First conceived in 2008 by Japanese developer Satoshi Nakamoto, the blockchain is a newly developed technology that, while being just seventeen years in the making, has already left some profound impacts in the insurance world. But what is a blockchain, and how has it been applied to insurance companies across the globe?
What is a blockchain?
Let’s start with definitions. A blockchain is a type of distributed ledger technology (DFT) that serves as a “record book” through utilizing data records “blocks” to store data, linking them together through a “cryptographic hash function” which encrypts the data and links all of it together, with each block containing information from the previous block. Hence, this creates a “chain” of information, which is then stored across many different computers. In order to better picture this, just imagine a shared document. Everyone has access to it, and instead of one person writing everything down, everyone has their own copies which they add information to, which is then checked for validity by everyone else before adding it to the document. Of course, instead of words, it is encrypted data, and instead of a paper document, it is information. Nevertheless, blockchains are extremely useful for consistent, universal data. Along with that, once someone adds to the blockchain, it cannot be edited or removed, and everyone sees the same records for the blockchain, making it an extremely secure and efficient way to store and manage data across a wide space.
How is it applied?
Blockchains can find themselves applied to a variety of things, even beyond just simple data storage; in fact, blockchains could serve as a link towards other security measures that can transform the internal operations and general security of an insurance companies. Here are just a few of the many ways in which blockchains can be applied.
- Smart Contracts: Being directly enabled by blockchains, smart contracts are essentially programs stored on a blockchain that activate when certain conditions are met, which benefit greatly from the decentralized, tamper-proof nature of blockchains, as they are able to run smoothly without the threat of tampering. Essentially, these contracts could be used to update the insurance companies’ records and data, or send out money to clients after filling out a form, which then automatically sends out the payment without any human effort.
- Fraud Reduction: In conjunction with AI-assisted fraud detection and flagging, blockchains can also be used as a way to reduce the chances of fraud in the first place. Since every interaction with the blockchain is recorded and etched into it, if there are any irregular patterns in the data, such as false medical claims, duplicate spending, or even simply just forging different identities under the same type of claim, the blockchain will notice this and flag it for review, whether that is checking the amount of times a payment has gone through the system, verifying medical forms through checking to see if they match with any other forms in the blockchain, or even just simply logging all ID’s in the system, ensuring that they can’t be changed or altered in any way.
- Parametric Insurance: Combined with predictive analytics, parametric insurance can be an extremely useful tool to have, where instead of relying on people sending in “loss assessments” and paying them out after the event has happened, the insurance company can instead rely on trusted data stored in the blockchain, and when a certain threshold is reached, the payout can be sent. Here are some examples of parametric insurance being applied.
- The average threshold for rainfall this year for farmers has not been met, so farmers receive a payout to make up for this year’s loss.
- A predicted earthquake with a magnitude of 7.8 is estimated to strike a Californian neighborhood, so the company sends out a payment to those who are most likely going to be affected.
- Decentralized Data Sharing: While a simple application, insurers and regulators are able to share data across an entire network without having a single person “own” the data. Hence, since nobody actually “owns” it, and it is instead spread across an encrypted, decentralized network, making it extremely difficult for malevolent actors or hackers to hijack the data in the company, as they would need to attack a lot of computers in order to even match up to the same amount of data that they would get by simply targeting a single data center. Combined with the fact that eve trying to edit the data would cause the system to flag the potential edit, since everything has to be uniform across many different computers, decentralized data sharing is a vital application in ensuring the security of an insurance company.
- Lower Operation Costs: Simply using a decentralized system can lower the costs of operations quite significantly, as utilizing smart contracts to act as automatic systems to reduce manual tasks and “intermediates” between systems, in conjunction with risk assessments and automatic claims handling can help in saving both money, and precious time.
Conclusion
Blockchains are incredibly useful, and have a wide variety of applications, even beyond the ones listed. However, the benefits of blockchains aren’t as simple as just “applying” them and reaping immediate rewards. Blockchains are still suspectable to poor management and human error, and a poorly managed and rigid blockchain could not only mess with the entire functions of the company, slowing down processing time and making it incredibly difficult to fix bugs due to an inability to set up a flexible system, but it can also leave it wide open for hackers to exploit; even a small contract bug can allow a hacker to steal thousands in cash. But, the benefits of a blockchain are still far better than leaving everything in an easily exploitable data center, and companies should consider utilizing it to it’s fullest extent, as it’s numerous benefits outweigh their negative traits. However, companies need to take action and seize this opportunity with diligence and effort; after all, poor management is not an option in this world.