This article describes how blockchain technology could enable insurance companies to solve a lot of problems that the car insurance world currently faces.
A blockchain consists of a decentralized ledger that registers, tracks and records immutable and irrefragable digital transactions involving some given assets between members of a business network.
The distribution of the ledger as a shared copy between the network members ensures that the blockchain data is incorruptible, secure, trustworthy, and transparent.
The transactions are stored inside blocks that are validated through a consensus mechanism and time-stamped. Each new block is concatenated to the older one, thus forming a chain of blocks (aka, the ‘blockchain’).
The chain is updated on a regular basis. Each participant of the network can synchronize their copy with the newer version. This allows the verification of all the transactional information that has occurred since the last time they updated their copy.
Some blockchains are able to understand and process what is known as smart contracts to automatically run a series of algorithms associated with transactions.
Because of blockchain technology, insurance companies will be able to solve a lot of problems that the car insurance world currently faces. As a start, insurers will be able to track claims in an unprecedented way only by looking at a shared trusted ledger.
For example, a car insurance company will be able to follow the driving history and behavior of an insured customer, and they will be able to adjust their policies accordingly. If the corresponding driver is reckless, he/she won’t be able to fraudulently claim eligibility for some premiums or bonuses.
Fraudulent claims will be virtually impossible since all information will be stored on a ledger. Therefore, different complementary but competing actors, often distrusting, such as reinsurers, insurers, and brokers will have their data stored and shared in the blockchain.
The underwriting process consists of the evaluation of the risks and exposures of potential clients and defines the coverage that the insurance is willing to provide if any. In certain cases, a typical insurance underwriting may take months while with blockchain, it may become ‘real-time’ and quasi-automatic.
Additionally, prior to the enforcement of a given policy, every car insurer has its own Know-Your-Customer (KYC) process. This is usually highly inefficient and time-consuming because of the involvement of numerous third parties and intermediaries. However, by using a blockchain, all authorized participants can instantaneously and securely, access previous KYC history and relevant verified documentation.
Insurers will also be able to build immediate and cheaper policies, by tracking the hours the car is driven, thus allowing for such policies as ‘pay-as-you-drive.’
Smart contracts consist of simple (or sometimes more complex) script-like code formalizing business rules to be applied in the corresponding blockchain and executed automatically when a transaction occurs.
A basic example of a smart contract is: “When a driver has an accident, an email with the corresponding information is sent to such address”.
Here we look at a fictional scenario involving an insured driver having a car accident. The details may slightly vary according to the country and its laws, but the main logic remains the same.
A driver has an accident. In many countries, the police being called is the initial step since they will make the necessary checks and compile a report.
As the driver submits evidence and data regarding the accident (photos, vehicle identification number, etc.) the police officer will access the driver’s KYC data from the blockchain. He will attach the documents together with his report, and store these documents in the insurance blockchain. Note that these documents may also be stored totally or partially in other blockchains, as well as the police blockchain or the car manufacturer’s blockchain (in case the car uses a blockchain-based digital passport).
The next steps will be for the insured to contact the car insurance company to make the relevant claims. The insurance company accesses the relevant data on its blockchain and can, therefore, examine the claims. The damaged car is examined and a list of the authorized garages is selected.
The car insurance company will run a smart contract to check the amount of coverage and an underwriting process is done smoothly. The car is eventually sent for repair to the selected garage, which will receive the claims on its blockchain, in such a way that the insurer does not pay anything.
Car insurance companies are expected to massively migrate to blockchain-based solutions since the benefits of such systems are huge in terms of speed, transparency, and trust. Of course, they shall need robust cryptographic solutions to manage the private keys and perform securely the cryptographic operations that are needed by blockchain platforms. Such blockchains need HSMs to complete them and provide adequate protection.