Blockchain in the insurance industry, a novelty or an asset?

In recent years, blockchain has evolved at a faster and faster pace, proving itself capable of transforming industries by creating secure, tamper-proof data networks. Its main appealing feature is the ability to establish distributed trust among multiple parties, without relying on a central authority.

For insurance and legal insurance companies, an use case we will explore below, blockchain holds the potential to enhance transparency, prevent fraud and streamline complex processes. However, while some organizations thrive on decentralization, others operate efficiently under centralized control, which is why it is essential to discern when blockchain is a genuine asset or an unnecessary layer of complexity.

A few insights into blockchain’s real value & limitations

Blockchain’s Core Value – Distributed trust

This is ideal in contexts where trust is fragmented, or where multiple entities need to collaborate but don’t fully trust one another. Examples include decentralized finance (DeFi), public cryptocurrencies like Bitcoin and industries with complex multi-party ecosystems.

Why centralized entities may not need blockchain

For organizations or governments with strong, centralized control (like most companies), blockchain may not always be necessary or add substantial value. Centralized authorities can already ensure trust internally via traditional databases, security measures and governance structures. In such scenarios, blockchain could introduce unnecessary complexity without clear advantages.

Efficiency: Centralized systems can be more efficient than blockchain, which has inherent trade-offs like slower transaction speeds and higher resource consumption due to consensus mechanisms (e.g., proof of work).
Control: Centralized authorities may not want to relinquish control to a distributed system, especially if they are already trusted intermediaries.

Situations where blockchain adds value to centralized organizations

Despite clear limitations, there are cases where even centralized entities might benefit from blockchain’s properties, particularly when interacting with external parties or operating in ecosystems that require shared governance or transparency. Some of those situations include:

Supply Chains: Tracking the provenance of goods and services across multiple, independent actors.
Insurance Consortiums: Where multiple insurance companies pool risk or need to share data (e.g., fraud prevention across the industry).
Public-Private Partnerships: When a company works with governments or non-profits where a transparent, tamper-proof system could ensure fair dealings (e.g., grant distributions or public bidding).

Blockchain as a PR or trust-building tool

In some cases, companies use blockchain to signal trust and transparency to customers or stakeholders. Even if a fully decentralized system isn’t needed, the use of blockchain can show that a company is committed to higher standards of accountability. For instance:

Trust: Companies could use blockchain in customer-facing areas (like claims settlement) to improve trust, even though internally, their operations remain centralized.
Compliance: Blockchain could serve as a tamper-proof audit trail for compliance, showing regulators that their processes meet high standards

Blockchain in the insurance industry

When is it NOT a good choice?

Internal operations

Centralized Authority: If the operations of an insurance company are heavily centralized, with them acting as a trusted intermediary for their customers, introducing blockchain may overcomplicate processes that are already working well through traditional databases.
Performance: Blockchain  applications in insurance can be slower compared to centralized systems, which could hinder day-to-day operations.

Simple Data Management

Efficiency: If there’s no need for decentralized validation or multi-party trust, blockchain is unnecessary. A standard relational database would perform better, with more cost efficiency, in most use cases where there’s no trust issue.

What are some of the main applications of blockchain in the insurance industry?

Claims Processing Automation

Problem: Traditional claims processing is time-consuming, prone to fraud, and can lead to disputes between customers and insurance companies.

Blockchain use case: Smart contracts can automate and streamline claims settlement by validating and executing claim payouts automatically when predefined conditions are met. This reduces manual intervention, speeds up the process and reduces fraud risk.

- Results: Reduced administrative costs, faster payouts to policyholders and enhanced customer satisfaction.

Fraud Prevention

Problem: Insurance fraud, such as submitting multiple claims or exaggerated claims is a costly problem for insurers.

Blockchain use case: A decentralized, tamper-proof ledger can securely store policyholder and claim data, ensuring that data is consistent across all parties and reducing the potential for duplicate or fraudulent claims.

- Results: Improved fraud detection, lower operational costs, and better risk management.

Decentralized Customer Identity and KYC

Problem: Verifying customer identity and conducting Know Your Customer (KYC) processes are complex, slow and require extensive data handling.

Blockchain use case: Blockchain in the insurance industry can enable decentralized identity management, allowing customers to maintain a single, verified identity that they can share with multiple insurers. This reduces the need for repeated KYC processes and ensures that personal data remains secure.

- Results: Faster onboarding, reduced compliance costs & improved data security.

Usage-Based Insurance (Pay-As-You-Go)

Problem: Traditional insurance policies are not always tailored to individual needs or real-time usage, which leads to inefficiencies.

Blockchain use case: Blockchain can track real-time data from IoT devices (such as telematics for vehicles or wearables for health insurance) and use smart contracts to adjust insurance premiums based on actual usage. Customers only pay for what they use.

- Results: Increased product customization, improved customer satisfaction and new business models for the legal insurance space (e.g., covering legal services only when specific activities occur).

Blockchain-Based Legal Contracts for Coverage

Problem: Disputes can arise regarding the specific terms of legal insurance coverage or when certain legal events trigger a payout.

Blockchain use case: Blockchain can be used to store insurance contracts securely, and smart contracts can automatically enforce terms and conditions of legal policies. If a client faces legal disputes, blockchain could automate parts of the legal insurance process, such as the allocation of legal resources or initiating payouts.

- Results: Greater transparency in contract enforcement, reduced litigation costs and faster resolutions.

Global Coverage & Cross-Border Insurance

Problem: Insurers face significant challenges when providing global coverage or cross-border services, especially in terms of compliance with local regulations and currency exchange.

Blockchain use case: A blockchain insurance policy can operate across borders with ease, enabling smoother compliance with various jurisdictions and using cryptocurrencies for settlement when necessary.

- Results: Access to a global customer base, streamlined cross-border claims processing, and compliance management.

Risk Pooling and Reinsurance on Blockchain

Problem: Reinsurance agreements are complex and often involve multiple intermediaries, resulting in delays and inefficiencies.

Blockchain use case: Blockchain can facilitate risk-sharing pools by creating transparent, automated, and tamper-proof records of reinsurance agreements. Smart contracts can handle the automatic distribution of risk and payouts among insurers, reinsurers, and customers.

- Results: Faster settlement of reinsurance claims, improved trust between insurers and reduced need for intermediaries.

Parametric Insurance

Problem: Traditional insurance payouts are based on losses incurred, which can be difficult to assess in legal disputes or cases where losses are non-quantifiable.

Blockchain use case: Parametric insurance leverages data from sensors or third-party sources to trigger automatic payouts when predefined parameters are met (e.g., a certain level of legal dispute arises). Blockchain can secure and automate the payouts based on these parameters.

- Results: More efficient handling of legal disputes or other triggers for coverage, reduced litigation, and quicker payouts.

Peer-to-Peer (P2P) Insurance Models

Problem: Traditional insurance models have intermediaries that add cost and delay to the process.

Blockchain use case: Blockchain technology in insurance can enable P2P, where groups of policyholders pool their resources to insure one another. Smart contracts handle premium collection and payouts, reducing the need for intermediaries.

- Results: Reduced costs, new revenue models, and increased customer engagement by building trust within peer groups.

Legal Document Provenance & Immutable Record Keeping

Problem: Proving the authenticity of legal documents or ensuring that they haven’t been tampered with is critical for insurance cases.

Blockchain use case: Blockchain can store immutable records of legal contracts, documents, and agreements. This provides an auditable, tamper-proof trail that can be crucial in legal insurance cases where documentation is central to a claim.