Blockchain for insurance: key use cases & implementation tips

Banks, insurance companies, and other financial service providers don’t exchange KYC information due to regulatory concerns, forcing customers to reenter the same data multiple times. As a result, financial institutions waste time performing work that has already been done and generating data discrepancies among each other. Blockchain is poised to solve these problems since it allows partnering insurers to share KYC and AML data within a private blockchain. This way, customers enter data only once, so it can be securely shared within a private blockchain-based database. Insurers, in their turn, don’t have to spend inordinate amounts of resources to process customer data, as it’s immutably stored on the blockchain. Itransition is ready to develop such a KYC verification application using blockchain and non-fungible tokens (NFT), which will enable the secure exchange of customer data within a private blockchain-based database. On top of that, blockchain can also streamline regulatory compliance and significantly decrease compliance costs. Insurers won’t need to submit compliance reports manually, as regulators can access all the necessary information on blockchain in real time.

One of the insurance industry’s legacy challenges is a lack of trust and transparency, as, according to IBM research, 42% of customers don’t trust their insurers. This statistic is truly alarming because trust is the foundation of long-lasting customer relationships. Importantly, this lack of trust is mutual, with customers often thinking that insurers are deliberately skimping on payouts while insurers are forced to carefully evaluate each claim to mitigate fraud risks. However, there is no surprise that insurance is an attractive field for wrongdoers. With multiple insurers and reinsurers constantly shuffling papers between each other, criminals have ample opportunities to make multiple claims for a single accident. Using blockchain, insurers can combat fraud by permanently storing claims data and sharing it with everyone within the network. This will significantly lower the risk of double-booking, counterfeiting, and other types of insurance fraud.

When it comes to reinsurance, there is usually a gamut of parties, including clients, brokers, and reinsurance companies themselves, all using different data standards. This significantly complicates reconciliation and disrupts the flow of information between parties. For example, excess of loss reinsurance, commonly used for catastrophic events, covers all losses beyond a specific threshold, with reinsurers often sharing loss percentages with the ceding company to avoid excessive responsibility. This way, reinsurance becomes an increasingly complex and resource-intensive process, because multiple parties need to endlessly exchange documents with each other since every claim submitted by the insured party requires reconciliation between all participants.

Peer-to-peer insurance involves a group of individuals that pool their resources together and insure each other against various risks. P2P insurance eliminates the need for a central authority, decreases overhead costs, and allows group member policyholders to get their refund at the end of the coverage period. However, these benefits are typically compromised by the lack of trust between group members. Blockchain can be that very missing ingredient that makes a P2P transaction network self-sufficient and trustworthy. By applying smart contracts, P2P groups at least partially automate claim payouts.

In the world of cryptocurrency like Bitcoin, platforms for lending and financial hedging have become the norm. Borrowers and lenders can connect directly, utilizing various on-chain protocols like Aave or Lyra. Through smart contracts, AAVE implements lending mechanisms, while LYRA offers hedging financial instruments. However, unlike traditional financial markets, cryptocurrency markets are inherently volatile and prone to unexpected events. This implies that borrowers’ collateral value can suddenly plummet, making lending on decentralized platforms unjustifiably risky.

Insurance-linked securities allow both insurers and reinsurers to transfer risk to the capital markets instead of other commercial insurance companies. While ILS doesn’t imply it by default, in most cases, these securities are usually linked to specific catastrophic events. Essentially, insurance companies issue catastrophe bonds to raise capital and cover potential losses. For investors, ILS offers a way to earn returns that aren’t linked to traditional financial markets.