The complexity of insurance means the claims process relies on efficient collaboration among a range of organizations and individuals. The chain of communication necessarily involves the customer and insurance provider—but it also involves other parties such as underwriters, brokers, and reinsurers. The number of links in the chain creates a lengthy process that increases the time required to process a claim and creates opportunities for regulatory failure. Blockchain is the technology poised to solve the problem due to its decentralization and smart contract functions, which can streamline the process and drive down operating costs.
Collaboration throughout claims leads to paperwork-heavy administration, and it is plaguing the insurance industry
The list of involved parties in insurance is long, and it only gets extended in the case of a claim. This problem infects many different categories of insurance offerings, but in the case of motor insurance claims, the customer and anyone involved in the accident will have to visit several enterprises to get vehicles repaired, and each one will require payment from the insurer. Often, an employee must manually approve every transaction throughout the process, which is time-consuming, expensive, and rife with opportunities for mistakes. The constant stream of information represents a necessary but drastically inefficient part of the insurance industry, which, if corrected, could help insurers achieve one of their main goals of driving down their operating costs (see Exhibit 1).
Exhibit 1: Driving down operating costs is the key goal for insurers
Sample: A sample of 39 insurers and 318 enterprise from other sectors.
Source: HFS Industry Blueprint: Insurance Operations Services, 2018.
It isn’t just insurers that hope to financially gain from the improved administration process; in the competitive market, savings may find their way to customers. The scale of the opportunity is laid bare in a 2018 study that found that administration represented 25% to 31% of total healthcare expenditure in the US, of which at least 62% is believed to be billing and insurance-related activities. If insurers can look beyond extending their profit margins and pass these cost savings on to their customers, they could enhance their competitiveness in a market that otherwise trades in services lacking tangible differentiation.
Applying blockchain to the insurance industry has the potential to drive costs down by 30%—insurers must experiment with the technology to streamline the claims process and achieve their goals
Blockchain’s decentralization, combined with its smart contract functionality, means it can play a pivotal role in driving down the administrative costs associated with insurance claims.
In Exhibit 2 B3i, which is explained later, demonstrates the current process of insurance information exchange alongside the method offered by decentralization. It is clear that insurance currently demands a constant stream of information, often leading to multiple versions of the same document and the inevitable human error this brings. However, by adopting a peer-to-peer approach supported by blockchain’s decentralization, the task would be streamlined as all information is shared across the network, so all parties have access to the same updated information. The result is a drastically reduced need for human intervention, driving down labor costs and the potential for human error.
Exhibit 2: B3i explains the difference between tradition information exchange and a blockchain
Source: B3i Development and Priorities Presentation
Once information is stored on the blockchain and every party has instant access, partners can leverage smart contracts, offering greater opportunities. For example, rather than have employees manually authorize payments at each phase of the process, smart contracts can do it automatically because the terms of the transaction are written in code which is then stored on the blockchain. Once these conditions have been met, the smart contract will automatically authorize the payment without the need for human intervention. In an example from healthcare—an industry where there are multiple payments for insurance companies to authorize on their customers’ behalf—a customer could visit a pharmacist who would then upload their prescription form to the blockchain, which would meet the requirements of the network and enable immediate payment authorization.
Industry leaders are already exploring blockchain—if you don’t get involved now, you might miss the boat
One of the biggest hurdles facing blockchain initiatives is encouraging industry leaders to collaborate to produce one single standardized blockchain—it’s not difficult to imagine why competing firms would be unwilling to support and enable each other. However, this is a challenge that the insurance industry has already overcome through the Blockchain Insurance Industry Initiative (B3i), which was founded in 2016.
B3i already consists of several industry leaders, including major insurance carriers Allianz and Zurich. Already they are working to offer a Property Catastrophe Excess of Loss product, which will be built on the blockchain and their roadmap pledges to expand into commercial insurance as well as life and health insurance in the next five years.
Exhibit 3: The insurance industry is already rapidly adopting blockchain
Source: HFS Research, Top 10 Blockchain Platforms 2018, Sample: 550 blockchain engagements across 15 blockchain service providers
The Bottom Line: The competitive nature of the market means margins are constantly under pressure. Insurance carriers must be proactive in exploring new technologies, and decentralization could be what they’re searching for.
The emergence of blockchain has presented an opportunity for insurers to experiment with the technology, and it’s one that some industry leaders are already taking advantage of. Any insurers who will experiment in an effort to drive down administration costs surrounding the complex claims process have the opportunity to maximize their margins and increased competitiveness in a market riddled with disruptive forces. Already, major players in the market are looking to blockchain as a potential solution (see Exhibit 3)—the time to act is now, or else legacy insurers risk becoming obsolete as the market is dominated by an oligopoly of blockchain augmented insurers.