What is the cost of trust in a money transaction? For example, would-be homeowners will happily pay for an inspector when considering purchasing a home in case the owner doesn’t disclose discrepancies that could end up costing the buyers more than they bargained for.  Similarly, buying title insurance ensures the seller is actually able to sell a property, and hiring a realtor protects the buyer during the transaction process.

However, this “trust friction” that occurs during the purchase of a home, amounts to approximately 6-10 percent of the cost of the house. While a home buyer may feel it’s a necessary and wise decision to go the extra mile to avoid costly mistakes, if blockchain technology was used by insurers across these transactions, not only would money and time be saved, but trust between all parties would be established and maintained from start to finish.   

The idea behind blockchain—a decentralized immutable distributed ledger that uses a list of ordered records known as blocks—is to create a multi-party networked environment in which this trust cost is minimized through digital trust. If insurance carriers leverage blockchain technology to minimize trust friction, they could see significant gains through reduced average transaction-handling times, mitigate fraud risk, and increase operational efficiencies.

How Smart Contracts and Blockchain Help Reduce Transaction-Handling Times

Smart contracts are self-executing, based on predefined triggers and data that is pulled from mutual trusted third party administrators. Carriers could automate some of the claims process by agreeing to pay a certain amount upon the occurrence of said predefined triggers. Trust is built into these contracts because all parties involve understand the blockchain cannot be altered, therefore it provides instant verification of identity and active policies.

For example, if a pipe burst in your house and an IoT (Internet of Things) smart sensor validated the event, you could automatically be paid out an agreed-upon amount, without an insurance adjuster even viewing the damage. Therefore, the trust friction would be minimized. And because this would happen in real time, there would be no need to spend time on the phone during the First Notice of Loss (FNOL) stage. Instead, claims would instantly be processed, regardless of who or what was involved. By automating the claims process, carriers could also potentially reduce the overall cost of the loss. For example, indirect damages, such as mold, could potentially be avoided.

Reducing Fraud Through Distributed Ledgers

A fundamental property of the blockchain is that once data has been integrated into a “block”, it cannot be altered unless agreed upon by all parties involved. High-valued assets, such as jewelry, could be appraised with in-depth detail, including extensive data points on the quality of the piece(s), as well as the history of ownership. Ownership would then be immutable unless the owner verified a change. Carriers who leverage the use of blockchain technology would thus reduce trust friction as they would no longer need to spend time verifying facts of what the asset was or to whom it belonged.

Increasing Efficiencies Through Eliminating Data Duplication

Blockchain also allows for customers, brokers and carriers to store, update, and share, verified data in a transparent and immutable way.  When data is stored on the blockchain, it is viewable in real time to all parties and produces timestamps every time an approved modification was made. Trust friction would greatly be reduced in the quoting process, as data would no longer need to be duplicated and verified in multiple places by multiple sources. Instead, all sources could integrate and pull data from the blockchain. This would not only save time and eliminate human error, but it would also enable synchronized ledgers with an end-to-end view of the quotation process.

Although Accenture estimates it may take 5-10 years for the insurance industry to adapt to blockchain technology, carriers need to realize the significant advantages minimizing trust friction holds and prepare to undertake what’s necessary to make a paradigm shift now. The insurance blockchain market size is estimated to reach $133M by 2021, growing at a CAGR of 58 percent between 2016-2021. Carriers who embrace this new technology will not only improve operational efficiencies and have better relations with their customers, but they will be positioned to be a leader in the future.

You can contact me with your comments, questions and feedback.

Special thanks to Cameron Goldade who helped me with this post. 

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