Can the insurance industry adopt blockchain technology and smart contracts, given the level of technological sophistication? Smart contracts, as they’re known informally, have existed since the 1990s. On the other hand, smart contracts did not become a reality until the introduction of blockchain technology—specifically, the Ethereum blockchain. Nonetheless, individuals, companies, healthcare providers, and even government entities all require various forms of insurance. Despite the market’s size, many insurance processes are still inefficient and do not induce confidence among partners and stakeholders. However, this problem might be solved by using smart contracts instead of time-consuming and error-prone paper-based contracts.

What Are Smart Contracts and What Makes Them Viable for Insurance?

Smart contracts based on the blockchain are already making waves in the corporate world. How? When specific circumstances are met, smart contracts employ computer software to enforce the terms of agreements automatically.

In the insurance industry, fraud is a massive issue. For instance, in the United States alone, fraud across all insurance lines is expected to cost more than USD 80 billion each year. Insurance companies employ advanced analytics and other tactics to prevent fraudulent claims, but criminals are always coming up with new and more sophisticated ways to scam insurers. Because of the inherent nature of blockchain technology, which records time-stamped transactions with detailed audit trails, fraudsters find it extremely difficult to infiltrate. A blockchain-based risk ledger, for example, might be used to track gemstones. This ledger may also be used to verify the authenticity and remove duplicate and fraudulent claims.

Blockchain-based transaction authentication helps to maintain security for application, renewal, reinsurance, and claim procedures.

As a disruptive  technology, blockchain has five distinct characteristics:

  1. Removal of intermediaries with decentralized validation that relies on network nodes.
  2. Prevents data loss since each network node has a local copy of the blockchain.
  3. Makes it almost impossible to change or remove data from a blockchain.
  4. Because transactions involving user credentials are encrypted, they cannot be reversed, establishing trust between the parties.
  5. All authorized users have access to the blockchain and the transactions contained inside it.

Smart contracts have several advantages in the insurance industry, including the following:

  • Cut down on the time you spend verifying claims. Smart contracts on the blockchain can transform the insurance industry’s claims system. To settle claims, paperwork is no longer necessary; just pre-existing processes are required. Insurers gain from more efficient procedures, improved efficiency, and lower costs.
  • Due to the decentralized and open nature of blockchains, every transaction recorded in a blockchain database is open to the public and has no specific owner. Any parties involved would see all changes made to smart insurance contracts, guaranteeing the discovery of any discrepancies.
  • Detects and evaluates potential risks. With the introduction of blockchain-based smart contracts, insurers may now incorporate cutting-edge risk assessment algorithms. A blockchain-based identity management system backs up this logic. Identification cards may be instantly certified and updated with new information, obviating the need for lengthy identity verification procedures. Further, a smart contract automatically examines all of a person’s data and assesses risk, saving time and effort on data collection and verification.
  • Automate processes. All smart contract-related processes are automated and secured via the blockchain. The most significant benefit of smart contract insurance is eliminating the need for intermediaries and human involvement. As a result, outside parties are less likely to manipulate the system. If blockchain is utilized for smart contracts, insurers may perform more transparent and accessible audits of their processes and operations.

Lower transaction costs and greater operational efficiency are two other significant advantages. Policyholders gain from automation since it reduces the administrative cost of the claims procedure, which is especially evident for small payouts. Insurers can save money on policing and claims investigation due to the blockchain’s transparency, which they may pass on to clients in the form of lower premiums.

Use AI to Detect Anomalies

The more common predictive analytics-based approach to AI-based fraud solutions varies from the anomaly detection-based method. Anomaly detection is comparable to other AI applications in that all machine learning models are trained on a stream of labeled data.

In addition, machine learning algorithms can learn how to spot anomalies by setting a baseline for how regular a claim seems.

For example, a human monitor is notified when an occurrence or claim deviates from its predefined baseline. This observer, usually a claims expert or a data scientist, can accept or reject the notice. This informs the machine learning model whether or not its assessment of a claim’s authenticity is correct.

This also teaches the machine learning model to detect when it is correct and incorrect, as well as how to account for such discrepancies in the future.

Consider These Potential Challenges to Blockchain and AI Adoption

The availability of gap-filling approaches that allow for interpretative flexibility is one of the major barriers to smart contract adoption in insurance. Even though words like “good faith” and “reasonability” appear in nearly every contract, it is difficult to convert into binary logic. Hence, developing “smart” contracts capable of self-interpreting and enforcing their conditions would need long-term AI and ML integration.

Robots can grasp unstructured material such as laws and contract terms thanks to advances in cognitive computing and natural language processing. Additionally, a machine-learning platform can assess all relevant data and make an autonomous decision, such as avoiding a contract or declining to seek redress, without the need for human intervention. If the risk materializes, the insured would be paid, and the contract would proceed thanks to a smart contract linked to the algorithm. This would radically alter the way contracts are written, paving the path for completely automated insurance markets. As a result, the customer experience and engagement would improve.

In Summary

Smart contracts may never entirely replace traditional insurance contracts without further technological integration. Instead, a hybrid architecture appears the most sensible, with intelligent contracts managing the more subjective parts of insurance contracts and a connected textual document handling the requirements (such as payment). When paired with AI and machine learning, smart contracts will drive a revolution rather than an evolution, facilitating true insurance automation.

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