Blockchain and smart contracts: revolutionising the insurance industry

Intermediaries Santam News Self-service Tools 3 min read 15 August 2017

Blockchain technology is heralded as the biggest symbol of the fourth industrial revolution and the next big disruptor for many industries, including insurance. While still in its infancy, this ‘business unusual’ technology can streamline paperwork, increase data security and save businesses costs by cutting out time consuming claims processes. We look at all the ways in which blockchain technology will benefit you – especially so-called ‘smart contracts’.


Recap: what is a blockchain?


Think of a blockchain as a sales ledger – a comprehensive, always up-to-date accounting record of who holds what or who transferred what to whom. This sales ledger is a secure decentralised database that’s publicly available. Blockchain can record anything, from physical assets to electronic cash.


When a digital transaction is carried out, it is grouped together in a cryptographically protected block with other transactions that have occurred, and sent out to an entire network. Based on their role, members in the network are able to verify the transaction.


After their verification, the validated block of transactions is then time-stamped and added to the chain in a linear, chronological order. New blocks of validated transactions are linked to older blocks, making a chain of blocks that show every transaction made in the history of that blockchain. The entire chain is continually updated so that every database in the network is the same, giving each member the ability to establish securely who has changed what at any given time.   


How blockchain will benefit the insurance industry


Just like blockchain has enabled the recording of electronic cash (in the case of Bitcoin), it can also enable innovative and disruptive changes to the insurance business model. A few things that blockchain technology can influence include:


  • Alleviating paperwork
  • Developing a system where some claims can be verified and handled very quickly
  • Minimising fraud
  • Improving the quality of data used during underwriting
  • Generally improve efficiency across the insurance value chain, e.g. creating processes where claims can be paid out automatically.



Understanding the so-called ‘smart contract’


On a daily basis, a typical insurance business deals with a number of processes involving an insurance contract. This can be anything from rating a client and deciding on a premium to paying a valid claim and investigating a fraudulent one. Industry insiders have speculated that the blockchain technology will change the way insurers deal with clients, thereby altering insurer value propositions and business operations completely.


So much of the insurance industry’s transformation is going to rely on data, and blockchain may well end up enabling all or most data-related transactions for an insurer through the so-called smart contract. A smart contract can facilitate, execute, and enforce the negotiation or performance of an agreement (i.e. insurance contract) using a blockchain. This process is automated and can act as a complement or substitute for legal contracts.


Since the contract is digitally enabled, it can enable efficiency in the insurance value chain wherever time, effort or money is spent to confirm information before processing transactions. Insurance contracts are typically complex and difficult to understand because of the legal language used. In an industry facing consumer-friendly regulations such as Treating Customers Fairly, smart contracts may well lead to the management of claims in a highly transparent and responsive way. For example, insurance contracts (policies) and claims could be recorded onto a blockchain and validated by an approved party, ensuring that only valid claims are paid.


The Everledger example 


The ‘smart contract’ concept has just been introduced by insurer American International Group (in partnership with IBM) as a way to manage complex international coverage. Another example of how it has already been used is Everledger, which is a permanent, global, digital ledger that tracks and protects diamonds, fine art and other valuable items on their lifetime journey.


Using blockchain, Everledger provides traders, insurance companies, financiers, consumers, claimants and law enforcers with a history of an item’s authenticity, existence and ownership. This type of use case has value for consumers, insurers and intermediaries alike.


This pattern of use (of blockchain) could in future be extended to other types of goods that insurance companies insure. The bottom line is that eventually, short-term insurance companies are going to start seeing that there is value in adopting disruptive forms of technology. Using it correctly will be a departure from the common method of finding ways to optimise existing processes. Disruptive technologies – like blockchain – completely alter the way we think about our business. It addresses industry-wide problems and presents opportunities that can take insurers like Santam to unprecedented heights.


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