New insurance business models enabled by blockchain

Blockchain is pushing the global insurance industry full throttle into the next stage of its digital transformation. With enhancing cost efficiency being a key objective in 2019, new technology combinations will become increasingly prominent as insurers digitize antiquated systems.

Blockchain’s ability to act as a common foundation that eases the transition to other next-generation digital technologies such as such as telematics, machine learning, robotics and artificial intelligence is widening its appeal amongst insurers.

The transition to digital technologies continues to be a top business priority for insurance CIOs in 2019, taking precedence over revenue and business growth. While insurers might not have experimented with blockchain as early as other financial services sectors, this pinpoint focus has united the industry and enabled it to move towards live deployment in an impressively short space of time.

Newly created roles such as Chief Digital Officer and Chief Innovation Officer are now commonplace across the industry, with firms vying to increase their market share by developing solutions that meet customers’ demands for innovation while increasing efficiency and profitability. Once data has been migrated to a blockchain platform, the potential to apply other technologies such as artificial intelligence (AI) to utilize this immutable, real-time information is vast.

Use cases

Dynamic pricing is an example of an emerging blockchain-enabled innovation that benefits both the insurer and the customer, with broad-ranging potential across health insurance, car insurance, property insurance and beyond.

Taking the case of shipping insurance, advances in technologies such as AI and telematics enable insurers to access detailed, real-time information about a ship’s location, age and condition. This means, if a ship enters pirate waters, its location data would automatically be updated on the blockchain and the insurer can make the necessary adjustments to its risk profile and policy pricing. The same applies in the converse scenario – for example if a ship is young, in good condition and doesn’t stray from safe waters.

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The Evergreen Marine Corp. Ever Smile container ship sits docked at the Port of Los Angeles in Los Angeles, California, U.S., on Wednesday, March 28, 2018. Long-only exchange-traded funds (ETFs) linked to broad baskets of energy, metals and agricultural products attracted $2.66 billion this quarter, Bloomberg Intelligence estimates show. While that's the largest quarterly inflow in data going back to 2005, the stream of money slowed in March as the U.S.-China trade row clouded the outlook for economic growth. Photographer: Patrick T. Fallon/Bloomberg

Now consider that the ship is transporting refrigerated cargo, which is also insured. How does an insurer know whether a temperature spike is taking place in a crate at sea a thousand miles from its destination that could potentially destroy the cargo? Thanks to telematics, sensors in the cargo containers can communicate accurate information about temperature, humidity and atmosphere.

This information can be updated in a smart contract on a blockchain platform in real-time, enabling an automatic pay-out to the customer if the cargo is spoiled by high or low temperatures. This saves the insurance company time and money while providing the customer with a better experience.

Dynamic pricing also has huge potential in the health insurance space. Health insurers require a vast amount of information about a customer’s medical history and lifestyle in order to piece together a policy, and provision of false or inaccurate information is commonplace. Blockchain enables insurers to accumulate data from multiple verified sources with updates occurring in real-time, allowing them to carry out more frequent risk assessments and customize pricing accordingly.

Usage-based insurance (UBI) is another innovation currently reshaping the car insurance industry. Many cars now come equipped with connected features or advanced driver-assisted systems (ADAS), which is having a profound impact on the way auto insurers handle policies.

Traditionally, car insurance policies have been based on driver characteristics like age, personal information and accident history. With UBI, insurers are able to incorporate driving behaviour data such as speed and hard braking that is updated in real-time on the blockchain. In addition, telematics technology in the car can measure the time a driver spends on the road each day, opening up opportunities for pay-as-you-drive insurance policies that incorporate this data into a smart contract.

A digital future

These developments would be innovative in any sector, but when you consider the processes underpinning the insurance industry have remained largely unchanged for hundreds of years, the evolution is even more dramatic.

By harnessing the attributes of blockchain to automate manual processes and alleviate frictional costs, insurers have made the necessary investment to position themselves to take advantage of the myriad of opportunities and further efficiencies that blockchain – and its convergence with other new technologies – will deliver over the coming years.

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