Insurance Smart Contracts: A New Chance for Greater Efficiency
Insurance is one technique to ensure that any possible and/or preventable risk is minimised. If anything goes wrong or behaves in an unforeseen way, it can be quite useful in helping you manage your financial risk. Using smart contracts on the blockchain, which enable transparency, autonomy, accuracy, and other crucial benefits, is another way to feel protected.
Both options are good and have some advantages. Can we, however, combine them to gain even more benefits for your company and yourself? Is there a way to increase productivity? Yes, there is a method, and we are now reaping the benefits. In this case, smart contracts are used in the insurance industry. They are now one of the smartest tools for minimising your risks and giving you peace of mind about your future. Do you want to know how it works? Let's dig a little more into the insurance sector, smart contracts, blockchain technology, and the use of smart contracts in insurance.
In the Global Economy, the Insurance Industry
The growth of the insurance sector is inextricably linked to the growth of the global economy. Insurance firms are some of the world's largest collective investors. They have a very active investing portfolio. This type of activity is directly influenced by the overall dynamics of the insurance market. As commerce and production become more international, there is a growing demand for global insurance cover, which kickstarts the insurance market's globalisation process. The increase in direct investment also signals a tightening of business processes, which opens up new avenues for global insurance development.
Transnational insurance businesses and organisations are currently the market leaders in insurance services. According to them, the global insurance market is on the cusp of becoming a homogeneous market.
These international insurance firms serve as a catalyst for integration. Their goals are to broaden the geographical area of their activities, reach regional markets by removing entry barriers, lowering costs, and improving competitiveness as a result.
Business Protection Insurance
The insurance industry has a significant impact on both the global economy and the security of businesses. Because a business owner is risking his or her own money, one of his primary responsibilities is to reduce risk. It makes logical to manage and limit risk under these scenarios. That is why it is critical to have adequate insurance coverage. Fortunately, there are a variety of insurance options available to safeguard organisations against a variety of threats. A business owner can get insurance to cover product liability, property, workers' compensation, professional liability, and home-based enterprises, as well as to safeguard his or her business from disruption.
Furthermore, firms with employees are required by law to carry some form of insurance. This is dependent on the state in where the company is located. Different insurance can safeguard different sorts of businesses against unforeseen risks. Individual business replacement expenses are substantially higher, which makes obtaining business insurance a prudent decision for many business owners, whether large or small.
We can see how important insurance is for businesses.
Insurance plans safeguard organisations against unanticipated events and threats. Traditional contracts are ideal for this. But, because to smart contracts, we now have the opportunity to improve our insurance experience and make it lot more clear and transparent. This combines the insurance industry's experience with all of the advantages that smart contracts have to offer. We have every reason to assume that this is a watershed moment in human history.
What Is a Smart Contract and How Does It Work?
Let's look at the benefits of smart contracts in the insurance industry by learning more about smart contracts on the blockchain.
Today, we are seeing the creation and implementation of wholly new technologies that, like the Internet, have the potential to revolutionise the world. Blockchain technology is one of these technologies.
In a metaphorical sense, if the Internet has reduced distances between people, blockchain technology aspires to diminish mistrust. This is critical since the mere existence of notaries, registers, banks, guarantors, and a slew of other modern civilised society institutions is predicated on a lack of trust between people.
Though blockchain is most commonly linked with Bitcoin, it can be used in a variety of ways. In fact, Bitcoin is just one of the applications that makes use of blockchain technology right now.
A distributed database, or blockchain, is a type of database that holds records of digital transactions. It has a network of replicating databases rather than a central administrator, like traditional databases (banking, government, and accounting) do. This network is synchronised over the Internet, and all users on the network may see it.
When a digital transaction is completed in the blockchain system, it is joined together with other recent transactions in a cryptographically protected block and circulated throughout the network.
Following that, the confirmed transaction block is dated and added to the chain in chronological order. Older blocks are paired with new blocks with trusted transactions. They construct a chain of blocks that represent each transaction made in the blockchain's history. This also provides unrivalled security advantages. For example, if a hacker wanted to break a specific block in the blockchain, he or she would have to break not only that block, but all of the output blocks in the blockchain's history—which may number in the millions.
As we can see, blockchain is a decentralised, open, cryptographic technology that allows people to trust one another and eliminates the need for intermediaries.
Without a doubt, this technology will not be able to entirely eliminate intermediaries from the world, but it is evident that it will greatly simplify economic transactions. As a result, current company models will become more efficient and transaction costs will plummet.
Ideas and concepts that were difficult to materialise in the past are now being developed thanks to the existence of blockchain technology. Smart contracts, the Internet of Things, and the economy of shared consumption (shareconomy) are among them.
A smart contract is not the same as a contract in the traditional sense. To make a comparison, consider how many attempts it would take in the real world to seal a deal between two parties. On the one hand, retaining the services of a legal representation would be required. This person is in charge of drafting a contract. The two parties would next have to agree on the terms. The government, on the other hand, would be required to furnish the currency for the transaction.
In addition, the government must establish a legal foundation and act if a conflict arises. It would be essential to involve a number of financial institutions in this process if the parties wanted access to their finances. We can see how many middlemen there would be. The scenario would be considerably more convoluted in the event of a confrontation, and even then, these intermediaries could not ensure a successful outcome.
Smart contracts make this procedure considerably easier and safer for all parties involved, assuring relationship transparency and payment assurance. Nick Szabo introduced the concept of smart contracts for the first time in 1996. Nick Szabo is a cryptographer and computer scientist who works at the intersection of economics, law, and computing. A smart contract, he explained, is “a series of promises, expressed in digital form, including protocols within which the parties fulfil on these promises.” The goal was to empower computers to regulate the ownership, management, and operation of property to which they had direct access. The rules of regulation itself were intended to be written in a programming language that machines could understand. Less than two decades have passed, and Nick Szabo's ideas are becoming a reality.
A computer algorithm is what a smart contract is. Its mission is to complete and support the gradual deployment of commercial contracts in blockchain technology—specifically, the action algorithm mirrored in the blockchain. The provisions of such a contract can only be interpreted unambiguously by the system as they are implemented.
The Advantages of Smart Contracts
What are the advantages of implementing smart contracts? There are numerous advantages, but the following are the most important:
Blockchain is a self-contained technology that does not necessitate the use of a broker. It is critical that no third party, such as mediators or lawyers, be involved in the conclusion of an agreement. As a result, because contract administration is automated through the network, the possibility of third-party manipulation is almost eliminated. In this situation, the human aspect is removed, and the contract's fulfilment is no longer contingent on subjective events.
Smart contracts, as contrast to manual document processing, automate such operations through programme code. This saves a significant amount of time that would otherwise be spent manually processing data.
Documents cannot be lost since they are saved in encrypted form on a shared account that is available to all contract parties.
Backing Up Your Data
This is a problem that blockchain solves. In the event that your accounts are lost due to the negligence of the other party, the contract will include duplicates.
Smart contracts use encrypted websites to provide an unprecedented level of protection. Cryptography is all about this. Because hackers would need great ability to grasp your code, your documents are safely safeguarded. As a result, your documents will be secure.
Smart contracts can save you a lot of money because you don't need to pay a lawyer to oversee the execution of your transactions because there are no intermediaries.
Internal smart contract automation helps to reduce the number of errors. In compared to manually filling out a slew of forms, it also helps to assure low costs and high speed.
These observations show that smart contracts have distinct advantages that can solve a wide range of problems in various sectors. Smart contracts can be used in a variety of settings and sectors because they offer transparency, independence, rapid speed, economy, accuracy, security, and other advantages. It is critical for the insurance sector to have these advantages and to take use of them. They are without a doubt capable of optimising the insurance industry. Let's have a look at how that goes.
Smart Contracts on the Blockchain in the Insurance Industry
Blockchain will undoubtedly become ubiquitous in the insurance sector. It could reach a new level of development if smart contracts on the blockchain are used. The reason for this is that blockchain has the potential to make the insurance sector more efficient and alleviate some of its difficulties. Despite all of the money spent on insurance, these issues continue to create discomfort.
Fraud, customer engagement, manual claim assessment, workforce, distribution channel, ineffective data exchange, and fragmented data sources are just a few of the issues. All of them are critical, but fraud is the most critical of them all. It impacts all types of insurance, resulting in exorbitant rates for the honest insured. So, what can insurance companies do to combat fraud and other issues? The usage of blockchain smart contracts in insurance is one of the greatest ways to achieve this.
Because blockchain technology has the ability to improve existing procedures, it has the potential to alter the insurance industry as well. This capability lies at the heart of the insurance industry's interest in blockchain-based technology.
The Benefits of Using Smart Contracts in the Insurance Industry
The adoption of blockchain technology will have the greatest impact on the insurance industry, according to professional services major Deloitte. The advantages of implementing smart contracts in the insurance industry are obvious.
Even non-contested claims payments can take weeks or months to be processed nowadays. Policyholders will be reimbursed more promptly as a result of the use of smart contracts and automated claims payment processes, as opposed to the current manual methods. Smart contracts will also lower the cost of claims management and the danger of false claims.
Insurers can benefit from blockchain smart contracts in the following ways:
Transparency helps to reduce fraud.
aid in the protection of policy documents
provide a system that allows some claims to be evaluated and addressed rapidly
lessen the amount of paperwork
Place policy documents on many ledgers to ensure that they don't get misplaced.
increase the accuracy of data utilised in underwriting
removing administrative roadblocks
design a mechanism for promptly verifying claims to improve the claims process
Increasing the efficiency of the insurance business in general
In the insurance industry, smart contracts have the potential to be beneficial. The blockchain does not establish a new market; rather, it alters the one that already exists.
Insurance Use Cases for Blockchain Smart Contracts
Allianz, Aegon, Zurich, Munich RE, RGA, and other insurance companies have joined forces to form the Blockchain Insurance Industry Initiative (B3i). They formed an alliance of insurers and reinsurers. The goal is to look into the possibilities that distributed ledger technology bring in the insurance business. This group was founded in 2016, and it presently has 15 members. Insurance risks are more tradeable thanks to the Blockchain Insurance Industry Initiative.
SafeShare has developed a new tool in collaboration with Vrumi to safeguard property owners from damage and theft caused by commercial tenants. SafeShare's blockchain-based insurance solution provides consumers with a 24-hour claims hotline and coverage that is processed in real time.
Insurance businesses will be able to keep their expenses down by utilising blockchain technology. Another advantage for the insurer is the chance to enter a new market of needs-based insurance. SafeShare is an excellent blockchain-based startup insurance solution.
In Ukraine, Vladimir Shevchenko, Director of the Ukrainian Motor Transport Insurance Bureau, proposes to use blockchain technology in parts of the bureau's business procedures.
The usage of blockchain, according to Vladimir Shevchenko, will substantially alleviate the problem of lack of confidence globally. The reason for this is that blockchain contracts are secure, unambiguous, and transparent. There is no way to modify a contract once it has been signed, or to claim that one does not exist.
Data is given a time and date field when it is entered into the blockchain. The distributed registries' technical properties prevent it from altering. When it's time to alter data, a new date and time is assigned, and the record's cryptographic settings are modified. As a result, blockchain is seen as an unbiased witness to the contract's conclusion that cannot be bribed.
Furthermore, even the first steps in the use of blockchain technology are expected to provide a tremendous impetus to the integration of multiple databases that can be utilised in automobile insurance, according to Vladimir Shevchenko.
The Rega Risk platform makes use of the Ethereum blockchain system to construct decentralised autonomous groups that function as mutual insurance clubs without the use of insurance firms as middlemen. Lexi Club is a cooperative insurance programme for domestic animals founded by the company ReGa Risk Sharing. It reimburses around 80% of the cost of veterinarian treatments.
Before the smart contract is completed, the owner submits a snapshot of his or her pet to a bot. Following that, the animal is classified to one of several risk groups. After that, the owner will get an offer and will be able to finalise the transaction. Every club member is given a virtual Lexi Card. It identifies the smart contract on the Ethereum blockchain that maintains the club member's account.
If the pet goes to the veterinarian, the service examines the user's check, compares it to the vet clinic's records, and refunds a portion of the general fund to the pet owner. The service will be monetized by a 20 percent commission on membership payments. In addition to insurance, the bot will aid in the recovery of a lost pet by analysing photographs on social media using neural networks.
The blockchain insurance services Rega Gadget Protection (gadget insurance) and Drone Insurance (drone insurance) will be offered in the near future.
AXA, the French insurance behemoth, has unveiled a new flight delay insurance product. Fizzy is the name of the product. It stores and processes rewards on the public Ethereum blockchain.
Flyers can utilise the "smart insurance" tool Fizzy to insure their flights if a flight is delayed by two hours or longer. This insurance solution is efficient and useful because it uses smart contracts, which are self-executing pieces of code that trigger once certain circumstances are satisfied on a blockchain.
Fizzy, according to AXA, provides direct, automatic compensation to policyholders who experience flight delays. Fizzy will reimburse the policyholder immediately if the plane is more than two hours late.
The Ethereum public blockchain can be seen to perform two important functions in this scenario. On the one hand, it acts as a trigger for the client's payment once the two-hour period has passed. On the other hand, within a smart contract, it keeps track of the insurance contract itself. Finally, this product is a method for AXA and the insurance industry in general to increase openness in the insurance process.
Allianz, a German insurance company, and its investment partner, Nephelia, demonstrate another another application of blockchain smart contracts in the insurance sector, this time for disaster swaps and bonds. To safeguard against huge catastrophic losses, an insurer uses tradable financial products such as catastrophe swaps and bonds. These are triggered by natural disasters such as hurricanes or typhoons. A payout might be requested by both the investor and the insurance. Today, settling payment transactions like these after a tragic occurrence might take weeks or even months. The insurer can receive money in hours after a disastrous occurrence thanks to blockchain smart contracts. “Blockchain technology would increase the reliability, auditability, and speed of both cat swaps and bonds because it would require less manual processing, authentication, and verification through intermediaries to confirm the legitimacy of payments/transactions to and from investors,” says Richard Boyd, Allianz Risk Transfer AG's Chief Underwriting Officer in Bermuda (ART).
Everledger is a global digital ledger that tracks and protects valuable assets such as diamonds, fine art, and other collectibles. Everledger protects diamond buyers from fraud.
A digital serial number is assigned to each stone. More than 300,000 diamonds have already been registered. Nobody can alter the data in the register thanks to blockchain technology. Everledger relies on both public and private blockchains to provide transparency, resulting in a hybrid technology approach. Consumers, insurers, and intermediaries all benefit from it in this instance.
“If it's insurance, it's blockchain,” Dynamis adds. Dynamis is a decentralised insurance firm based on the Ethereum blockchain. Customers can get unemployment insurance through Dynamis. Dynamis is a smart contract for peer-to-peer insurance that provides supplemental unemployment coverage, according to Joshua Davis, the company's CEO and creator. This platform leverages keybase.io to verify a customer's identification by looking at their social media profiles. LinkedIn can be used to verify an applicant's identity and work position when applying for a new policy. Claimants might use their LinkedIn connections to prove that they are job-hunting. By utilising their social capital within their social networks, participants can obtain a new policy or open a new claim.
The remaining members of the insurance collective accept requests for the conclusion of an insurance contract and decisions on insurance payments.
Traity, a Spanish online reputation business, has built a chatbot called Kevin in collaboration with Suncorp, Australia's largest insurance giant. Kevin uses blockchain technology to provide micro-insurance for peer-to-peer transactions.
When someone wants to purchase or sell something, he sends Kevin a message and informs him about the peer-to-peer transaction. Kevin provides this user a one-of-a-kind URL. After that, the user sends his opponent this link. This peer-to-peer transaction is insured for up to $100 once that person is approved. It's vital to note that all of this is completely free. This technology, according to Traity, allows anyone, at any time, to verify and audit Kevin's balance sheet. As a result, the startup is as "trustworthy" as any large bank or insurance firm.
Marine insurance is also impacted by blockchain technology. Modern arrangements for cargo insurance for maritime transport, according to market participants, are severely overburdened and ineffective. Using collaborative efforts and current technology, existing challenges in maritime insurance can be considerably eased.
Maersk, a Danish shipping giant, EY, Microsoft, and GuardTime, a blockchain cybersecurity firm, have teamed up to work on a blockchain initiative for shipping insurance.
Azure, Microsoft's cloud platform, was used to create the service. It would develop a unified database that will store information on shipments and potential dangers, allowing the courts to comply with insurance laws.
The blockchain technology was created to assure the transparency and security of all input data, which is a complicated network of variables. Because of the complexity and duration of operations, according to Lars Henneberg, a spokesman of Maersk, there are certain issues with maritime insurance. Blockchain technology encourages the growth of maritime insurance and aids in the resolution of these issues.
Transport businesses will undoubtedly be able to provide standardisation, cost reduction, automation, and efficiency in the marine insurance industry with the adoption of blockchain technology. The introduction of blockchain technology, according to representatives of joint firms, can contribute to a drastic transformation in the overall structure of the marine insurance market. Another advantage of blockchain technology is that it can increase prospects for successful collaboration with global transportation corporations.
The choice to integrate blockchain technology, according to Bill Pieroni, is truly unusual, given the depth and breadth of the anticipated potential, and it is likely to have a substantial impact on a wide range of insurance products and services.
Smart Contracts Improve the World
We can deduce from these considerations that insurance is critical for a person's safety and a business's security. But now is the time for a major shift in the insurance market. Fraud, client interaction, manual claim assessment, workforce, distribution channels, and poor data-sharing are all issues that make the insurance sector less efficient than it could be.
The usage of blockchain smart contracts in insurance is one solution to this problem. It will aid in the removal of administrative hurdles, the reduction of fraud, the improvement of the quality of data used in underwriting, the protection of policy papers, the reduction of paperwork, and the improvement of the claims process by building a system for rapid claim verification. There's no denying that implementing blockchain smart contracts in the insurance industry could boost the industry's overall efficiency.
Smart contracts, according to experts, have the potential to be beneficial to the insurance business. Based on these data, it is reasonable to assume that blockchain is transforming the existing insurance business by increasing transparency and autonomy.
Many organisations have already implemented blockchain smart contracts in the insurance industry. There are both major corporations and small start-ups among them. They are united by a goal to use blockchain smart contracts to make their businesses more efficient, to provide customers more confidence and safety, and to make the world a better place. There is no doubt in my mind that they can do it, and we will see the results soon.