How Insurance Benefits from Smart Contracts: Using Blockchain and Bitcoin Technology
Updated: February 24, 2020
A Smart Contract is a contract that shows quick-witted intelligence in a clever and bright manner.
Smart Contracts are also known to excel in academic aspects of life while many are graduates of esteemed universities.
Okay, I had to.
It was too easy.
For the record, that’s not what a Smart Contract is.
A Smart Contract is actually a computer protocol intended to digitally facilitate or verify the negotiation or performance of a contract.
They help you to exchange money, property, or anything of value in a conflict-free way to avoid a middle-man.
How Insurance Benefits From Smart Contracts
Here’s an example:
Typically, you’d go visit a lawyer, pay them, then play the waiting game until you receive the document.
(Now think of Smart Contracts as a vending machine.)
With Smart Contracts, you would put bitcoin into the Machine, or ledger, and your driver’s license, escrow, etc. would fall into your account like a Snickers bar from the top row.
The really handy thing about Smart Contracts, is that unlike a customary contract, these can enforce the rules and penalties that have been agreed upon.
Relationship to Bitcoin & Blockchain
Bitcoin is to thank for the support of smart contracts.
Bitcoin is the network of nodes that validate transactions only if and when certain conditions are met.
In the Bitcoin network, value can be transferred from one person to another.
Blockchain is the database that stores records of digital transactions typically made with bitcoin.
Blockchain replaces traditional databases like banks and accounting businesses and provides users with more transparency, since it is visible across the Internet and its users.
Thanks to Bitcoin and blockchain technology, business is more efficient, and the costs associated with transactions are greatly reduced.
Check it out: How Blockchain Can Help the Insurance Industry
How Can Insurance Benefit From Smart Contracts?
Blockchain is working to improve the existing processes, which could have a big impact on the insurance industry.
Studies from experts show that insurance will experience the most significant changes from blockchain and smart contract technology.
This is because smart contracts give you autonomy, trust, backup, safety, speed, savings, and accuracy.
With that being said, there are several ways in which smart contracts are useful in the insurance world, so let’s talk about them.
1. Reduce Paperwork
This is pretty obvious already, but yes, you will save yourself a ton of paperwork when working with smart contracts.
Everything is done on the computer and navigated through code on the blockchain network, so you can cap your pens and turn off the printer.
With all of the agreements and terms on the smart contract, you don’t have to worry about keeping hard copies, since deleting these contracts is difficult, as they can exist on multiple ledgers.
The only way for a smart contract to expire is for the contract to execute itself based on preset conditions such as its coded terms.
Meaning, the words in an agreement are replaced by code, so that they can automatically be read by computers.
This can benefit insurance because there is less dependence on the interpretation of clauses.
Since processes will be quicker and cheaper, this could result in a reduction of premium rates.
Not to mention, smart contracts could benefit insurance by filling coverage gaps.
Check it out: Going Paperless In Your Agency
2. Reduce Fraud Through Transparency
Smart Contracts make fraud more difficult because all documents and ledgers are encrypted on a shared ledger.
Meaning each contract or document in the network, is visible to the public so regulators are able to view the blockchain to better understand activity in their market.
The main premise is that every change in the contract is permanently recorded.
Even though documents are viewable to the public, the privacy of the parties involved in the contract is still maintained due to the encryption, or code on the document allowing only those who created it to see it.
This type of visibility adds a better level of security by allowing more people to see what’s going on and hold people accountable for trying to penetrate the document.
3. Improve the Quality of Data Used During Underwriting
Underwriting is a tedious task that involves evaluating risk for the company, setting prices, end establishing premiums for the individual.
By reviewing information, an underwriter can make a risk assessment to determine the type of policy and coverage that is needed.
Smart contracts improve the quality of data used during the underwriting by assigning it a date and time field that cannot be changed.
While blockchain decentralizes record-keeping, users can easily add and update information on the chain.
Another use case for smart contracts in insurance is that they could automatically adjust premium rates if the conditions met changed the rate.
Check it out: The Power of Smart Contracts on the Blockchain (Infographic)
4. Remove Administrative Barriers
This one is pretty simple and straightforward, but still worth mentioning.
Because smart contracts are created by the individuals involved in the agreement, this allows for the parties to skip the administrative process typically involved in creating contracts.
The timeline for a contract drawn up through administration is subject to the availability and constraints of the people in the administrative area.
Instead, by creating the contract through the blockchain, that process can be eliminated entirely, allowing the process to run much smoother and efficiently.
5. General Efficiency
Overall, smart contracts help to improve the insurance process.
By reducing, removing, and improving aspects of traditional insurance systems, insurance companies can enhance their daily workflow by cutting costs and corners to improve their customer experience and satisfaction.
By exchanging the value of insurance in a conflict-free manner, the process becomes much more efficient than a traditional insurance or contract process.
See also: Which AMS Does Your Insurance Agency Need: Appiled TAM vs. Applied Epic?
Eventually, smart contracts will automatically pay insurance claims.
And that’s probably the most attractive part to this technology.
In theory, once the coverage is triggered, the smart contract proceeds to pay the indemnification.
Therefore, no loss adjusters or carriers have to get involved.
And the claims process is operating more efficiently.
There are some kinks to be worked out with smart contracts and Bitcoin technology.
Thus far there are concerns with data privacy, international regulation, and what to do when the insureds views differ from the automatic triggers.
Until then, we will have to continue to wait patiently for our claims checks in the mail.
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