The blockchain revolution is all set to disrupt several industries that rely on intermediaries because of the trust blockchains create between network participants. The trillion-dollar insurance industry which is one of the oldest industries in the world could benefit greatly from this new invention since a lot of the insurance business takes place via paper forms and is therefore prone to errors. The process of getting insured involves human supervision and is therefore slow and inefficient. Blockchains can significantly automate the process and help manage the risk in the insurance business using smart contracts. Consequently, it is no surprise that the effects of blockchains are going to be most evident in the banking and finance sectors.
What is an Insurance Broker?
An insurance broker is a specialist in insurance and risk management. Brokers act on behalf of their clients and provide advice in the interests of their clients. A broker will help his clients identify their risks to help them decide what to insure, and how to manage those risks in other ways. Brokers are aware of the terms and conditions, benefits and exclusions and costs of a wide range of insurance policies, so they can help pick out the most appropriate cover for their clients. Since getting insured is a relatively complicated procedure, most people choose to employ insurance brokers to negotiate on their behalf. Since the general insurance industry offers so many options, it can be quite challenging to choose the right policy. According to Canadian Underwriter, brokers earn as much as 20-25% in commission from their clients to do negotiate the best deal and get all of the paperwork ready.
How are Blockchains Disrupting Broker Commissions?
Until recently, the insurance procedure had remained elusive due to the host of options offered and the legal red tape required to carry out the terms correctly. But now, because of smart contracts, a lot of the heavy lifting in insurance could be automated.
That means that because of blockchain technology, brokers are going to see less friction in their work and therefore will have a difficult time justifying such high commissions. Instead, their commissions would have to rely more on data and analytics which is still going to be very valuable.
Benefits for the Insurance Companies
Insurance companies stand to gain millions of working hours every year by switching to an immutable ledger and eliminated common sources of errors in the procedure. The move would have the added benefit of getting rid of the middlemen in the process thereby bringing down costs for both the consumer and the providers. Benefits of switching to blockchain technology for insurance companies include:
- Fraud detection and risk prevention: The total cost of insurance fraud (not counting health insurance) in the US is estimated at $40B a year. This isn’t just a problem for the insurance companies losing money — insurance fraud costs the average US family anywhere between $400 and $700 in the form of increased premiums. This is because that handling of insurance is a complicated procedure that involves several steps that can be exploited by criminals. Blockchain Technology can enable better coordination between insurers to combat fraud. On a distributed ledger, insurers could record permanent transactions, with granular access controls to protect data security. By increasing the coordination between insurers, blockchains can prevent double booking and make sure that claims are settled quickly and accurately.
- Healthcare: Healthcare is one of the most complex and expensive subdivisions of the insurance industry because it involves a plethora of insurers, providers, and patients. Typically a patient sees several different doctors throughout their insurance. This consists of maintaining and transmitting sensitive healthcare information that results in increased costs for the insurers. Blockchains can be very useful here as they provide an immutable shared ledger which can be accessed by every healthcare provider as needed.