Evolving Role of Smart Contracts in InsurTech

6 min read
May 29, 2021 10:00:00 AM

When the FinTech revolution began, insurance companies found themselves struggling to gain a foothold amidst disruptive innovations. The modern enterprises that were quick to see value eagerly embraced it. All their corporate strategies have technology at the heart and customer-centricity remains a constant priority. We are now in the era of InsurTech and those that have adopted modern technologies have become its frontrunners setting new standards in quality, reliability, and customer service.

InsurTech funding ended 2020 on a record high with $7.1 billion across 377 deals. Enterprises are now using smart contract technologies to reshape InsurTech and create a transformative impact. Smart contracts play an important role in the InsurTech landscape and their performance is underpinned by blockchain technologies. As a ledger created in 2008, blockchain allows multiple users to work simultaneously but in a secured manner. It empowers InsurTech by enabling smart contracts that are irrevocable and self-executing. 

Smart contracts are being used extensively even by government bodies worldwide. The lack of human intervention ensures reduced cost of contract handling and provides a smart, secure, accurate, and transparent means to InsurTech to enable transactions. From $106.7 Million in 2019 to $345.4 million by 2026, the global smart contracts market is expected to be growing fast at a CAGR of 18.5% for the forecast period.

Smart contracts are helping InsurTech companies build trust and transparency for the digital native generation. They enable an efficient flow of information as well as payments between parties while allowing insurance companies to explore new possibilities. They come with a lot of potentials that makes them a must-have for insurance companies across the globe. But to understand the critical role they play in InsurTech, it's important to delve deeper and see what they are all about.

The Basics

Smart contract

A smart contract is a software program that runs within a decentralized network such as blockchain. Recent advances in blockchain technology fueled by a growing need for insurance products have put smart contracts in the driver's seat. Smart contracts have been instrumental in helping insurance companies release claim amounts in case of catastrophic events like hurricanes and floods too. 

When conditions cited in the smart contract are met, claims are settled automatically. For instance, when a cargo shipment reaches a port of entry and the quality of its contents is verified by the IoT sensors inside the container, a bill of lading gets issued automatically.

In other words, a smart contract acts as an intermediary, albeit digitally, to ensure transactions between two parties are conducted in a swift and secured manner based on pre-agreed terms. This helps the insurance industry eliminate third parties that would often take days to complete claims processing.

Hosted and executed within a distributed, decentralized blockchain environment, smart contracts are accurate and most importantly, tamper-proof. This means it is impossible for related parties to unfairly control or manipulate them. Triggers are activated only based on verifiable data about insurable events. While the older versions of smart contracts faced difficulties in connecting with data outside the blockchain in a secured manner, modern developments in blockchain technology now enable swift and secure connections with live, real-world data in real-time. There is no room for data manipulation and smart contracts are executed accurately.

The Value

Smart contracts are now helping insurance companies worldwide offer insurance products that respond to real-world, insurable events in a reliable manner. It helps them reduce administrative costs and enables them to channelize the savings to offer lower premiums. This also means an opportunity to increase their market share. Besides, the fact that all the information pertaining to the agreement is stored on the blockchain ensures neither party can ever lose critical data. 

Explains Lydia Clougherty Jones, senior research director at Gartner, "When an organization adopts blockchain smart contracts — whether externally imposed or voluntarily adopted — they benefit from the associated increase in data quality, which will increase by 50% by 2023."

To know how smart contracts are reshaping InsurTech, let’s look at some of the top use cases and applications. 

Customer Onboarding

The fact that only 29% of customers trust insurers as per a study by Accenture underlines the importance of strengthening the trust factor. There is no doubt that digitization is helping customers in a big way. But it should not dehumanize customer relationships and every effort should be made to instill faith and trust in the minds of your customers. Luckily, transparency goes a long way in building trust. 

Blockchain smart contracts are helping InsurTech companies tide over hurdles on this path allowing customers the choice to grant permission to only those with who they want to share information. The global blockchain market is already growing at a whopping 67.3% CAGR during the forecast period from $3.0 billion in 2020 to $39.7 billion by 2025. The numbers speak volumes about the growing popularity of blockchain across all sectors. 

Blockchain smart contracts come as a huge relief in a day and age where regulations around data security and integrity continue to evolve. All a customer looking for a new policy needs to do is allow you access to a link to encrypted data. This saves you time and money while giving customers the peace of mind that their data is in the right hands.

Underwriting and Claims Processing

Smart contracts alleviate the workload of underwriters who often spend a huge amount of time reviewing applications and evaluating risks. When a policy is offered as a smart contract, it not only gives clarity into the terms applicable but also helps efficient claims processing. For instance, payouts to insured farmers can be triggered the moment drought or flood conditions are ascertained by verified climate databases. 

Internet of Things (IoT) enables insurance companies to offer smart contracts in a blockchain network to automate claims and payments as soon as damage is detected and verified. Insurance companies are now even offering self-service claim reporting that enables policyholders to have greater control over their insurance. So if you are covered for certain damages, you can simply click and upload images and bring claim processing up to speed. 

Risk management and fraud prevention

Insurance companies forever are under the threat of insurance fraud. The traditional processes were often paperwork-intensive offering plenty of leeway to fraudsters. As a result, they would often leverage a single loss to make multiple claims to different insurers or over-exaggerate the damage to seek higher compensation. 

Fraudulent claims across all lines of the insurance business have cost American companies $80 billion already while insurers end up paying out up to 10% of their claims cost on fraudulent claims every year. What's worth noting is that this happens even though 95% of insurance companies have already deployed anti-fraud technologies. 

Claims processing usually necessitates a lot of coordination among stakeholders unless of course, you are using smart contracts. Thanks to a shared ledger, insurers can now collaborate to track fraudulent activities and detect fraud patterns. Every time information is submitted through claims, they check the authenticity of that information. 

Looking ahead

The distributed ledger technology is making smart contracts an absolute must for InsurTech. From modernizing data transfer to facilitating reinsurance, smart contracts are paving the path for exciting possibilities. They are clearly moving the needle towards interoperability and greater efficiency. 

TransformHub collaborates with some of the best players in InsurTech to facilitate end-to-end development, claims management, and a host of other services to develop capabilities and reimagine the customer experience. With a blend of experience and expertise, TransformHub helps them strengthen their technology landscape for tomorrow. 

Lead with TransformHub:

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So, if you are looking to innovate, trust TransformHub to be your like-minded partner that can help you cut costs and digitally transform your business with our expertise. Our team does the thinking and focuses on getting the Return on Investment (ROI) and controls the Total cost of ownership (TCO). 

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TransformHub Insights Team