Can Smart Contract Insurance Help Eliminate Fraud?

Traditional insurance companies become less trustworthy year over year because of increasing levels of insurance fraud.

In the United States alone, insurance fraud steals more than $300 billion from consumers yearly. 

Moreover, things seem to get only worse. Reports show that in 2017, the percentage of US customers who didn’t trust insurance services accounted for 42%. In 2022, this number has grown up to 62%.

What can insurance companies do to improve the situation?

The answer may be smart contract insurance.

Blockchain is, of course, not a holy grail. But in the case of the insurance industry, it may surely provide more transparency and eliminate the lack of trust among customers. 

How does it work, and what benefits does it provide? Read on to find out.

Key Takeaways

• Smart contracts work best for those businesses that strongly depend on intermediaries and conduct the majority of operations on the web.
• In traditional insurance, there is a lot of fraud both on the companies' and customers’ side due to the lack of transparency.
• Smart contract insurance can make the processes more cost-efficient, transparent, fast, and fair. Companies that pioneer in this area may have good long-term gains.
• Blockchain insurance has its drawbacks as well. Some of the most crucial cons include the lack of proper regulation, technological complexity, and code limitations.

Smart Contracts in Business

A smart contract is a piece of code that automatically executes specific actions once the predefined conditions are met.

For example, it can send money from one party to another once a deal that these parties set up is complete.

Such an approach can help to speed up business processes and provide all the interested parties with an unprecedented level of transparency.

Yet, it has a limited scope of usage. 

To get the most out of blockchain and smart contracts, businesses should have two key characteristics:

1. Companies should strongly depend on intermediaries. 

Blockchain enables parties to exchange value on a peer-to-peer basis by removing the need for intermediaries. Thus, it can provide the highest value to those companies that heavily rely on third parties in their business processes.

Speaking about the insurance industry, it’s worth noting that it meets this criterion perfectly.

2. They should mostly operate on the web.

As a web-based solution, blockchain can only access and process in a fully unbiased manner the data that is available online. 

For those businesses that require input data from the outside, blockchain oracles can do the job. These are the third-party services that collect the data from the real world and send it to the blockchain.

In the case of insurance, both scenarios are possible. 

Yet, why would this industry need to make any drastic changes in its technological approach?

What is Wrong with Traditional Insurance?

The traditional insurance industry relies on the pooling of risks.

Companies combine smaller payments from a large set of customers into a single centralized vault. When any of their customers face any losses that are covered by the agreement, companies use the funds from this vault to make insurance payout.

By evaluating the level of risk, they assume that the sum they gather will always be sufficient to cover any insurance claims.

At the same time, their centralized nature enables them to manipulate numbers in their favor. Besides, to assess the size of the damage, they rely on third-party inspectors who may not always make correct judgments.

This results in overall customer dissatisfaction and ever-growing suspicion.

Tricky customers, in turn, act likewise. At this, they also exaggerate the damage they receive to get higher payouts. All-in-all, the lack of transparency doesn’t play into the hands of either side.

What is Smart Contract Insurance?

Smart contract insurance can resolve the problems mentioned above. It can help to exclude the human factor from the equation and thus make the whole process transparent.

Let’s review a real-life example to understand how smart contract insurance works.

1. A traveler purchases smart contract insurance.
2. According to the agreement, the insurance company takes responsibility to reimburse the money spent on the flight in case of its delay or cancellation.
3. Smart contract insurance includes the details of the booked flight. Also, it contains the link to the aviation company to pick up the most relevant data about the flights.
4. If an insurance event occurs, the self-executing smart contract will get the information from the website and automatically send the appropriate sum to the customer.

Thus, smart contract insurance can process all the claims in a fully automated way. It can eliminate human errors and make any external manipulations impossible.

Smart Contract Insurance: Pros and Cons

The blockchain-based approach may have a strong impact on the whole insurance industry. Here are just a few benefits of smart contracts that can change the situation for the better:

• Increase transparency. With all the records being stored on a public ledger, blockchain insurance may provide companies and their customers with a much higher level of transparency.
• Reduce paperwork and increase automation. Smart contracts can help to automate manual processes thanks to the automatic execution of different tasks.
• Eliminate manipulations. Since smart contracts stand in place of intermediaries, they can help to reduce the human factor. Therefore, they can make it impossible to manipulate the numbers for anyone’s benefit.
• Reduce time and costs. With smart contracts replacing traditional time consuming claims processes, customers will enjoy lower costs and higher efficiency of insurance services. 
• Eliminate risks of losing customers’ files. Thanks to blockchain immutability, customers will no longer fear that insurance companies may lose or alter their data.

Not everything is perfect, though.

The technology bears some risks as well. Here are some of the obstacles that prevent smart contract insurance from getting adopted at scale:

• Code limitations. As mentioned earlier, smart contracts can only operate with the data that is available online. Insurance, on the contrary, can rarely rely on such unbiased sources of data. Thus, companies in many cases will still have to apply to third parties to input the data which negates all advantages of blockchain.
• Technological complexity. To implement smart contracts in the insurance business specific skills are required. The high complexity of blockchain technologies imposes additional barriers both for the companies and for their customers.
• Bugs in the code. Smart contracts may contain bugs that, when discovered, may turn into vulnerabilities and eventually result in money losses.
• The lack of a clear legal framework. There is just a small handful of countries that consider Bitcoin and other cryptocurrencies legal tender. The absence of a proper legislative structure may become a serious stop factor for the industry that swarms with lawsuits.

Smart Contract Insurance Use Cases

Travelers insurance is just one small example of how blockchain insurance may work in practice. Yet, the scope of its usage is much broader.

Here are a few more use cases of how this technology can help to improve the processes in the insurance industry.

• Fraud prevention. Thanks to immutability, transparency, and public data availability, blockchain insurance can help to reduce overall fraud. Clients won’t be able to alter information and submit fraudulent claims. Insurance companies, in turn, won’t be able to neglect their obligations and deceive their customers.
• Claims management. The information shared on a public ledger can help insurance companies act in a much more efficient manner. For insurance companies, it can eliminate duplicated work and potential human errors. Injured parties, in turn, can get payoffs much faster.
• Health insurance. Blockchain insurance can also significantly improve the healthcare industry. With all the patients’ data being stored on distributed ledgers, there will be no more inconsistency in healthcare records across different medical organizations. At the same time, customers’ privacy will be protected by encryption.
• Customers’ data collection. End-users are often unwilling to share their personal information due to the fear of this data being compromised. Integration with certified KYC companies combined with encryption on the blockchain can help insurance companies overcome this problem.

Smart Contract Insurance Examples

All these scenarios may sound like a miracle. Yet, there are a few companies that have already implemented blockchain into their insurance services.

Here are some of them.

Chainlink Labs

Founded in 2014, Chainlink keeps the leading position in blockchain oracles’ development. At this, smart contract insurance is one of the key services that it offers.

Chainlink creates secure parametric insurance products. They access real-world data through oracles and make corresponding payouts when predefined events or parameters occur.

Besides, it offers a way to monetize your data by selling it to blockchain insurance projects.

Consensys Software Inc.

Being one of the leading Ethereum companies, Consensys targets to cover the insurance industry as well, aiming to eliminate the flaws of centralized solutions.

At this, it provides a solution based on the distributed ledger technology that insurance companies can use right out of the box. 

Deloitte

Founded more than 150 years ago, Deliotte remains at the forefront of progress as it offers blockchain-based solutions to health and life insurance companies. 

With the help of this innovation, it aims to create a comprehensive, secure, and interoperable repository of health information.

IBM

IBM blockchain targets many different industries including insurance. The company aims to transform the processes in this industry to add transparency and trust to data collection processes.

Bottom Line

Implementing new technology may be a complicated process. 

On one hand, it requires additional funds, time, and technical expertise. On the other hand, end-users may not always appreciate the results due to the lack of knowledge of how blockchain works and what benefits it provides.

Yet, the results may be worth the effort.

As technology advances, end-users will grasp its benefits all the more. At this, the companies that implement smart contracts for insurance services have all the chances to hit the jackpot at the long-term scenario.