What is Insurance?
Insurance is the business of covering the financial risk of a possible event for a fee paid by the insured. This service provided by insurance companies arises out of the average person's primal need of security and protection from untoward incidents or accidents that may cause harm to the insured.
This need to reduce uncertainties has given birth to the trillion dollar insurance industry. There are seven main types of insurance categories, these are;
- Life assurance
- Property Insurance
- Marine Insurance
- Fire Insurance
- Liability Insurance
- Guarantee Insurance
- Social Insurance
Though generally, people seek for insurances for two major reasons; personal and business.
History of Insurance business
Although there are several accounts concerning the historical development of insurance business, the first significant kind of formal insurance started in the 1700 BC, with a type of insurance policy that is classified today as marine insurance. Ancient Babylonian and Persian ship owners would enter into a contract with a lender to acquire funds to equip their ship, fix it, or upgrade it.
They would agree on the terms of indemnification, interest, or forfeiture in case of a particular risk event happening. These kinds of contracts bottomry contracts.
Insurance in modern times started from Italy with the Lombard traders in the thirteenth-century. From there, different countries and merchants in England and other parts of the world began to subscribe to it. The British businessmen and insurance companies later became the major key players through the 1800s and well into the 1900s. And the insurance industry has grown exponentially since then.
Blockchain Use-Cases in Insurance
1. Blockchain Application in Vehicle Insurance
This is one of the most popular insurance products, with over 205 million cars insured in the United States. The huge number can create a challenge in the claims management process, especially when dealing with another insurance company to process claims.
To paint a picture of how the current claim process is, let us look at the following example. Assuming John is involved in a car accident and the driver of the other vehicle (Viktor) is at fault, John would submit a claim with his insurer, with possible evidence. John's insurer will contact the insurer of Viktor, who will investigate to confirm that Viktor is genuinely at fault.
If the assertions are correct, Viktor's insurer will notify John company about their findings, and indemnify John via his insurance company. The process to indemnify John takes a lot of effort to coordinate, and could even take several weeks.
This kind of delay can be prevented with the use of blockchain applications, as several insurers will be able to share and verify information seamlessly. An example of a real use case is Kasko2Go, a blockchain, and AI-powered app used to monitor driver behaviour, improve claims management, and track vehicle use.
2.Blockchain Application in Peer to Peer Insurance
For some people, the term peer to peer insurance is something new, but this concept has been around since 2010. The term peer to peer( or P2P) also describes the decentralized nature of the blockchain network. P2P insurance connects people with similar insurance needs to form a pool, where every claim is paid from the premiums collected from that pool.
The group may be include those people who know each other, like family, friends, neighbors, or colleagues. This kind of arrangement is different from the traditional method of insurance, where the insurer creates different risk profiles based on the individual assessment of the potential client. It is this risk profile that determines the amount of premium that the insured will pay, with high-risk profiles paying higher premiums for the same kind of risk and vice versa.
Compared to traditional insurance models, P2P insurers charge a fixed fee only for arranging the insurance contract. If, at the end of the period, none of the risk events happens, the insurer would refund the excess amount to the members of the pool( after subtracting fees and expenses). This system of operation is different from the traditional insurance model, where the insurance company keeps the excess amount as profit.
Peer to peer insurance can greatly benefit from the use of blockchain applications. Insurance companies can promote P2P coverage, as they can set up smart contracts, where the individuals in a pool can vote to determine if an individual should be reimbursed in the advent of a risk event.
If the required consensus is met, the individual is indemnified, and leftover funds distributed to the other members of the pool or a charity. Dynamis is an example of a company that uses the Ethereum blockchain network to operate its peer to peer insurance model. The company uses a Peer's LinkedIn network, and smart contracts feature to verify the profiles of a claimant.
3. Blockchain application in Health Insurance
We discussed in the previous episode, the relationship between healthcare and blockchain technology. Health insurance is one of the most popular insurance policies, after vehicle and life assurance policies. As a result, a large number of people are enrolled daily. Because the insurer has to verify the medical records of each enrollee, it can take a while before a comprehensive analysis is complete to ascertain the correct premium.
Now, with blockchain technology, insurance companies can quickly verify the medical records of their clients from the point of enrollment. This quick access to immutable data of a patient's history will reduce costs and prevent fraud, as a client cannot alter his medical records because he wants to take up a new policy.
An example is Blue Cross, a Hong Kong insurance company that uses blockchain technology to verify medical claims. The company has used this technology since 2019 to process various requests for its over 200,000 customers.
4. Blockchain application in Marine Insurance
This sub-sector of the insurance industry is very capital intensive to operate, as the cost of acquiring or building a vessel usually amounts to millions/billions of dollars. As such, the need to have adequate cover is necessary, given the size of capital involved. Insurance companies also have to verify every aspect of the claim because of the complexity of marine logistics and the size of the money required. The method of verifying claims takes a while because of the process of tracking a shipment and ascertaining the state of the vessel.
With blockchain applications, insurance companies can track shipments while communicating with the insured. As captured data nto the system, there will be faster decision-making. Because each participating entity will be able to see records in real-time.
A use case application can be seen in a platform built by EY, Maersk, Microsoft, and other industry practitioners. The platform, called INSURWAVE, incorporates and protects the flow of different data sources engaged in insuring shipments around the globe.
5. Blockchain Application in Reinsurance
The present reinsurance structure is overwhelming and inefficient in most cases. The procedure for dealing with several brokers and insurance companies is often a complex one. It causes delayed responses, especially in periods where there is a repeated occurrence of low-incidence events.
The complexity of managing the claims makes it vulnerable to human error.
Reinsurance companies can use blockchain applications to set up treaty insurance effectively. The terms of this type of contract are usually precise and structured. By that approval is automatic once the defined risk event occurs. B3i - a blockchain insurance start-up that has hosted over 30 reinsurance contracts as of February 2020 is a good case.
The platform connects brokers, insurers and reinsurers and provides a framework for efficient risk transfer and reassignment. Allianz and Generali have also used the B3i blockchain platform to place reinsurance contracts.
Despite a lot of progresses with the adoption of blockchain in the insurance sector, this field is still very potential. Industry leaders and practitioners should embrace digital systems that automate transactions via smart contracts. The insurance industry's future belongs to those who dare to move into new frontiers against all the odds.
