Traditional insurance companies become less trustworthy year over year because of increasing levels of insurance fraud.
In the United States alone, insurance fraud steals more than $300 billion from consumers yearly.
What can insurance companies do to improve the situation?
The answer may be smart contract insurance.
Blockchain is, of course, not a holy grail. But in the case of the insurance industry, it may surely provide more transparency and eliminate the lack of trust among customers.
How does it work, and what benefits does it provide? Read on to find out.
A smart contract is a piece of code that automatically executes specific actions once the predefined conditions are met.
For example, it can send money from one party to another once a deal that these parties set up is complete.
Such an approach can help to speed up business processes and provide all the interested parties with an unprecedented level of transparency.
Yet, it has a limited scope of usage.
To get the most out of blockchain and smart contracts, businesses should have two key characteristics:
Blockchain enables parties to exchange value on a peer-to-peer basis by removing the need for intermediaries. Thus, it can provide the highest value to those companies that heavily rely on third parties in their business processes.
Speaking about the insurance industry, it’s worth noting that it meets this criterion perfectly.
As a web-based solution, blockchain can only access and process in a fully unbiased manner the data that is available online.
For those businesses that require input data from the outside, blockchain oracles can do the job. These are the third-party services that collect the data from the real world and send it to the blockchain.
In the case of insurance, both scenarios are possible.
Yet, why would this industry need to make any drastic changes in its technological approach?
The traditional insurance industry relies on the pooling of risks.
Companies combine smaller payments from a large set of customers into a single centralized vault. When any of their customers face any losses that are covered by the agreement, companies use the funds from this vault to make insurance payout.
By evaluating the level of risk, they assume that the sum they gather will always be sufficient to cover any insurance claims.
At the same time, their centralized nature enables them to manipulate numbers in their favor. Besides, to assess the size of the damage, they rely on third-party inspectors who may not always make correct judgments.
This results in overall customer dissatisfaction and ever-growing suspicion.
Tricky customers, in turn, act likewise. At this, they also exaggerate the damage they receive to get higher payouts. All-in-all, the lack of transparency doesn’t play into the hands of either side.
Smart contract insurance can resolve the problems mentioned above. It can help to exclude the human factor from the equation and thus make the whole process transparent.
Let’s review a real-life example to understand how smart contract insurance works.
Thus, smart contract insurance can process all the claims in a fully automated way. It can eliminate human errors and make any external manipulations impossible.
The blockchain-based approach may have a strong impact on the whole insurance industry. Here are just a few benefits of smart contracts that can change the situation for the better:
Not everything is perfect, though.
The technology bears some risks as well. Here are some of the obstacles that prevent smart contract insurance from getting adopted at scale:
Travelers insurance is just one small example of how blockchain insurance may work in practice. Yet, the scope of its usage is much broader.
Here are a few more use cases of how this technology can help to improve the processes in the insurance industry.
All these scenarios may sound like a miracle. Yet, there are a few companies that have already implemented blockchain into their insurance services.
Here are some of them.
Founded in 2014, Chainlink keeps the leading position in blockchain oracles’ development. At this, smart contract insurance is one of the key services that it offers.
Chainlink creates secure parametric insurance products. They access real-world data through oracles and make corresponding payouts when predefined events or parameters occur.
Besides, it offers a way to monetize your data by selling it to blockchain insurance projects.
Being one of the leading Ethereum companies, Consensys targets to cover the insurance industry as well, aiming to eliminate the flaws of centralized solutions.
At this, it provides a solution based on the distributed ledger technology that insurance companies can use right out of the box.
Founded more than 150 years ago, Deliotte remains at the forefront of progress as it offers blockchain-based solutions to health and life insurance companies.
With the help of this innovation, it aims to create a comprehensive, secure, and interoperable repository of health information.
IBM blockchain targets many different industries including insurance. The company aims to transform the processes in this industry to add transparency and trust to data collection processes.
Implementing new technology may be a complicated process.
On one hand, it requires additional funds, time, and technical expertise. On the other hand, end-users may not always appreciate the results due to the lack of knowledge of how blockchain works and what benefits it provides.
Yet, the results may be worth the effort.
As technology advances, end-users will grasp its benefits all the more. At this, the companies that implement smart contracts for insurance services have all the chances to hit the jackpot at the long-term scenario.
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Kate is a blockchain specialist, enthusiast, and adopter, who loves writing about complex technologies and explaining them in simple words. Kate features regularly for Liquid Loans, plus Cointelegraph, Nomics, Cryptopay, ByBit and more.
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