The following article was written by Tim Coates, senior consultant at Synechron Business Consulting in London.
The insurance industry has historically resisted disruption as the threat of new entrants is inhibited by the large balance sheet risk and regulatory requirements borne by insurers. However, the innovation stakes have been raised with new technologies such as blockchain, artificial intelligence and internet of things shown to improve customer service and reduce operational costs and fraud losses. Since blockchain emerged, the focus of the insurance sector has been on asset provenance on the network of value. Asset-based solutions, such as Everledger’s blockchain for diamond ownership certification and Ascribe’s fine art registry, have captured the attention of insurers. However, it could be that insurers need to look within their own technology architectures to unlock the greatest potential from blockchain.
Blockchain is an ideal solution to claims handling for low-value, high-volume retail products such as cars, phones and travel insurance. The automation and objectivity that comes with blockchain will solve challenges in the retail consumer sectors such as:
- Claims handling costs have climbed to 10-15% of premiums. Any savings are multiplied by the high volumes.
- Fraud losses up to 5% of premiums. The compressed margins on low-value items cannot justify more than three hours of claims assessment and dispute resolution.
- Customers and regulators alike bemoan the lack of trust, transparency and timeliness in retail claims.
Blockchain could pose a scenario in which the customer does not submit a claim and the insurer does not administer it. An objective set of insurance policy criteria is coded into smart contracts, which take regular feeds from trusted authoritative sources to determine whether the claims conditions have been satisfied. Payments are then automatically processed via the blockchain wallet. This creates an environment of trust across insurer, customer, asset provider and regulator that claims will be assessed in a timely, transparent and objective manner. Free of subjectivity, biases and commercial influences on decision making. And it’s ready to implement now.
Insurers should review the asset classes in their product portfolio and, for each, identify whether they can establish a blockchain-based claims handling procedure and what constraints need to be resolved. Firms should establish uninhibited cross-functional innovation teams to answer the following questions:
1. Can you define strictly objective policy criteria that applies across the asset class? Are there regularly exceptions made and/or non-binary rules? Can you break down policy criteria into sub-sectors to cover every variation of the asset, jurisdiction, contract, etc?
2. Is there authoritative source data available in digital form that counterparties would view as trusted, independent and recognized owners/administrators of data? Can they be used for contract execution? Would they require service level agreements and independently governed controls over data collection and provision?
3. Is there a trust problem statement? Have we established a sufficient incentive for customers and asset providers to support the change to automation? Have regulators and other stakeholders been demanding improvements?
While only a few asset classes will meet all criteria now, the constraints should be identified and analyzed for solutions, alternatives and future possibilities. Opportunities could arise as authoritative sources increasingly seek to monetize their data by making it available digitally. This will create opportunities to re-design policy criteria shifting away from subjective disputes over events between customer and insurer, to objective and independent evidence. Looking further ahead, there will be a shift away from organization-collected and provisioned feeds towards Internet of Things smart sensors. Blockchain has the potential to re-invent the way insurance claims are done – one asset sector at a time.
The preceding article was written by Tim Coates, senior consultant at Synechron Business Consulting in London. The views expressed within the article are not necessarily reflective of those of Insurance Business. For more information about Synechron Business Consulting, visit its website.
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