Introduction:
The implementation of new technologies by insurance companies requires judicious risk analysis. New technologies require resources that could potentially go down the drain in case of failure. The main objective of insurance companies is profit-making growth. Therefore, new technologies have to be assessed and analyzed by a simple ‘wait and watch’ technique.
In the past few years, insurance companies have become excessively competitive due to high demand. There are numerous intricacies liked with the insurance business. Some of these are prevention of fraud, assessing risks, etc. it is taxing for both customers and employees to deal with such intricacies judiciously. Hence, new technologies are adopted to make such tasks less tedious and more efficient.
Modern and developing technologies are equipped for dealing with inefficiencies that arise in different business sectors. Technologies such as Artificial Intelligence (AI), Blockchain, etc. are developed for the very purpose of leaving no room for error. Blockchain is adopted for securing customer data and for automated payment systems.
What is Blockchain?
“A blockchain is, in the simplest of terms, a time-stamped series of immutable records of data that is managed by a cluster of computers not owned by any single entity. Each of these blocks of data (i.e. block) is secured and bound to each other using cryptographic principles (i.e. chain).”[1]
Blockchain is a centrally democratized system and has no paramount authority. The information on the blockchain is available for anyone to see since it is essentially an immutable ledger. Consequently, data existing on the blockchain is inherently transparent in nature and the people performing the transactions are accountable for their own actions.
Authors Don Tapscott and Alex Tapscott in their book “Blockchain Revolution,” describe the concept of blockchain as “an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
This technology has the potential to revolutionize businesses and have a profound impact on them. Unsurprisingly, to unlock the underlying potential of blockchain technology, several researchers have plunged into researching the operational prospects of the same.
Application
Blockchain has a lot of potential, but the potential can be unlocked by the development of the technology. It has strong application in terms of short term and long term usage. The following are some of blockchain’s applications in the short and medium-term:
- Data storage and exchange:
A large number of data and files are stored using blockchain. The technology used by blockchain provides for a secure and completely traceable transaction as opposed to the current method.
- Peer-to-peer electronic payment:
Bitcoin and other types of cryptocurrencies are used under the blockchain. These cryptocurrencies are proof based electronic payment systems as opposed to trust-based ones. This ensures accountability and transparency.
- Smart contracts:
Smart contracts are essentially digital protocols that have certain parameters set up beforehand. When those parameters are satisfied, the smart contract can execute various tasks without any human intervention. This greatly increases the efficiency and reduces the risk of error.
Effects on Insurance Industry
Blockchain technology reduces the issues faced by employees and customers remarkably in the insurance industry. Here’s how:
1. Enhances Efficiency: The adoption of this technology greatly reduces the risk of losing customer information and other data pertinent to the smooth functioning of a company. It also increases efficiency by reducing human intervention and storing data with blockchain.
2. Increases Trust: The amount of transparency prevailing in a blockchain using industry increases the trust that customers place in insurance companies. The lack of trust is one of the reasons for the under-insurance in the recent past. This technology ensures efficiency and transparency at the same time which may be appealing and reassuring for the consumers.
3. Claims Processing: Blockchain and smart contracts provide solutions for the multitude of problems existing in the insurance industry. A layman would inherently find an insurance contract to be too taxing and overly complicated. Insurance companies seem to face the issue of fraudulence and the prevalence of smart contracts reduces the risk of fraud due to its transparency and effective resolution. When an insurance claim is being submitted, blockchain technology passes and approves only the valid seeming claims. In case of a multitude of claims about the same incident, blockchain comes in to play again. It would ensure the passing of only proper claims. All this is performed without human intervention. This, inadvertently, increases the speed of resolution of claims and the efficiency of the same.
4. Prevention of Fraud: Insurance industry loses a hefty amount owing to fraudulence, annually. Blockchain can detect and prevent fraudulent activities. This stands to be one of the most substantial reasons for the integration of this technology into the insurance industry. Blockchain technology has the ability to check the authenticity of transactions, claims, etc.
5. Product Development: It is difficult for a person to club together data from a multitude of sources. Blockchain technology deals with this issue. It helps one plan efficient and potent actuarial models. This can only be achieved if data from various sources is brought together in one place. These products will be in sync with the latest requirements of the customers. Subsequently, this data and the information help in the expansion of businesses.
6. Cost Saving: Blockchain assists in the reduction of cost which the insurance companies spend annually. This is because of the automation of processes, i.e., verification of claims, contracts, policyholders, etc. This helps in reducing excessive administrative costs incurred by an insurance company.
Challenges and Problems
The fact that Blockchain is a decentralized system, it strengthens the information sharing and reduces monopolization. Because of this, companies have to pay attention to how they price their services, how they develop their products, and the risk to their reputation. This gives rise to new challenges that the management of the company might encounter.
The synergy of blockchain with other technologies such as AI could lead to intermediary roles being replaced by new and rapidly developing technologies in numerous sectors. If the insurance industry wants to ensure the continuous development of the intermediary it should address the possible disruptive risks to existing distribution business models posed by blockchain.
Additionally, the amount of investment and resources that are required for a company to adopt blockchain technology is still a hindrance for most companies at an early and initial stage of development.
Conclusion
The prospect of blockchain is deemed to be an inspiring concept. There seem to be reasons to believe that this technology will revolutionize and bring positive breakthroughs in the insurance as well as other industries. Nonetheless, the challenges that are imposed by the technology on budding insurance companies cannot be overlooked.
While it is visible that this technology shows promising potential, blockchain technology is still in its infancy. There seem to remain too many uncertainties as to the true power of this technology. Research suggests that there are several start-up companies paving their way through with blockchain, exploring the pros as to how this technology could boost business processes and consumer satisfaction in the industry.
References:
[1] https://blockgeeks.com/guides/what-is-blockchain-technology/
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