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Distributed ledgers in Insurance

Photo by Austin Distel on Unsplash

Insurance is based on the principles of utmost faith and fundamentals of indemnity. It involves multiple stakeholders besides the insured and the insurer and is built on mutual agreement and the fundamentals of risk pooling. For these reasons, insurance as we experience today is conservative, walled, process-heavy and ridden with challenges, errors and fraud. Distributed Ledger Technology (DLT) popularly called Blockchain, with it’s core attributes of transparency, trust and privacy is equipped to address these snares.

Property and Casualty, two of the most important segments of insurance is plagued with issues such as poor evaluation for claim processing, manual data entry, coordination gaps, and so on which hurts end users as well as insurers. DLT comes to the rescue by managing the terms of engagement between parties using Smart Contracts which can be automatically executed. Liabilities can also be calculated using Smart Contracts which then can be swiftly paid out to claimants. Auto insurance can benefit from DLT and IOT as sensors on the vehicle record accidents and damage details instantly. Smart Contract system can then match this data with claim information, and settle the claim with minimal or no human intervention.

DLT enhances process efficiency and reduces costs of administration and verification across the entire insurance value chain involving application, information collection, underwriting, estimation, regulation and claim handling. Going paperless, avoiding middlemen and lowering human errors leads to improved transparency and trust with customers, regulators and other stakeholders. As insurers attract new business through higher-quality service, revenue increases. The following DLT deliverables serve the insurance cause appropriately –

Identity: The possibility of portable, secure, verifiable identity immensely simplifies KYC/AML processes, reducing delays, costs and risk of fraud. The repetitive practice of all parties — brokers, underwriters, reinsurers — performing KYC and AML on the same client is avoided with DLT. The customer can govern his/her personal identity and credentials in digital form and can record consent to share with any party to give access on a limited purpose basis. The insurer and other institutions involved benefit by getting trusted and instantly verifiable credentials. This strengthens KYC/AML activities and facilitates fraud detection and prevention.

Integration: Transparency and interoperability enable seamless interaction between dispersed participants, leading to broadening of network of insurers involved in transactions and hence faster adjustment across markets. The claims management process and regulatory auditing is improved when all the documents created in the claims process are incorporated into the public ledger, thereby negating the need for a claims broker to coordinate. Combined with other emerging technologies this is bringing to market more precise, on-demand products, such as insuring a cargo container on a single leg of its journey.

Immutability: The chain and order of events are captured as time-stamped immutable permanent records, which in turn enables new capacities within insurance. For instance, a real-time blockchain register of goods movements and warehouse inventory updates value thus allowing a new type of insurance covering actual risk rather than maximum risk. All stakeholders benefit from such a ‘super audit trail’ to legally ascertain the proof and timing of occurrences.

Mutuality — DLT and Smart Contract enable interaction between primarily involved parties without need for a central processor or intermediary, thereby reducing relevance of ‘natural monopolies’ which tend to extract excessive rents. A large chunk of processing expense of insurance, is attributed to keeping track of contract documentation, and making sure records are consistent between client, broker, underwriters, reinsurers, and claims managers. DLT provides a natural mechanism for managing terms of engagement through smart contracts and handling claims by recording the ‘one version of the truth’ which is tamper-evident, irrefutable and accessible to all. This reduces errors, delays and uncertainty due to human intervention, subjectivity and propensity to cheat.

Besides improving the traditional model and efficiencies, DLT is proving to be a catalyst to industry innovations such as decentralized autonomous organizations, event-based insurance, index-based insurance, peer-to-peer pooling, direct-risk management and regulatory- restriction revision all of are set to increase scope and penetration of insurance.

Insurance for the sharing economy

Event-based insurance, shared among various parties to cover specific events or periods of risks (e.g. hourly car-insurance policies) becomes applicable for collaborative model businesses such as Uber rides and AirBnB stays. Applications built on distributed ledger technology enables peer-to-peer value exchanges not only efficiently possible but also transparent and secure and enhances customer experience.

Index-based insurance is another new trend designed to provide low-cost coverage purely driven by economies of scale. DLT powers multiple low-cost applications, connecting the vast micro-insurance population to the larger market place using mobile phones that expands existing distribution channels.

Peer-to-peer insurance

DLT with its attributes of transparency and trust is making another emerging insurance model possible: peer-to-peer insurance driven by process automation with no control of a third party authority. In such a model the role of the insurer is reassigned and they cease to assume the risk. Peer- to-peer pooling groups participating via blockchain networks retain risk among themselves (Direct risk management). Regulatory boundaries are also diminishing with decentralized regulations and coverage making seamless business customizations across geopolitical boundaries possible. This gives rise to real- time, self-regulated insurers and a truly global insurance marketplace.

Decentralized Autonomous Organization

Decentralized Autonomous Organization (DAO) is not just process innovation, it is a very shift in architecture. In a DOA policyholders come together to become the shareholders of the corporation too. Such an organization operates without the need for any employees, executing all business operations using blockchain-enabled automation and crowd-sourcing.

DAOs are ultimate proof of DLTs potential to decentralize the insurance industry. Risk is pooled within and insurance policies are issued on a peer-to-peer basis. Consensus-based underwriting and claims pay- outs involve participation of every peer policyholder. No insurance​ ​policy​ ​is​ ​issued​ if ​it is​ ​not​ ​fully​ ​backed​ ​up by​ ​collateral. The system has in-built capability to scale up or down the available collateralization based​ on desired​ ​demand. Under this model surplus premium float is paid back to policyholders in the form of rebates on their upcoming premiums making the enterprise eligible for non-profit corporation status and tax elimination.

According to reports, a majority of insurance players are already adopting or planning to adopt DLT and other emerging technologies to create better products and newer applications, though most still are at proof of concept stage. Uncertainties will continue to disrupt human life but insurance in its new avatar will innovate and underpin the economy and events more effectively and in doing so contribute better to the common good.

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