The Benefits of Blockchain Technology To The Insurance Industry

This article highlights that there is better value for the insurance industry in using the blockchain technology protocols than sticking to their old business model.?

Cost Drivers in the Insurance Industry

As in others, the insurance industry has several cost drivers. According to a?McKinsey & Company article?(2015), bottom-performing insurers experience almost double the costs experienced by their top-performing rivalries in the industry, this is attributed mostly to management attitude.??Operational costs for higher performers in life cover insurers are estimated at 9%, while it stands at 17% for bottom performers. In the property and casualty sector, higher performer operational costs account for 9% of the total expenses, while for the bottom performer, the share stands at 18%. This is blamed on the managerial belief that such high costs are integral to their business model and cannot be changed. In the operational space, typical insurance costs could involve membership drive for new customers, primarily through brokers. Another operational cost driver can be in the form of relationship management, as well as transaction processing, especially where shuffling of layers of documents, data and paperwork cannot be avoided. These are typical cost driver candidates for elimination of when blockchain technology is used or adopted.?

What Is Blockchain Technology

For simplification, let us break down the word blockchain into two – 'block' and 'chain'. In a typical value chain, one can have blocks of stakeholders, blocks of ledgers, blocks of checks and controls at various stages. These blocks are then linked in real time interface. Anything happening, taking place, or changing at one block is simultaneously replicated at all other blocks in the same chain. Thus, if a transaction such as signing up a new customer takes place at one block the verifiable and authentic detains of this new transaction must be fully and instantly accessible to other stakeholders (blocks) like the insurer, the bank, a credit agency without any delays. Approval of this new customer cannot be concluded until all these other stakeholders or blocks have authenticated and equally verified the details as deposited. Therefore, once this transaction is concluded, it is stored on a ledger system that is decentralised to all these stakeholders with the same code or key of information.?

This way, all stakeholders are synchronised to have?'one big view of reality'. That is how blockchain works, and no single member of the blockchain can modify data of any transaction without similarly going through a synchronised consensus with the other stakeholders on the blockchain. Therefore, we sometimes regard blockchain technology as immutable – not corruptible. At the same time, and for transparency's sake, blockchain makes it easy to access or process a particular piece of inquiry or data at the client, broker, insurer, Bank, credit agency, or contractor. There is no one stakeholder holding monopoly on data and information. All information and data for any activity are decentralised and accessible equitably to all those on the chain.?

This means there is no need for any stakeholder to worry about trusting another stakeholder for information or data. The new paradigm with blockchain is “trustless” –?trust is no longer an issue. In this way, if clients consider putting in a claim, they will know in advance if their claim will be honoured before asking the insurer as the two share and hold the same reality of information on the decentralised ledger. Therefore,?blockchain saves time?and brings about needed efficiency in operations.

Finally, if all the stakeholders have the same access to information about any particular transaction, why would an insured client need a broker or the insurer to put in their claim? Can’t, they just go straight to the insurer's bank and present a claim for payment as the bank holds the same verifiable data on the claim? Well, because of this possibility, blockchain usually works on the basis where no brokers or third parties are needed in the value chain. The system prefers a?Peer-to-Peer approach.

Where can the Blockchain Technology add value in the Industry?

The diagram above is a rough illustration of flows of transactional activities commencing with the client, going through various stakeholders and eventually ending with the client in an insurance value chain. One can just imagine the cumbersome details that come with, especially the paper-based manual processing of such transactions. Obviously, in this kind of a business model, many insurance companies are most probably heavily buckling under the tyranny of bureaucracy, implicit costs and bottlenecks in the system. With the adoption of a corporate Blockchain solution, the entire system can easily be detoxed and made seamlessly efficient by removing brokers, digitizing the many documents and automating their processing and retrieval. This is exactly where the decentralized ledger system of the blockchain comes into play as illustrated in the diagram below. For further details, you are advised to consult more experts in this field as well as reading more in books like the one whose launch on 9 June 2022 was proudly sponsored by NamibRe. That is “INTRODUCTION TO BLOCKCHAIN TECHNOLOGY AND CRYPTOCURRENCY: A HANDBOOK FOR BEGINNERS”?By Dr Gurvy Kavei .