Blockchain is receiving increasing attention from scholars and industry, as it is considered a revolutionary technology that could bring enormous benefits in many different fields. In 2017, Gartner positioned the blockchain near the peak of the hype curve, acknowledging the strong feeling of enthusiasm that the public was already showing for this technology, now widely discussed across all media. In this scenario, the risk of adopting the blockchain just as a result of such enthusiasm, without objectively assessing the real added value that it could bring to the business, is quite high, as well as the risk of being cut out from the competitive arena in the case of late adoption and consequent missed opportunity of exploiting its potential benefits.
The insurance sector is one of the first ones that has carefully started studying what the benefits of using the blockchain could be.
For this specific sector, however, the hype curve shows that technology is still in the very fluid stage of triggering disruptive and unexpected innovation, which means that the spectrum of possible applications has not yet been fully explored. Insurers, as many other companies not necessarily only active in the financial sector, are currently required to make a difficult decision, i.e., whether to adopt the blockchain or not, and, unfortunately, they will know if they were right not earlier than at least three years from now.
The blockchain, with all its applications, such as crypto-currencies, distributed registries and smart contracts, is no longer, therefore, to be considered an obscure technology at the margins of the financial services sector, but rather a real breakthrough in the business model of insurers around the whole world, allowing them to significantly reduce costs, accelerate transactions, distribute risk and grow the markets that they already preside.
The use of blockchain could positively influence different internal processes (from customer acquisition and management to fraud prevention, etc.) and it could even allow companies to reach new markets.
In particular, the most important and extensive use case, which very well demonstrates major benefits deriving from the introduction of the blockchain technology in the insurance sector, will be presented in detail below. I am talking about the improvement of the customer experience and reduction of operating costs.
In this case, smart contracts could be used to increase the speed of processing complaints and to reduce the costs (and mistakes) associated with the human intervention that is usually involved. From this point of view, a smart contract could automatically verify the conditions required to allow the transfer of the reimbursement sum from the insurance company to the its customer.
A simple application could, for example, consist of activating an automatic transfer of reimbursement for any car accident only if the customer assigns the reparation of the car to a mechanic whose identity has previously been certified through the “Know-Your -Customer “(KYC) mechanism. More complex use cases could also involve Oracle services to gather information from the real world. To give an example, in the crop insurance an Oracle system could periodically check the meteorological data and insert this information into the blockchain, for it to be analyzed by a smart contract, which would then be able to activate an insurance claim in case of bad weather persistence.
Similar problems have been addressed in a prototype that was presented in 2017 by AXA Assicurazioni for travel insurance, where the idea is to exploit a smart contract developed on the Ethereum blockchain to automatically reimburse travelers if their plane or train has suffered considerable delays.
The name of the service is Fizzy, a parametric insurance policy, the cost of which is calculated on the basis of historical analysis run on the transportation data gathered over the last seven years, which automatically compensates the customer in case of delay, regardless of the reason for the delay itself and therefore without any exception.
Another interesting use case, which could widely benefit from the increasing diffusion of sensors, is the implementation of smart contracts in combination with IoT. In fact, houses could be equipped with sensors that automatically recall a smart contract in the case of domestic damage (for example, humidity sensors could be used to monitor damage on the roof). Likewise, smart appliances could automatically monitor their operational status and initiate a complaint, if not even contact the repairer directly, in case faster assistance is needed.
Solutions like the ones described above bring benefits to various actors of the insurance ecosystem: to the insurance company, which could reduce the amount of resources normally dedicated to handling requests, but also to customers, who would be able to receive money before being aware of the damage itself. Another advantage derives from the fact that everyone can freely inspect the smart contract at any time. The customer who signs a policy would, thus, have a clear idea of ??the contractual conditions (even if, given the state of art, he/she should have mastered some programming skills in order to understand the code of the smart contract). As a result, it would be easier for the customer to review the insurance policy that he/she has signed, as well as to compare it with those offered by other companies, making sure that the choice is no longer based solely on the degree of trust felt towards a given company (because trust would be implicitly guaranteed by the smart contract) but rather on objective data.
Despite these advantages, it must be said that, at current conditions, the outlined scenario could not be adopted for the entirety of insurance policies available. In fact, most complaints processed by insurance companies have yet to be evaluated by an external expert before being resolved. In the case of manual processing, however, customer experience could still be improved by managing payments in cryptocurrencies, which are again one of the many blockchain applications out there. In fact, using cryptocurrencies, repayment transfer would be faster than it would be with traditional methods, since it would only be a matter seconds or minutes, depending on the blockchain protocol used.
From a system architecture perspective, the most appropriate choice is probably to adopt a combination of public and private blockchains, where the private blockchain could be used to record claims policies and data, while the public blockchain could be used to trigger repayment valued in terms of marketable cryptocurrencies (e.g., Ether, Bitcoin). The private blockchain could be managed by the computers, called nodes, of a trusted third-party company, thus reducing the costs of mining, while the maintenance of the public blockchain would be left to the large audience of interested actors, who would surely be encouraged to contribute through to mining rewards. Alternatively, the insurance company may decide to only use one public blockchain, accepting to incur in higher transaction costs in order to improve its reputation and gain customer trust by ensuring complete decentralization.
There are numerous other use cases, some of which have already been tested with prototypes, such as data entry and identity verification, calculation of premiums, risk assessment and prevention of fraudulent behavior, so-called “Pay-Per- Use ” insurance (also known as micro-insurance) and” Peer-To-Peer ” insurance.
In short, it is quite clear that the insurance field is one in which, even if the potential of the blockchain has not yet been completely explored, such technology could have a significant impact on different processes and application scenarios. Therefore, I hope that the examination of use cases such as those mentioned above may be useful for the public to identify the advantages and disadvantages of the technology itself.
By Eloisa Marchesoni.