactions using blockchain technology.
blockchain in business
When somebody want to buy or sell something, he sends a message to Kevin and tells him about this peer-to-peer transaction. Kevin sends this user a unique link. After that user sends this link to his counterpart. Once that person gets approved, this peer-to-peer transaction is insured for up to US$100. It is important to say that all this happens absolutely for free. According to Traity, this system means that anyone, at anytime, can verify and audit Kevin’s balance sheet. So it makes the startup as “trustworthy” as any big bank or insurance company.

Blockchain technology also has a great impact on the marine insurance. In the opinion of market participants, the modern system that provides cargo insurance on sea transport is extremely overloaded and not effective enough. The existing difficulties in the marine insurance can be greatly simplified by using joint efforts and modern technologies.

Danish shipping giant Maersk, the audit company EY, Microsoft and blockchain cybersecurity company GuardTime combined efforts to work on a blockchain project for the insurance of shipping.
marine insurance blockchain
The service is built using Microsoft’s cloud platform Azure. It will create a common database, which registers information on shipments and potential risks, the use of which will help the courts comply with the rules of insurance.

Blockchain technology is designed to ensure the transparency and reliable storage of all the input information, which is a complex network of variables. The representative of Maersk Lars Henneberg said that there are some problems in the marine insurance because of the complexity and duration of operations. Blockchain technology stimulates the development of marine insurance and helps to solve these problems.

There is no doubt that with the introduction of blockchain technology transport companies will be able to provide standardization, cost reduction, automation and efficiency in the marine insurance industry. According to representatives of joint companies, the introduction of blockchain technology can contribute to a radical change in the entire structure of the marine insurance industry. Another good thing about blockchain technology is that it can expand the opportunities for effective interaction with world transport companies.

According to Bill Pieroni, the decision to implement blockchain technology is truly unique, given the depth and breadth of the anticipated opportunities, and is able to have a significant impact on a wide range of insurance products and services.

Smart Contracts Make the World Better

From this arguments we could conclude that the insurance is very important for the safety of a person and security of a business. Bur now insurance industry needs a big change. Such problems in insurance industry as fraud, customer interaction, manual claim review, workforce, distribution channel, inefficient data sharing make it not such efficient as it could be.

The way to resolve this situation is using blockchain smart contract in insurance. It will help to remove administrative barriers, reduce fraud, improve the quality of data used during underwriting, protect policy documents, reduce paperwork, improve the claims process by developing a system for quick verifying the claims. So there is no doubt that using blockchain smart contract in insurance could generally improve efficiency of the insurance industry.

Experts are convinced that smart contracts have the potential to play a great helpful role in the insurance industry. From these facts, one may conclude that blockchain changes the existing market of insurance services, giving it more transparency and autonomy.

There are a lot of companies that have already used blockchain smart contracts in insurance. Among them there are both large giants and small startups. They are united by the desire to make their business more efficient using blockchain smart contracts, to give people more confidence and safety and to make the world a better place with it. There is no doubt that they can do it, and we will see the result of it in the nearest future.

1Comment
  • Nik
    Posted at 02:57h, 06 February Reply

    That is very deep and awesome article. I simply love an idea of integrating blockchain to the insurance industry. This process will make whole industry much affordable and transparent! Very good idea!

1 Star2 Stars3 Stars4 Stars5 Stars (2 votes, average: 5.00 out of 5)
Loading...
Post A Comment