Calculating and managing risk is the foundation upon which the insurance sector rests, but as digitalization has permeated every aspect of our lives, it has put into question the resilience of the traditional insurance model and its ability to cope with the fast-paced demands of an increasingly interconnected digital world.
For the past decades, the insurance sector has remained largely unchanged, as it still relies on traditional data silos and inefficient technologies, which are unable to facilitate the trust and transparency necessary to support a collaborative and sharing economy. Even with the rise of online insurance services such as brokers, most consumers still use these services over the phone to purchase new policies.
In turn, insurance policies, the contracts that are signed between the insurer and the policyholder that stipulates the terms and conditions between the two parties, are still reliant on the old fashioned, error-prone pen and paper model which requires human supervision. Add to this the fact that the insurance market is composed of a complex web of actors such as consumers, brokers, insurers, and reinsurers as well as the unpredictability of the sector’s main product, risk, it becomes increasingly clear that this multi-trillion-dollar global industry is in dire need of a mechanism that can overhaul the flow of operations, increase transparency, collaboration and enhance customer experience.
Since 2008, blockchain has become a hot topic in the tech community, cementing itself in the vocabulary of savvy entrepreneurs and tech evangelists for its ability to ensure trust, consensus and immutability to the information it stores. In its debut years, blockchain garnered much attention and hype mainly due to its initial use case, cryptocurrency, but similar to an artist that has managed to prove that his first big hit wasn’t a one-hit-wonder, blockchain slowly began to mature and draw the attention of the enterprise sector for its ability to act as a secure storage medium that enables cooperation, information traceability, transparency, secure storage, decentralization and distribution.
As the technology continues to mature, it becomes evident that blockchain will most likely be remembered as a transformative force, capable of reinvigorating antiquated sectors and business models that so far have manifested a higher degree of resistance against the wave of digitalization.
Modex makes blockchain affordable and easy to use
Regardless of the promise to unlock new business momentum, opportunities and streamlined operations, blockchain so far has managed to remain as a somewhat elusive proposition for many business sectors and industries, mainly due to its complex and costly implementation, hidden technological overhead and trade-offs.
As one of the early players in the blockchain space, Modex had ample time to listen to the pulse of the market and analyze how this technology can render its benefits across multiple business sectors without requiring companies or any other types of organizations that wish to access its benefits and features to completely change their infrastructure. To answer this series of questions and to provide an answer to the blockchain conundrum, Modex patented its Blockchain Database (BCDB) technological layer which connects to existing IT infrastructures with minimal changes to add a blockchain layer that grants access to all the benefits this technology offers.
With multiple approaches to implementation, the solution developed by Modex can also be used to build new infrastructures from the ground up, so companies can integrate a blockchain layer into their applications and infrastructures even from the design stage.
The innovation of the BCDB solution stems from the fact that it hides all the complexities of blockchain technology behind the familiarity of a traditional database system, to give companies access to all the benefits offered by a blockchain framework like decentralization, distribution, data traceability, integrity assurance, immutability and transparency, all while retaining the familiarity of working with a classic database system.
Implemented in the insurance sector, the Blockchain Database solution can support and enable policyholders and insurers to track, manage and insure physical assets digitally, unlock new revenue models, lower the risk of fraud and theft of insured property, reinvent asset management, enhance Know Your Customer (KYC) verification and codify business rules by providing a permanent audit trail.
What does blockchain bring to the insurance sector?
At its core, blockchain is a decentralized, consensus-based incorruptible digital ledger of transactions that can be programmed to record not just financial transactions, but virtually any valuable data. Without diving too deep into the technical aspects of blockchain, it is a convergence of multiple technologies and fields such as cryptography, peer-to-peer networks, distributed systems and information security all bundled under a single package that provides resilience and a single source of truth to the information it stores.
Blockchain comes with a unique set of functionalities and features that can help reinvigorate the outdated insurance sector:
- distribution – due to its design, blockchain promotes a new working model that operates based on collaboration. After verification, data is distributed to every member of the network, so that every participant has a copy of the information. This design choice renders data silos obsolete, while also removing the need for reconciliation between parties
- transparency – as every member of the network has access to the data, the blockchain records are easily verifiable by every participant
- decentralization – because the data is distributed to every participant of the network, verification and network maintenance does not rely on a single centralized authority. This means that blockchain is immune to the dangers found in single point of failure systems.
- tamper-resistant – once data has been introduced in a blockchain network, its integrity is ensured by the complex inner workings of blockchain. Data cannot be altered without compromising the entire data chain. Any data discrepancies are automatically detected by the system, which allows companies to pinpoint in real-time any tampering attempts.
- traceability and record history – blockchain is an append-only structure. This means that it does not follow the traditional CRUD paradigm of standard database systems. Information is never deleted. When a record suffers a modification, a new entry is created and appended to the system. This means that a complete history of every version of the data is maintained in the system.
- streamlined auditing – as an append-only structure, blockchain provides an indisputable record history of all the data that has been introduced in the network.
- data immutability – by combining cryptography with hashing algorithms, blockchain ensures data immutability. In turn, immutability provides data integrity which drastically simplifies audit processes, while providing proof to stakeholders that the information has not been altered.
- encryption – encryption ensures that network members see only information that is relevant to them and that data is secure, authenticated and verifiable.
- smart contracts – self-executing code that runs on top of the blockchain. Smart contracts trigger when pre-defined criteria are met to execute a set of business logic agreed by the participants involved. Smart contracts can be utilized to automate the execution of automatic contracts or agreements.
Blockchain use cases in the insurance market
Automated index-based insurance
As the name suggests, index-based insurance is a type of insurance linked to an index that can be represented by rainfall, wind speed, earthquake, flight delay time, temperature, crop yield, etc. In this model of insurance, the insurers agree to pay a set sum when the parameters agreed upon with the insured fall under or go over a certain threshold. Index-based insurance aims to address some of the limits of traditional crop insurance in rural areas by reducing settlement and managing costs. Although this type of insurance provides multiple benefits for the insured, acting often as a financial safety net against the capricious weather, it is often difficult to put into practice due to the complexity and costs involved. An infrastructure capable of supporting index-based insurance by gathering accurate data demands considerable expertise and resources.
Blockchain used together with smart Internet of Things (IoT) sensors can provide aid in this area by adding a layer of automation that streamlines the collection and processing of data. A smart contract between an insurer and farmer can be designed to automatically trigger a payment in case of a drought that lasts for more than a month, for example. In this scenario, the payment would trigger automatically without requiring an insurance claim from the insured or for an expert to conduct an on-site examination.
Lower risk of fraud and theft
Under the current paradigm, insurers gather data from the public domain and from private businesses to analyze and come up with patterns for fraudulent activities. The main issue is that the data collected is often inconsistent and unreliable because of the difficulty of sharing sensitive information between different companies.
An example is the directors’ and officers’ liability insurance market, which insures business leaders for actual or alleged errors that may be committed during their duties, like failing to comply with legal provisions, publishing inaccurate financial statements, and failing to pay salaries, or taxes. With its ability to increase cooperation, transparency, enhance data sharing and guarantee a single version of the truth, blockchain can act as an auditable data ecosystem that can be easily verified to detect fraud patterns.
A study conducted by McKinsey underlines that “An estimated 5 to 10 percent of all claims are fraudulent. According to the FBI, this costs US non-health insurers more than USD 40 billion per year.” The same study goes on to point that blockchain can be used as a tamper-proof cross-industry, distributed registry of data that validates authenticity, ownership and provenance of goods as well as the authenticity of documents, prove date and time of policy issuance, confirm subsequent ownership and location changes.
Blockchain is already seeing successful implementation in these areas. Blockverify is using this technology to check for counterfeit products or stolen property, and fraudulent transactions in goods such as pharmaceuticals, electronics and luxury items. A similar use case for blockchain is implemented by Everledger, who uses blockchain to prove the authenticity of precious stones and track and related transactions.
Big players from the insurance sector have set up internal or external reinsurance mechanisms that protect the insurer from insolvency when large numbers of claims come in at once, such as during a natural disaster. As risk is the main object of business in the insurance industry, insurance companies rely on reinsurers to offload a portion of the risk they are exposed to and to mitigate unexpected events like landslides, wildfires, hurricanes that may lead to a spike in insurance claims. Simply put, reinsurance is a process through which insurers are insured, acting as somewhat of a financial safety net for the companies that activate in this area. The main issue with reinsurance is that it is a highly convoluted process that involves multiple third parties such as brokers and professional reinsurers who need to collaborate and exchange information in accordance with strict regulatory and fiscal requirements.
Commenting on the impact that blockchain can have on the reinsurance sphere, Emmanuel Dubreuil, Partner, PwC France Advisory Property & Casualty/Reinsurance highlighted the fact that “There would be a whole host of benefits, including a simplified governance structure, auditability, lower costs, greater speed, and confidentiality. In the context of internal reinsurance, blockchain technology offers real potential for reducing transaction costs and improving reliability for insurance groups.”
Blockchain is often referred to as a shared digital ledger that holds valuable information that can be seen by every participant who has access or permission. Because of this design choice, blockchain is an ideal solution for facilitating a better flow of information between insurers and reinsurers. The shared and distributed aspects of blockchain allow for data to be updated in near-real-time between participants. In reinsurance, this would drastically cut down on the time and paperwork needed to reconcile books between institutions for each individual claim.
Cost-effective and secure KYC
Insurance alongside the banking and the public sector are domains where it is mandatory to compile documentation concerning customers and stakeholders, a process referred to as Know Your Customer (KYC). Although KYC has become an integral element in any financial and payment business, it remains a costly and time-consuming process. Another important aspect that needs to be taken into consideration is the fact that insurance and other institutions that rely heavily on KYC verification still rely on siloed, centralized data centres which opens up a wide venue of vulnerabilities that are exploited by cyberattackers who target customers’ personal data.
Statistics show that these types of attacks are on the rise as more and more companies fall victim to attacks engineered to target the data records of their customers: 1 billion accounts hacked in 2013 and another 500 million in 2014; eBay: 145 million hacked in 2014; LinkedIn: 117 million in 2012; JPMorgan: the accounts of 76 million retail customers and 7 million institutional customers hacked in 2014; Facebook: 419 million accounts leaked in 2019.
In a research report, focused on exploring the real-life applications and use cases of blockchain technology, Goldman Sachs arrives at the conclusion “that consistent, coordinated use of blockchain technology in banking could save the industry between USD 3 billion and USD 5 billion a year in KYC and anti-money laundering (AML) costs”.
Blockchain is a decentralized and distributed infrastructure that manages to circumvent the security dangers posed by a single point of failure. By spreading the attack surface across all the members of the network, it becomes almost impossible to shut down a blockchain network. Even if a portion of the network is compromised by an attack, data can be easily reconstructed from the copies held by the other members of the network, and attackers will find it difficult to use any compromised information due to the complex layer of encryption used by blockchain. Insurance companies can use blockchain technology to make KYC processes more efficient by removing the need for personnel focused on KYC operations. Customer experience will also witness a boost because blockchain will simplify the KYC process and considerably shorten its duration while also removing the risk of human error.
Enhanced property and casualty insurance
According to McKinsey, property and casualty insurance accounted for a third of all insurance premiums in 2020, making it one of the most lucrative business ventures in this area. The issue is that property and casualty data is spread across multiple insurance actors which makes it very difficult to reach a consensus between all the parties involved. The process is further complicated by the fact that insurers still rely on manual data entries which makes it difficult for different parties to cooperate and reach a consensus in order to determine who receives what.
For example, when you get into a car accident, insurers need to examine the case and determine who is at fault. But if the drivers have different insurance providers, the process of reconciliation extends due to a lack of a unitary system and process for claims management. Blockchain can act as a boon for the property and casualty insurance sphere because it can provide a more efficient way to manage, track and insure digital assets.
One of the major advantages of blockchain technology in insurance is the fact that it enables separate policyholders and insurers to track and manage physical assets by enabling an immutable audit trail of information. Smart contracts can further streamline this process by codifying business rules and adding a layer of automation to claims processing. By transforming paper-based insurance contracts into programmable code, smart contracts and blockchain technology can automate the calculation of the liabilities in insurance for all the parties involved and automate the whole claims processing operations.
Boston Consulting Group (BCG) explains that blockchain could make the process of settling a motor claim as much as 3 times faster and 5 times less costly. BCG also points out that smart contract technology could save property and casualty insurers more than USD 200 billion a year in operating costs and lower their operating ratio by anywhere from 5 to 13 percentage points.
New models of health insurance – A Modex Blockchain Database use case
In the traditional healthcare ecosystem, patient data resides in siloed data centres that do not communicate with each other, making it difficult for insurance providers to have access to a patient’s full medical record.
Also, over the course of his life, a patient will often change multiple healthcare providers, which will further scatter his medical records, between different clinics and providers. Blockchain technology can be used to create a new type of ecosystem that puts the patient in control of his data, while also preserving privacy and facilitating cooperation between the patient and external organizations and entities such as insurance providers.
Modex has already laid the groundwork for the successful implementation of blockchain technology in healthcare. PatientDataChain is a personal health record system built on the Modex Blockchain Database technology that utilizes a decentralized, blockchain-based architecture to integrate patient medical record systems by gathering and connecting all the stakeholders in the healthcare value chain. The idea behind PatienDataChain is to create a patient-centered model where patients are the true owners of their health records and digital identities.
Due to the permission-based mechanism facilitated by the Modex BCDB layer, patients are able to grant healthcare organizations, physicians, and other medical personnel access to their data for a limited time frame. Based on this functionality, PatientDataChain enables an integrated and interoperable approach, capable of collecting and combining medical data from a diverse pool of sources: EHR (electronic health record) systems, different healthcare providers as well as from a multitude of wearable sensor-based healthcare and fitness devices.
Through the decentralization facilitated by the Modex BCDB component, PatientDataChain introduces an enhanced data sharing and exchange system capable of ensuring an optimal level of privacy and confidentiality combined with secure access to patient health records.
Modex BCDB is a middleware software solution that combines a blockchain engine with a traditional database system to augment the security and data privacy of existing software infrastructures. By adding a blockchain backend to a client’s existing database system, the newly created infrastructure becomes able to demonstrate zero-knowledge proof which means that data can be verified with third parties without the information.
These design features make Modex BCDB an ideal technological foundation for PatientDataChain because it enables the PHR (personal health record) solution to seamlessly integrate with existing EHR systems or other medical databases, including data collected by medical wearable devices and other types of healthcare sensors.
An essential component of the PatientDataChain system is the Patient Health Wallet app which represents the PHR element that unifies all the data related to a patient’s medical records. The Patient Health Wallet represents a single version of the truth that is owned and controlled entirely by the patient. The system is designed to grant patients full control over who can access their medical records. When a patient is scheduled for a medical appointment, he will need to give read access to the physician, to enable her to access his medical records. Write access will also need to be granted to the physician to write a new medical record that will be added to the wallet after the consultation ends.
All the prescriptions written by doctors will be added to the Patient Health Wallet to provide traceability and an accurate representation of the treatment a patient followed. Future system functionalities will allow patients to grant pharmacies access to see the prescription to purchase medication, to search for prescribed drugs in the system and make reservations and receive notifications from the pharmacy when the patient can come and pick up his order.
The core element that facilitates the integration and aggregation of the diverse medical sources is the blockchain component facilitated by the Modex BCDB layer which is composed of an array of distributed nodes. Due to Modex BCDB’s agnostic take on database engines, the nodes that compose the blockchain network can be configured with different database connectivity parameters. Network nodes perform a wide range of functions, ranging from data processing, database connectivity, read/write operations to the blockchain, data synchronization, and permission granting. The business functionality component is provided by the software application client that integrates with the blockchain nodes.
Modex Blockchain Database, an ideal framework for the insurance sector
To overcome all of the challenges associated with blockchain implementation and to help enterprises and businesses tap into the benefits of this technology, Modex has created its trademark Blockchain Database solution, a technological layer that fuses the advantages of blockchain with a database system, a technology that is already deeply ingrained in every business and industry sector, to create a hybrid software product that makes blockchain easy to use in existing systems, to streamline operations and data security, or to build an entirely new infrastructure from the ground up that has a blockchain engine running in the background.
Bundled as an Infrastructure as a Service offering, Modex BCDB is devised to act as a building block that companies can use to build an infrastructure tailored to their specific business requirements. What makes the Modex technological layer stand out is the fact that it incorporates a blockchain component that unlocks a series of powerful features and functionalities without requiring any prior knowledge of blockchain development.
Azure subscribers are now able to access and deploy with the push of a button a blockchain database infrastructure that enhances data security and data management operations. Modex enables companies to customize and deploy from a wizard interface the network infrastructure in a matter of minutes, compared to the weeks and even months required for deployment by other solutions present on the market.
Once a client configures the network according to the business logic of their company, Modex begins to set up the infrastructure and virtual machines according to the network configurations chosen by the client. Once that step is complete, Modex will coordinate the client’s configuration settings while also providing the blockchain and database technological layer.