Blockchain Disrupts Insurance, Redefines Customer Value
Long predicated on trusted relationships between people, the insurance industry is ripe for disruption. However, innovations like blockchain technology are not necessarily bad for insurance workers. Blockchain in particular represents an amazing opportunity for the insurance industry at-large to redefine the value it delivers to customers – the essence of any worthwhile transformation.
Non-traditional start-ups are eyeing blockchain as a driver for new business models. Established insurers and re-insurers are attracted to anything that promises to improve operations for greater efficiencies and reduced costs, boosting customer satisfaction along with the bottom line. This is how Stefan Schmidt, Solution Manager at SAP for Insurance, recently summarized the industry’s situation for me.
“Digital transformation changes customer relationships as people can go online and use their mobile devices to select and accept insurance contracts without the direct involvement of a person,” said Schmidt. “This transforms how insurance companies compete, the role of insurance representatives, and operational costs. Using the right technology, insurers can provide the same contract at a lower price for customers and higher margin for the company.”
According to Schmidt, blockchain has the potential to streamline processes like automatic payments, claim initiation and management, risk transfer and micro insurance across a trusted network of participants – whether public or private. One of the biggest promises this technology offers insurers is the opportunity to lower the cost per contract.
“Every member of the network has the same tamper-proof information at the same time, and can trust that it’s accurate and approved automatically by the built-in algorithms,” he said. “It’s not possible to easily destroy or change data in a distributed ledger, so people can be sure that the stored information is correct without any manual review required.”
Schmidt described one scenario of a farmer with a smart contract for crop insurance. The blockchain technology triggers a fully automated claim and payment process. Algorithms automatically check GPS and weather station data based on the location of the farmer’s fields, allowing the insurance company to cost-effectively calculate risk and contract terms initially, and manage claims over time. Eliminating what was a labor intensive process saves the insurer time and money, and not only because it’s faster. Automation mitigates the risk of human error. This has the potential to reduce fraud while streamlining claim payments.
Like any disruptive technology, the cascading impact on standards, data governance and regulatory compliance is huge. “Blockchain can only work if a group of insurers and customers standardize and simplify contracts,” said Schmidt. “We’ll need new processes, governance and standards.”
Near term, Schmidt sees the blockchain most applicable in less complex insurance contracts like crop, transport or hurricane insurance, that typically have more known data around risk variables (e.g., IoT, GPS, weather conditions).
“Blockchain doesn’t change the insurance business completely right away. It’s a new element in the future architecture of insurance companies,” he said. “Blockchain is likeliest best for a certain kind of contract and transaction – a piece of the process. You cannot use it for the storage and selection of a huge amount of data.”
Will the blockchain redefine the entire insurance industry? Probably not immediately, but it has strong potential to redefine what customers can expect, opening up opportunities for entirely new industry players and workers with higher value skills. At the very least, companies and their policyholders can look forward to digital handshakes powering more efficient protection behind the scenes.
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