Blockchain can deliver major benefits to insurers, especially those with intermediary based models. This article looks at the common issues within the insurance industry and how blockchain technology can be applied in three main areas.
The insurance industry is dominated by companies that have complex system architectures, including legacy systems, built up over decades. This leads to differing processes across all insurers and intermediaries forcing them to carry unnecessary inefficiencies and cost.
Blocksure has developed a revolutionary insurance platform based on blockchain technology for the intermediated market. It is a full cycle sales and administration platform including claims.
First level benefits are around speed and quality of data transfer. This will radically improve processes and deliver major costs savings. Second level benefits allow insurers to develop new distribution models based on lower distribution and administrative costs.
Blockchain and Blocksure OS can provide insurers with major financial benefits at a time when most are facing ROE pressure.
Blockchain Applications for Insurance
Blockchain can be applied in three main areas across insurance:
1. Delivering expense reduction:
- Insurer’s internal operating model
- Intermediary interaction
2. New product models
3. Improved cash management and investment income
Delivering expense reduction
Insurer’s internal operating model
A number of areas will require reduced processing or be completely removed. Blocksure projects that this will drastically reduce internal operating expenses. For the UK’s commercial insurance industry, we project a reduction in the industry expense ratio from 19% to 13%. This will be delivered through a number of areas: –
1. Process removal or improvement:
- Requirement for bordereau and cash transfers between intermediaries and insurers removed.
- Underwriting authorisation levels built into smart contracts so cannot be abused.
- Reinsurance arrangements controlled via smart contracts and data transferred via distributed ledger technology.
2. Smart claims that pay out automatically in line with policy terms
3. Smart settlement across the claims supply change facilitated by smart contracts. All parties involved in a claim, e.g. claimant, insurers, suppliers and loss adjusters, are automatically paid (including cash settlement) once the claimant digitally signs the claim settlement letter.
Intermediaries can still deliver existing levels of profitability at a lower level of cost. This can lead to insurers paying lower commission levels and all parties being economically better off. Certain processes are removed (e.g. client money, premium reconciliation, bordereau), and others are made much easier (e.g. KYC and AML checking). This could reduce the commission requirements by 3% — 5%.
New Product Models
Blockchain radically drives down the base cost of issuing a policy — US$1 or less. This allows insurers to consider new and exciting product solutions in areas such as IoT (Internet of Things), the sharing economy, micro insurance etc.
Improved cash management and investment income
Cash transfers become quicker and eventually insurers should receive all premiums directly from a customer, even in intermediated business. Intermediaries only receive their brokerage and insurers will be paid risk premiums direct.
Also, insurers will not need to provide loss adjuster with claims floats as they will be able to settle all claims directly due to the functionality of smart contracts.
This means that all insurers should have larger cash balances to invest and increase their investment income. The benefit of this depends on an insurer’s business model. Intermediary focussed insurers will see the greatest benefits.
Blockchain can deliver major benefits to insurers, especially those with intermediary based models. There is a potential to substantially improve their ROE through a number of areas.
Contact us if you would like more information or just an informal discussion.