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Author: Ashwin Sooraj Kudwa |08/23/18

Blockchain: Life and Vehicle Insurance

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In this blog, we will explore how blockchain technology is applicable in real life scenarios for life insurance and vehicle insurance businesses.

‘Blockchain’ has become a popular buzzword among business circles in recent times. It is one of the biggest innovations since the ‘Internet’. It is a transformative digitization technology made popular by its first use case implementation, a digital currency named Bitcoin. Bitcoin is a cryptocurrency, the world's first digital currency designed to carry out digital transactions on a peer-to-peer network without any administrator or intermediaries. Blockchain is used to track and record these bitcoin transactions on a permissionless network. Larry Summers, US Former Treasury Secretary, envisions that blockchain will change a great deal of financial practice and exchange and, 40 years from now, blockchain and all that followed from it will figure more prominently than bitcoin.

Understanding Blockchain

Blockchain is a decentralized database (ledger) that tracks assets (anything of value) and records valid digital transactions involving these assets between participants in a business network. A duplicate copy of this ledger is shared and distributed among all participants in the network. The distribution of the ledger between participants ensures that the encrypted data is incorruptible, secure, reliable and transparent to all participants. The data cannot be erased or modified leading to increased trust as well as identification and prevention of fraudulent transactions.

Valid transactional data is stored in blocks. A validated block of transactions is time stamped and added to a chain in a linear chronological order. Newly added blocks get linked to older blocks (via block hash*) forming a chain of blocks that contain every transaction made in the blockchain’s history. This chain is updated regularly and shared with all the network participants to synchronize with every ledger in that network, enabling each participant to verify any transactional detail at any given point of time. Hence, blockchain is a non-destructive way to track data changes overtime. The participants in the blockchain validate the data through a consensus mechanism. Blockchain utilizes smart contracts to help with automated execution of algorithms related to the transactions.

What are Smart Contracts?

Smart contracts are codified algorithms (simple or complex) signifying business rules that are stored on the blockchain and get automatically executed whenever certain predefined conditions are met or satisfied without any human mediation.

Here is an example: “When the user withdraws an amount greater than USD 100, the banks send a SMS to the user’s registered mobile number and email id”.

The smart contract has an in-built logic that verifies whether the correct user has withdrawn the money. If this condition is satisfied, it sends a SMS to the user’s registered mobile number and email id informing them of the same.

To understand the concept of the blockchain and smart contract, a simple example is an excel spreadsheet and the macros. Each sheet can be considered as a block of transactional information recorded in cells. A collection or chain of these blocks (sheets) form the blockchain (spreadsheet). The blockchain (spreadsheet) has smart contracts (macros) which are executed when certain conditions are met or satisfied.

Recent studies have highlighted that the industry has acknowledged the positive impact that Blockchain technology can bring to improve the operational efficiency. Patrick Byrne, the CEO of Overstock.com states, With blockchain technology, we can create a version of Wall Street where no one can cheat and where all kinds of mischief cannot even occur. Crypto currency gives us a way to communicate value that's outside the control of any government mandarin, and I think that's good”. Mark Russinovish, CTO, Microsoft Azure, mentioned that, “Microsoft believes blockchain is a transformational technology with the ability to significantly reduce the friction of doing business, especially streamlining business processes shared across multiple organizations.” “Blockchain allows people to exchange value without knowing the identity of each other necessarily, in a secure way on the back end, on the front end, it's simplicity, transparency and trust.”, says Jason Kelley, IBM Global Manager for Blockchain Services. He further adds, “Think of all the cost, time and often waste that happens in the exchange of value – blockchain rids that from the system.

Blockchain has immense innovation potential to disrupt the insurance industry as well as other sectors and businesses. However, in order for this technology to be adopted widely, the industry should know how to respond by exploring practical scenarios and building prototypes.

Insurers such as Achmea, Aegon, Ageas, Allianz, Generali, Munich Re, Hannover Re, Swiss Re, Liberty Mutual, SCOR, Tokio Marine, XL Catlin and Zurich have formed a B3i consortium (Blockchain Insurance Industry Initiative) to conceptualize, prepare proof of concepts and test blockchain-based insurance scenarios aiming to provide faster, secure and efficient services to clients.

In mid-2017, this consortium completed the first prototype of its product aimed at property cat excess-of-loss reinsurance contracts. This prototype underwent functional testing from various groups of insurers, brokers and reinsurers that proved its robustness. This Proof of Concept (POC) revealed that the interactions were secure and faster than the methods used today. While there were other POCs in the pipeline, this product was expected to go live at the end of the year.

As per blockchain expert Dr. Pat Schmid, Visa and DocuSign are working on a blockchain related project to make car leasing as easy as click, sign and drive. Educational organizations are looking to see if certifications can be stored on a blockchain, to make it easy for future employers to validate if the certification is authentic. In the media industry, Disney has formed its own blockchain called Dragon Chain.

Scenarios for Blockchain in the Insurance Industry

Let’s look at some scenarios where blockchain and smart contracts can be used.

Most of us have purchased various types of insurance policies such as life insurance, vehicle insurance and so on, with single or multiple insurers. Prior to the enforcement of the policy, every insurer has their own KYC processes for collection, verification and validation of documents. This is highly inefficient and time consuming due to the involvement of various third parties and intermediaries. This process needs to be repeated for every new insurer you intend to purchase insurance with.

However, by using a blockchain solution, the shared ledger can be accessed by all participants such as consumers, insurers, doctors and so on, to analyze the KYC documentation that is necessary for policy issuance.

Life Insurance

Here are the steps that can be used by the participants on the blockchain network. The participants in this scenario are limited to the Industry Regulatory Body, Insured, Insurer and Hospital.

Note: The number of participants involved in a scenario may vary depending on the scenario and its complexity and, or availability of respective data.

blockchain and insurance

Figure 1: Diagram explaining the flow of events for a life insurance scenario

1. The Industry Regulatory Body creates a KYC registration process on the blockchain.

2. The Insured utilizes this process to ensure the capture of important KYC data points such as the following:

  • Customer identity (ID Proofs, UIN/SSN, Driving License, Passport and Tax Returns information, Family information and so on).
  • Financial information (credit history reports, loan history, outstanding loans and loan defaults).
  • Electronic health and medical records (medical tests and proof of health carried out by regulatory approved doctors, providers or hospitals, inpatient records for ailments, diseases and hospitalization).
  • Medication used (doctor’s prescriptions for various non-hospitalization as well as during hospitalization, treatment of ailments and diseases).
  • Lifestyle and nutrition (alcohol, tobacco, narcotics, hazardous occupation like chemical factories and radiation exposure or hobbies such as bungee jumping, mountaineering and others).
  • Previous policy and claims information

3. The initial set of KYC data, as well as further updates to KYC information are validated by the Industry Regulatory Body.

4. The Insured approaches an Insurer (for example Allianz) for purchasing a life insurance policy, utilizes the AI chatbot interface to submit coverage requirements.

5. The Insurer then proceeds to carry out a KYC check for the Insured.

  • The Insurer requests access to the Insured’s KYC data** residing on the blockchain. Each insurer may look at different attributes as part of the KYC check.
  • Insured provides access to the relevant KYC data.
  • A copy of the relevant KYC data is made available to the Insurer.

6. The Insurer validates its checklist for KYC data sufficiency. If certain medical information or tests are missing, then the Insurer can ask the Insured to get those tests done.

7. The Insured fills an online form with the respective hospital and sets up an appointment.

8. The hospital requests access to the Insured’s KYC data** residing on the blockchain.

  • Insured provides access to the relevant KYC dat
  • A copy of the relevant KYC data is made available to the hospital.

9. The respective medical tests are carried out and the hospital updates its records.

  • This triggers an update to the Insured’s KYC data on the blockchain and the Insured gets notified. The Insured then provides access of the medical tests to the Insurer. This triggers an alert to the Insurer.

10. After verifying the sufficiency of the Insured’s details (KYC data as well as medical health and tests), the Insurer runs a smart contract to provide a quote.

  • The smart contract (a predictive model for analyzing risk using machine language) considers the coverage requirements provided by the Insured as well as the Insured’s medical tests, past medical history, past policies purchased, claims information and others to arrive at a premium value.

11. This quote is then sent to an Underwriter for manual review and approval.

12. The approved quote is then made known to the Insured. Once the Insured agrees and makes the payment, the policy receipt as well as policy information documentation is updated to the Insurer’s database record as well as the Insured’s blockchain.

** The type of KYC data that is required by each participant in the network may vary depending on the type of participant and the related processes. In this scenario, the KYC data requested by the Insurer versus that requested by the hospital will vary. The data related to customer identity may be common.

Claims Processing in Vehicle Insurance

Here are the steps that can be used by the participants on the blockchain network.

The participants in this scenario are limited to the Industry Regulatory Body, Insured, Insurer, Police Station and Hospital.

The claim submitted here is for vehicular damages and bodily injury due to an accident

insurance claim

Figure 2: Diagram explaining the common steps in vehicle insurance claim

  1. The Insured files the First Information Report (FIR) at the local police station and submits evidence [registration number and photos of his or her vehicle as well as the other vehicle(s) involved, contact details of witnesses and so on].
  2. The Police Station requests access to the Insured’s KYC data on the blockchain. A similar request for access will be submitted to the owner or driver of other vehicle(s) involved.
  3. Insured provides access to the relevant KYC data. The owner or driver of other vehicle(s) involved also follows a similar process.
  4. A copy of the relevant KYC data is made available to the Police Station.
  5. Once the FIR is filed by the Police Station in its online system, a copy of the FIR is shared with the Insured’s KYC blockchain. A copy of the same FIR is made available to the owner or driver of other vehicle(s) involved.
  6. The Insured approaches the Insurer for submitting claims via an AI chatbot interface to submit evidence, photos and answers to questions. If the Insured has sustained bodily injuries during the accident, the Insurer will need to be informed of this.

Vehicle Damage

Vehicle Damage

Figure 3: Diagram explaining the flow of events for claim related to vehicle damage.

  1. At the time of submitting claims, the Insured informs Insurer about vehicle damage due to the accident.
  2. The Insurer requests access to the Insured’s FIR data residing on the blockchain.
  3. Insured provides access to the relevant FIR data. A copy of the relevant FIR data is made available to the Insurer.
  4. The Insurer sends a surveyor to inspect the vehicle and provides an estimate of the damage.
  5. The Insurer also provides a list of its approved garages that can address the repairs.
  6. The Insurer then runs a smart contract to verify whether the submitted claims are covered in the policy and calculates a claim amount.
  7. The Underwriter reviews and approves the claims and the claims transaction and related details are updated on the blockchain.
  8. If the Insured selects a garage from this list, the claim amount will be transferred directly to the garage (cashless claim).
  9. If the Insured selects an external garage (that is not present on the Insurer’s list), the claim amount will be reimbursed in the Insured’s bank account.

Bodily Injury

Bodily Injury

Figure 4: Diagram explaining the flow of events for claim related to bodily injury due to an accident.

  1. At the time of submitting claims, the Insured informs Insurer about bodily injury due to the accident.
  2. The Insurer asks the Insured to get physically assessed at a hospital to prove that the injury is indeed due to the accident.
  3. The Insured fills an online form with the respective hospital and sets up an appointment.
  4. The hospital requests access to the Insured’s KYC data residing on the blockchain.
  5. Insured provides access to the relevant KYC data. A copy of the relevant KYC data is made available to the hospital.
  6. The respective assessment tests and medical treatments are carried out and the hospital updates its records. This triggers an update to the Insured’s KYC data on the blockchain.
  7. Insured then provides the Insurer with access to the hospital test results and receipts of medical treatments. This triggers an alert to the Insurer.
  8. The Insurer then runs a smart contract to verify whether the submitted claims are covered in the policy and calculates a claim amount.
  9. The Underwriter reviews and approves the claims and the claims transaction and related details are updated on the blockchain.
  10. If the Insured approached a hospital approved by the insurer, the claim amount will be transferred directly to the hospital (cashless claim).
  11. If the Insured had approached a hospital that is not present on the Insurer’s approved list, the claim amount will be reimbursed in the Insured’s bank account.
  12. As per the FIR, if the other vehicle is at fault, the Insured’s Insurer contacts the Insurer of the owner or driver of vehicle at fault to recover funds paid to the Insured (subrogation) or by taking possession of the third party’s significantly damaged vehicle and selling all or parts of it (salvage).

    While blockchain technology has enormous potential to significantly transform the efficiency of the insurer’s operational landscape, it will take time for the insurance industry to launch and use a mature blockchain model for the widespread utilization.

Limitations of Blockchain Technology

The use of Blockchain technology in the insurance industry raises a lot of regulatory issues and legal questions. There is no defined legal framework recognizing blockchains and smart contracts. Even though the blockchains have been deemed immutable and corruption free, if something were to actually go wrong, given its distributed nature, there is no legal framework and clarity surrounding the correct jurisdiction that the error should be considered under, the law that will be applicable and the parties that will be held liable. The European regulation allows its citizens to delete their respective data if they wish to do so. This conflicts with the immutable nature of the blockchain. Legal solutions that prohibit the use of data via effective encryption instead of deleting it outright may be achieved. Standardized regulation that supports and ensures proper data protection is required. The technology is still in its infancy, once it becomes more widely used, regulators, legislators and legal courts will need to work out a legal framework within which blockchain technology can be used effectively.

How soon do you think blockchain will be accepted in the insurance industry?

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