Is Blockchain and Bitcoin the Future of Insurance

Some believe blockchain is the next big revolution. Though it dominated headlines in 2017, blockchain's impact is only just beginning. Financial institutions are already reaping the benefits of this transformative tech, and the insurance industry is next in line.

While not mainstream yet, blockchain is generating significant buzz for its potential to improve every step of the insurance journey – underwriting, payments, claims, back-office tasks, and even risk management.

Blockchain in context of Insurance

In blockchain, each block is a record of new transactions, which could include anything like- the location of cryptocurrency, or medical data, or voting records. After completion of each block, they all are clubbed together to create a chain of blocks, simply known as a blockchain.

Imagine a trusted record book for insurance, shared across a network. That's blockchain! It cuts out the middleman and fraud by keeping everything transparent and tamper-proof. This could mean faster claims processing, fairer pricing, and even peer-to-peer insurance models. While not a quick fix, blockchain has the potential to revolutionize how we think about insurance security and efficiency.

Benefits of Blockchain in Insurance

1. Detection of Fraud: One of the major challenges faced by insurance companies is fraudulent claims. With the blockchain technology, insurance companies can now check the trustworthiness of the claim based on the historical data. This can help them identify differences between true or false claims.
2. Reduction in Administrative Costs: It is assumed that blockchain will help reduce administrative costs for life insurance companies. There would be an automated verification of the customer’s identity, the validity of the contract, the registration of the claim, and the data from the third party.
3. Peer-to-Peer Insurance: Blockchain can facilitate the development of Direct contact insurance models. These models cut out the middleman, allowing individuals to form risk pools and share payouts directly, potentially lowering costs and increasing flexibility and increasing transparency between the company and the policyholder.
4. Improve Data Quality: Blockchain will improve the data quality of front-end and back-end office sources. The errors and inefficiencies in the system will be eliminated, thereby bridging the gap between the end-users and insurers. Specialty insurers and reinsurers are two segments that will immensely benefit from the blockchain technology (Source: Ernst & Young Report, December 15, 2016).
5. Help in Product Development: The linking of blockchain data with other data sources will help insurers to come up with more accurate actuarial models. For example, a company selling auto insurance can generate insights by gathering usage-based data about driving patterns, speeds, distances, safety features and braking habits. Analytics can help to identify high-risk drivers and customized offerings and premium plans can be devised accordingly.

At present, it seems very challenging to aggregate relevant data from a large number of data sources. However, the blockchain database will provide an effective platform for collaborating with other large and complex peer-to-peer data networks.

The Role of Bitcoin

While often mentioned in conjunction with blockchain, it's important to understand that Bitcoin is a cryptocurrency that uses blockchain technology, not the other way around. Bitcoin itself may not play a direct role in future insurance models. However, the underlying blockchain technology offers the potential for secure and transparent transactions, which is crucial for the insurance industry.

Challenges and Considerations

Although blockchain technology has its share of benefits, we cannot certainly ignore its limitations. As the blockchain’s network of users grows in the coming years, it will be more attractive to cyberattacks. Also, if events are not originally registered with accuracy, the trustworthiness of the stored data could be seriously doubtful. Apart from this, transaction cost and complexity also add to the limitation list.

Conclusion

The alignment of blockchain technology and insurance holds immense promise. While challenges like regulation and integration exist, the benefits are undeniable. From thwarting fraud and streamlining claims to fostering transparency and enabling innovative models, blockchain can revolutionize the insurance experience for both insurers and policyholders.

The future of insurance may not be solely written in blockchain, but it's clear this transformative technology will be a key player in the chapters to come. As the technology matures and the industry embraces its potential, we can expect a wave of innovation that fosters a more efficient, secure, and customer-centric insurance landscape.