Potential Impact of technology

INSURANCE, which plays a critical enabling role in wealth creation and economic growth, seems to lack the trust of Asian consumers. Unfortunately, it doesn’t seem like this will change anytime soon.

Lack of trust plays a part in the region’s extraordinarily high levels of underinsurance.

Without the ready availability of insurance products and services to all segments of society, the economic progress made by individuals and households in developing Asia will remain tenuous.

However, the advent of new technologies could help to restore consumer faith in insurance products.

One of them — blockchain — has the potential to impact the entire insurance value chain end-to-end.

In fact, harnessing the power of blockchain could transform the way insurers create products, making them more relevant and appealing to the next generation of policyholders.

By creating new gauges of trustworthiness as well as disrupting the existing trust protocols, it promises to provide a secure, transparent and verifiable mechanism to execute transactions-replacing the traditional notion of utmost good faith with provable good faith.

In insurance, blockchain can replace traditional trust notion

Furthermore, blockchain can considerably reduce both operational costs for financial institutions and the number of service providers.

Blockchain can have far-reaching effects on insurance claims.

A good example is the smart contract, a computer code running on top of a blockchain containing a set of rules under which the parties agree to interact with each other.

The agreement is enforced automatically once the pre-defined rules are satisfied, so the code facilitates, verifies, and enforces both negotiation and performance.

Blockchain can also help lower costs. Smart contracts allow secured data to be easily accessed and shared without time-consuming data entry or lengthy verification.

It can also enable efficient sharing and matching of information.

For instance, 15 insurers recently kicked off India’s first blockchain project, allowing health insurance providers to access policyholders’ medical examination information, thereby facilitating swift yet secure data exchange.

Another advantage is secure data storage and retrieval.

With blockchain, policy documents can be stored on multiple digital ledgers so all are available for amendment and evaluation, but can never be altered or lost without the parties’ agreement.

They also securely streamline legal and contractual procedures.

Blockchain facilitates swift yet secure insurance data exchange

Finally, the insurance industry has struggled to manage claims and combat fraud without jeopardising its own image.

Blockchain can help insurance firms create a public, tamper-proof database to track ownership and transfer of assets.

It can also be used to authenticate police reports, purchases and other documents.

After inputting the claim details, a smart contract can verify valid claims, detect any malicious activity (such as multiple claims for a single accident) and pay out against the occurrence of an insurable event without having to manually make or process a claim.

For instance, with a personal accident insurance policy issued on blockchain, a beneficiary can go to an authorised doctor, get treated and have the claim managed in real time, rather than sending photocopied documents and waiting months for reimbursement.

Blockchain is helping rebuild trust between insurers and policyholders via improved customer experience, higher scrutiny of affordability, and product innovation.

A good example is pay-as-you-go insurance or usage-based insurance (UBI), which interprets the number of miles one drives and adjusts the premium rates accordingly.

Leverage blockchain to expand financial inclusion for SMEs

UBI encourages people to drive less and drive safer for availing lower premium rates — a win-win for both insurer and policyholder. Blockchain could popularise UBI products by storing collected data from vehicle sensors in the blockchain, thus lowering costs for drivers and providing insurance companies with complex, protected consumer data.

Blockchain-enabled UBI could thus determine the right amount of coverage based on a person’s lifestyle.

A novel application is in disaster relief.

Blockchain can’t prevent natural calamities of course, but it’s now a leading solution to disburse insurance claims post-disaster in a transparent way when millions of people are struggling to get back to normal.

By leveraging blockchain, ADB’s developing member countries can expand financial inclusion to increase the productivity and earnings of small enterprises.

For instance, Zhong An, a property insurance company in the People’s Republic of China (PRC), sells all its products and handles claims online.

It has recognised the massive potential of the rural financial market and realised how risky and costly it is to finance the agriculture sector because of lack of risk accumulation data.

Putting in place a robust authentication and traceability system can generate better data and reduce risk for companies that finance and insure farms.

Insurers need to move quickly to gain experience with blockchain

The firm’s tech incubator-which focuses on financial technology applications such as blockchain, artificial intelligence, cloud computing, and big data — is currently piloting a facial recognition and blockchain system for organic chickens.

The system allows consumers to preorder a chicken and then watch it grow remotely, with data such on number of chickens being raised and their mortality rate.

It’s an anti-counterfeit traceability solution that also reduces the risk control cost for financial institutions, and encourages insurance companies to underwrite farmers and their breeding assets.

The Gogo chicken project has the potential to significantly expand agricultural and health insurance in the PRC, and beyond.

This technology is expected to extend to fish farms, pigs, and other livestock, as well as crops like tomatoes or watermelons.

Blockchain can likewise dramatically improve pension funds’ operations and significantly reduce operating costs.

Smart audit contracts ensure full transparency and compliance with fund rules, and allow calculations for contributions, employer matching, and benefits.

Other advantages are selection of investment profiles, registration of beneficiary designations (in case of death), administrative fee calculations, and portability between funds.

While blockchain’s potential benefits in insurance are apparent, it’s still uncertain where the technology will have the most significant impact.

Insurers need to move quickly to gain experience with blockchain, and gauge how it can be applied to solve real problems, particularly by improving access to finance.

* The author is the principal financial sector specialist, Sustainable Development and Climate Change Department at ADB

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