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How Can Blockchain Reshape Future of Insurance: Scope and Challenges

Can blockchain reshape insurance as we know it? Let’s find out.

8 min read

December 19, 2024

Kumari Savita

The insurance industry is on the brink of a transformative shift, and at the heart of this revolution lies blockchain technology. As a secure, transparent, and immutable digital ledger, blockchain is reshaping traditional processes, unlocking efficiencies, and delivering enhanced customer experiences. For people in their 30s, navigating responsibilities and financial planning, understanding this evolution can provide valuable insights into the future of insurance and its intersection with technology. 

 

At a Glance

Aspect

Key Points

Global PerspectiveBlockchain streamlines claims, fraud prevention, and underwriting globally, with major investments.
Indian PerspectiveBlockchain is growing in India’s health, embedded, and agriculture sectors, supported by government initiatives.
Future TrendsHyper-personalized policies, decentralized insurance, and standardized global services.
BenefitsImproves transparency, efficiency, security, and customer empowerment through automation and control.
LimitationsHigh initial costs, regulatory hurdles, and data privacy concerns slow blockchain adoption.

 

Global Perspective

Globally, blockchain is being heralded as a game-changer for the insurance industry. Its applications span beyond basic record-keeping. It is redefining claims processing, fraud prevention, and policy underwriting. Companies in the United States, Europe, and Asia are exploring blockchain to streamline operations and reduce costs. According to a 2024 article by Reuters, major insurers are investing heavily in blockchain-based platforms to combat inefficiencies and enhance trust among stakeholders. 

 

1. Claims Processing:

Blockchain automates claims handling using smart contracts, which execute transactions once pre-set conditions are met. For example, a flight delay can trigger an immediate payout for travel insurance claims, eliminating manual paperwork and delays.

 

With smart contracts, policyholders experience quicker settlements without the need for lengthy verifications. This enhances customer satisfaction while reducing administrative burdens for insurers. Automation also minimizes human errors, ensuring accurate and reliable claim resolutions.

 

2. Fraud Prevention:

With a transparent and tamper-proof ledger of all transactions, blockchain identifies inconsistencies and prevents duplicate claims. This is critical, as insurance fraud costs billions globally every year. 

 

By creating an unchangeable record, blockchain in insurance makes fraudulent activities easier to detect. Cross-referencing data ensures that duplicate claims or false information cannot slip through, saving insurers significant financial losses and improving their reputation.

 

3. Underwriting and Risk Assessment:

Blockchain enables insurers to access real-time, accurate data, enhancing their ability to assess risks and offer competitive policies. This data-driven approach improves both efficiency and customer satisfaction.

 

Insurers use aggregated data from reliable sources to evaluate risk more effectively. Blockchain’s ability to verify data ensures accurate risk profiling, leading to fair pricing and personalized policy offerings.

 

4. Peer-to-Peer (P2P) Insurance Models:

Blockchain facilitates decentralized insurance coverage, where individuals pool resources for shared protection. This innovative approach reduces reliance on intermediaries and fosters transparency.

 

P2P models operate without traditional insurance companies as middlemen who facilitate premium collections and claim processing, giving beneficiaries more control and ensuring fair distribution of funds. Members can directly monitor fund usage, building trust and collaboration.

 

5. Parametric Insurance:

Parametric insurance offers predefined payouts based on specific triggers, such as weather events, complementing traditional policies by ensuring swift, hassle-free settlements when unexpected incidents threaten your business.

 

Blockchain is widely used in parametric insurance, where payouts are predefined and automatically triggered by specific events, such as natural disasters or weather conditions. This eliminates lengthy claim assessments and provides immediate support to policyholders.

 

By tying payouts to data points (e.g., rainfall levels or earthquake intensity), parametric insurance ensures faster financial relief to affected parties, making it particularly effective for disaster recovery and large-scale events.

 

6. Reinsurance:

Reinsurance — known for its complexity and administrative overhead, benefits greatly from blockchain’s transparency and accuracy. By maintaining a shared ledger, all parties involved in reinsurance transactions can access the same information, reducing redundancies and delays.

 

Blockchain simplifies coordination between insurers and reinsurers, reducing disputes and enabling faster settlements. It enhances trust and ensures consistency in large-scale, multi-party agreements.

 

Scope of Blockchain in Insurance Industry

In India, the adoption of blockchain for the insurance industry is still in its early stages but shows immense potential. India’s health insurance sector can benefit significantly from blockchain and smart contracts. With a rapidly digitizing economy and a growing middle class, blockchain’s role in fostering trust and efficiency is becoming increasingly relevant. 

 

The IRDAI emphasizes blockchain’s potential to revolutionize insurance by enhancing transparency, fraud detection, and claims processing, while enabling innovative applications like Internet of Things (IoT) product development and improved risk management processes. 

 

1. Affordability:

Blockchain can streamline claim processes and enhance transparency, ensuring fair settlements in health insurance. Smart contracts enable automatic processing of claims when predefined conditions are met, reducing the hassles faced during the term insurance settlement process. 

Blockchain in insurance makes the end-to-end insurance settlement process affordable, enabling the access to best insurance plans in India. Below is a list of top affordable health and term insurance plans offered in India. 

Top Affordable Insurance Options

Health Insurance

Term Insurance

Tata AIG Medicare Plan Bajaj Allianz- E Touch Term Plan
Star Health Assure Plan Icici Prudential- Saral Jeevan Bima Term Plan
ICICI Elevate Plan Icici Prudential- Iprotect Smart Term Plan
Care Supreme Plan Max Life- Max Smart Total Elite Protection Term Plan

 

 

2. Embedded Insurance:

Embedded insurance is an important distribution channel for the insurance sector that is likely to grow in the coming years. Blockchain can be used to verify and record embedded insurance contracts that are sold as part of a product or service. The following are some common examples of embedded insurance:

> Travel insurance: Offered when booking a flight

> Car insurance: Offered when renting a car

> Protection plans: Offered when purchasing electronic goods

> Personal policies: Embedded within a family health insurance policy

 

3. Agriculture Insurance:

India’s agriculture sector can significantly benefit from blockchain. Farmers, often burdened by complex claim processes and delays, can leverage blockchain for quicker claim settlements tied to predefined parameters like rainfall levels. This innovation could drive higher participation in crop insurance schemes, bolstering rural resilience.

Blockchain ensures that payouts reach farmers promptly during times of crisis, boosting trust and participation in insurance programs. Transparent records reduce exploitation by intermediaries and ensure equitable benefits.

 

5. Government Initiatives:

Programs like the Digital India campaign pave the way for blockchain adoption. Insurers are collaborating with tech startups to pilot blockchain-based solutions addressing challenges like claim settlements, policy distribution, and fraud detection.

Government support creates an ecosystem conducive to innovation, allowing startups and insurers to experiment with cutting-edge solutions. These initiatives build confidence among stakeholders and accelerate adoption. Same stands for government initiatives in the insurance sector.

 

6. Integration with Emerging Technologies:

Blockchain is being paired with artificial intelligence to create smarter, more adaptive insurance systems. These integrations allow insurers to gather real-time data for better risk assessments and personalized offerings.

Combining blockchain for insurance industry with devices like weather sensors offers precise data for parametric insurance claims. AI models process this data to refine risk assessments and optimize premiums

 

7. Educational Initiatives:

Institutions and think tanks are exploring blockchain’s potential in the insurance space through workshops and pilot programs. These efforts aim to upskill professionals and address the talent gap required to implement blockchain-based solutions effectively.

Building a skilled workforce ensures long-term sustainability and widespread adoption of blockchain in insurance industry. Educational initiatives also foster collaboration between academia, startups, and insurers.

 

Blockchain ≠ AI

Blockchain and Artificial Intelligence are both futuristic technologies. However, their use cases set them apart from each other in many ways. Below is a comparison between blockchain and artificial intelligence.

Aspect

Blockchain

Artificial Intelligence

Meaning

 

 

A decentralized, distributed ledger technology that securely records transactions across multiple computers.The simulation of human intelligence in machines, designed to perform tasks that typically require human cognition.
Data HandlingStores data in a distributed record book.Analyses and processes data
End goalsEnsure data security and transparency.Enable learning and decision-making.
Applications in Insurance

> automated claim processing via smart contracts.

> record storage in a decentralized network.

> manage policies and renewals in a digital ledger.

> reduced paperworks

> minimized human error

> detect fraud through pattern recognition.

personalise insurance, recommend adjusted premiums, and tailored policies to customers.

> 24/7 virtual customer support 

> analyse risk & forecast trends

 

Limitations of Blockchain in Insurance

While blockchain technology offers immense potential to revolutionize the insurance industry, its adoption comes with several challenges that need to be addressed for its successful implementation.

 

1. High Initial Costs

Implementing blockchain in insurance requires significant upfront investment in infrastructure, technology, and talent. 

Small and medium-sized insurance companies, in particular, may struggle to afford the high initial costs associated with adopting blockchain. This includes the expenses of setting up the necessary hardware and software systems, integrating blockchain solutions into existing business processes, and training employees to work with the new technology. 

Collaboration between multiple blockchain and insurance platforms could potentially mitigate these costs. By pooling resources, companies can lower individual expenses, share the technological burden, and accelerate adoption. 

 

2. Regulatory Hurdles

The insurance industry is heavily regulated, with strict rules governing the management of policies, claims, and customer data.

The lack of clear regulatory frameworks can create uncertainty for insurance companies considering blockchain adoption, as they may face challenges in ensuring that they are compliant with existing laws and regulations. 

To overcome this challenge, it is crucial for insurers, technology developers, and regulators to engage in open dialogues to develop comprehensive and flexible regulatory frameworks. By doing so, the industry can foster innovation while ensuring that consumer protection and industry standards are maintained. 

 

3. Data Privacy Concerns

Blockchain technology operates by storing data across decentralized nodes, creating a transparent and immutable ledger. 

While this provides benefits such as enhanced security and accountability, it also raises significant concerns regarding data privacy. In the insurance industry, where sensitive customer information is stored and exchanged, ensuring privacy is of utmost importance. 

Transparency of the blockchain means that once data is recorded, it cannot be altered or deleted, which poses additional privacy challenges, especially if the data contains personally identifiable information. 

To address these concerns, blockchain developers must implement advanced encryption techniques and ensure that the system complies with global privacy standards such as the General Data Protection Regulation (GDPR) in Europe. Blockchain solutions that offer “privacy by design” can ensure that sensitive data is protected without compromising transparency or accountability.

 

Benefits of Blockchain in Insurance

Despite the limitations, blockchain offers a multitude of advantages that can transform the future of insurance industry by improving efficiency, transparency, and security. Let’s explore some of the key benefits in more detail.

 

1. Transparency and Trust

One of the key advantages of blockchain for insurance industry is its ability to create an immutable, transparent ledger of transactions. This feature is particularly valuable in the insurance industry, where trust between insurers and policyholders is crucial. 

Blockchain’s transparency ensures that all parties have access to the same information, which significantly reduces the potential for fraud and disputes.

In cases of disputes, the blockchain can serve as a reliable source of truth, reducing the time and cost spent on resolving conflicts. By enhancing transparency, blockchain fosters a higher level of trust between insurers and their customers, improving overall customer satisfaction and loyalty.

 

2. Operational Efficiency

Blockchain can greatly enhance operational efficiency in the insurance industry by automating many time-consuming processes. 

Traditionally, insurance involves a large number of administrative tasks such as data entry, policy verification, claims handling, and auditing. These tasks are often manual, prone to errors, and require significant time and resources. Blockchain’s smart contracts and automation capabilities can streamline these processes, reducing administrative costs and increasing productivity.

Blockchain enables insurers to automate key processes through the use of smart contracts. These are self-executing contracts that automatically enforce the terms of an agreement when certain conditions are met. For example, a smart contract could automatically trigger a claim payment when specific conditions are satisfied, such as after a verified car accident. 

This eliminates the need for intermediaries and reduces the risk of human error. As a result, insurance companies can process claims more quickly and efficiently, reducing overhead costs and enhancing customer experience. Furthermore, blockchain’s decentralized nature ensures that data is consistently updated in real time, reducing delays and improving the speed of operations.

 

3. Enhanced Security

Blockchain technology offers superior security compared to traditional centralized databases. In a decentralized blockchain network, data is stored across multiple nodes, making it much harder for hackers to tamper with or corrupt the information. This feature makes blockchain an ideal solution for protecting sensitive insurance data, such as customer personal details, medical records, and financial information.

This level of security helps protect against fraud, identity theft, and cyberattacks. As cyber threats continue to grow, blockchain for insurance industry provides a robust solution to safeguard both insurers and policyholders. 

 

4. Customer Empowerment

Through blockchain technology, customers can have real-time access to their insurance policy details, claims status, and other relevant information, all in one secure and transparent platform. This level of transparency and control can greatly enhance customer engagement and satisfaction.

Additionally, blockchain and insurance platforms can enable customers to make more informed decisions about their policies, compare offers, and track claims, improving the overall customer experience. By putting customers in control of their own data, blockchain also promotes transparency, reduces friction, and fosters a stronger relationship between insurers and their clients.

 

What the Future Entails

The future of insurance industry, powered by blockchain, promises a landscape of innovation, accessibility, and efficiency. Key trends include:

 

1. Hyper-Personalized Policies:

Blockchain’s ability to securely store and process granular customer data will enable insurers to craft highly customized policies tailored to individual needs and behaviors.

Insurers can analyze blockchain-verified data to offer products that reflect lifestyle choices, health conditions, and risk levels, creating a user-centric insurance model.

 

2. Decentralized Autonomous Insurance:

With the advent of blockchain, decentralized insurance organizations may emerge, where policyholders collectively decide on claim approvals and fund distributions.

These models reduce dependency on traditional insurers, giving policyholders more control and fostering community-driven risk management.

 

3. Global Insurance Ecosystem:

Standardized blockchain and insurance protocols will enable seamless cross-border insurance services, addressing the needs of an increasingly globalized world.

Blockchain ensures uniformity in regulations and claim settlements across jurisdictions, opening doors for international collaboration.

 

FAQs

1. Is blockchain legal in India?

Yes, blockchain technology is legal in India. However, cryptocurrency-related activities have faced regulatory scrutiny, but blockchain itself remains unregulated or ‘self-regulated’ and legal.

2. How is blockchain different from traditional databases?

Unlike traditional databases, blockchain is decentralized and immutable, meaning once data is recorded, it cannot be altered or deleted, providing higher security and transparency.

3. What are smart contracts in insurance?

Smart contracts are self-executing contracts with terms directly written into code. In insurance, they automate policy execution, such as claims approval or premium payments, based on predefined conditions.

4. Can blockchain enable microinsurance in India?

Yes, blockchain can make microinsurance more affordable and accessible by reducing administrative costs, enabling efficient distribution, and automating processes, which is particularly beneficial in emerging markets like India.

5. What is the environmental impact of blockchain?

Many blockchain networks, particularly those using proof-of-work (PoW) consensus mechanisms like Bitcoin, consume a significant amount of energy, contributing to environmental concerns. However, some blockchain projects are shifting towards more energy-efficient models like proof-of-stake (PoS).

 

Bottomline 

Blockchain is paving the way for a user-centric insurance model, enabling highly customized policies tailored to individual needs and behaviors across multiple insurers. However, comparing these options can be complex. That’s where we come in. Book a call with OneAssure today, and let our specialists help you find the perfect coverage.

Dive deeper into the world of insurance and read our other blog articles for valuable insights, tips, and guidance on navigating the complexities of policies and coverage options. Whether you’re securing your family’s future or protecting your business, OneAssure is here to simplify insurance for you.

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