Blockchain: Ready to take on claims?
We’ve been discussing the topic of howbBlockchain stands to inform and aid, as well as change, the insurance industry. In the first article in this two-part series, I introduced the research that we’ve undertaken to better understand how the tech is already being used in the insurance industry, and how its adoption could help in the future, with risk assessment in property & casualty. Here we will see how not only distributed ledger technology, but the selective permissioning that blockchain offers can add value to the claims process.
For most insurance customers, after buying a policy, their next likely contact with the agent or carrier is when they need to make a claim. The biggest impression in the mind of the customer is the amount of work involved in making a claim – all for an unpredictable outcome which ultimately can leave consumers unsatisfied with the process. For insurance companies, there comes a moment of truth when they must respond in an adequate and timely manner to these claims—one only needs to think of Hurricane Sandy or Michael. If dealing with the carrier is easy for the customer in these moments, then life is good. If it is a cumbersome process, then life isn’t going to be good for the insurance company or the customer. Well, here’s some good news both for insurance companies and for their customers: Blockchain applications can help expedite the process while providing a better sense of what outcome to expect.
Insurance, in its absolute essence, is a contract, detailing the timing and amount of payments to be made to the insurance company by the insured; and the amount of coverage and scenarios under which claims will be paid out by the insurer. There is a very basic transfer of risk. The first component is extremely straightforward, involving very little judgment: either the insured has made their premium payments, or they have not. As we’ve said, however, there is an enormous amount of judgment involved when evaluating the amount of coverage to be paid. Policyholders may need to deal with the inconvenience of completing stacks of paperwork immediately after a traumatic event, dealing with multiple parties by phone and email, a complicated and lengthy process that doesn’t always yield an outcome the customer finds satisfactory.
An insurance company that can offer its policyholders a low-stress solution involving as much automation as possible—thereby circumventing as many subjective human factors as possible—will have a significant competitive advantage over other players in the industry.
One way to achieve this is by applying smart sensors to the insured’s asset, and uploading all data relevant to an event into a distributed ledger, or blockchain. This raw data from the sensor is factual, immutable, and permissioned, and—because of the selective nature of access—readable only by the policyholder, insurance company, and other relevant parties. The data is then inserted into the smart insurance contract so that both parties can determine exactly what the coverage will be. While smart sensors could significantly improve the insurance process, Consumers are typically reluctant to have a third party collecting data on them or their assets. Some insurers have found that if they offer significant premium reductions to incentivize smart sensor usage, that’s a trade-off wherein customers are prepared to share the requisite data.
A simple example of how this might work can be taken from one of the basic coverages in a homeowners insurance policy. The main issue around flood/water damage is that the policy excludes damage by flood waters. It does, however, cover “water damage caused by wind and rain.” A smart sensor embedded at various heights in the basement or ground floor of a house can measure if the damage was due to rising waters—flood, which isn’t covered—or by wind-blown rain, which is covered.
The potential benefit of this intelligence to claims processing efficiency is sizeable. To take another example, let’s say that a car’s sensor indicates that a bumper has been damaged while the vehicle is traveling at 10 miles per hour. All of this information is loaded into the distributed ledger immediately after the event for a pre-assessment of loss coverage by smart contract. If the smart contract detects an elevated level of complexity in these risks, the case can then be escalated for human analysis and decision making. Smart contracts can also automate the process to engage property reparations based on the pre-assessment, ensuring that the insured is able to start using their asset again as quickly as possible after the damage has occurred. Finally, once the coverage amount has been confirmed either by smart contract or human, all payments to third-parties can be automatically disbursed on the blockchain.
Allianz has been one of the key pioneers of DLT so far among the major insurance companies. Board member Hartmut Mai said that the company is eagerly exploring “the potential of this exciting technology in the corporate insurance segment.” The company has demonstrated viability for the use of a distributed ledger to streamline data processing and payments in the captive insurance space. The company teamed with Ernst & Young to build a prototype on Hyperledger’s Fabric Blockchain, and is utilizing Citi’s CitiConnect API for payments processing. Yann Krattiger of Allianz is extremely bullish on the technology. He said, “Our captive insurance Blockchain prototype demonstrates that regular transactions and cash transfer between fronting insurers and clients can be significantly accelerated and simplified. Automated processing replaces the exchange of thousands of emails and massive data files. Each process is transparent and can be tracked in real-time. Our customers benefit from increased speed, reliability and auditability.” Though there are far more technological and regulatory hurdles associated with traditional property and casualty insurance, as opposed to self-insurance, this offers an extremely promising start for a technology that is still in its infancy.
The transparency and audit trail delivered through a decentralized immutable ledger could also bolster fraud prevention, due to verification by multiple parties to a claim. For insurance providers, the length of time to settle a claim is directly proportional to the ultimate cost of the claim, and reserves rarely shrink over time. Thus, securely shared and expedited information will benefit claimants in the speed of resolution and ultimately payment—usually hours rather than days or weeks. Ultimately this benefits the insurer, too, in saved labor hours. For the policyholder, smart contracts triggering reserve increases and payment of deductibles will smooth transfers of money in a secure manner, limiting paperwork and invoicing.
Between time saved and less red tape, insurers and their customers both have much to gain by adopting a distributed ledger approach to claims. Whether the industry is ready or not, Blockchain technology is here to stay, and is already being used by some big insurers to face those moments of truth with more preparation and confidence of a positive customer outcome. Companies would be wise to look into its benefits.