What Benefits Do The Use Of Smart Contracts Offer Insurance Companies? - Comparewise
What Benefits Do the Use of Smart Contracts Offer Insurance Companies?

What Benefits Do the Use of Smart Contracts Offer Insurance Companies?

Smart contracts are making a big difference in many industries these days. Thanks to their increasingly widespread usage, companies are able to perform more efficiently, effectively, and provide greater levels of customer satisfaction than ever before.

One of the industries that is seeing a rise in the use of smart contracts is insurance.

Many aspects of insurance policies used to involve time-intensive manual input that not only slowed processes down, but took up employees’ time that could be better utilized on other tasks and generally prevented companies from growing at the pace that they potentially could.

What is a smart contract?

A smart contract is a program or transaction protocol that is programmed to automatically store information and execute certain types of functions according to the stated terms of a given contract.

There are a number of benefits to the use of smart contracts, including the elimination of the need for trusted intermediaries, arbitration costs, and fraud losses. And – perhaps most importantly – they eliminate the possibility of human error as calculation parameters are pre-programmed into the contracts.

Smart contracts rely on the use of blockchain technology, which stores information on a distributed ledger. Individual data points cannot be changed, destroyed, or moved.

Smart contracts initially gained popularity for their use in cryptocurrencies, but they soon gained popularity in other industries, as well.

Are there different types of smart contracts?

There are two major types of smart contracts. They can exist on a third-party platform, meaning one that already exists.

If you choose this method of creating contracts, however, you should keep in mind that the overall construction of the blockchain will already have been put in place, so you will not be able to customize it for your own particular needs.

There is also the option of creating your own blockchain. This requires more effort on your part, but it allows for a greater degree of customization.

What does this mean for the insurance industry specifically?

There are a number of benefits that the use of smart contracts provides for the insurance industry in particular. Among them are the following:

Increased trust

Smart contracts help build trust in insurers. It is a well-known fact that historically many people do not trust insurance agencies. With the incorporation of smart technology, the concerns that many people once had about being overcharged  are eliminated.

Having processes automated means that human intervention cannot manipulate the numbers involved. A customer’s data and policy criteria are straightforward and clear.

Specifically, smart contracts use smart insurance code. Smart insurance code contains software algorithms that can predetermine all of the potential insurance payout scenarios, and execute contract terms without human intervention.

In fact, the nature of blockchain is such that it is automatically open and decentralized. Because there are no specific owners to any particular blockchain, anyone is able to see the chain and the transactions that are made on it.

Whenever a change is made, all parties to the blockchain are notified. So the chances of fraudulent activity taking place are basically nullified.

What Benefits Do the Use of Smart Contracts Offer Insurance Companies - Comparewise

Claims

The process of making and verifying claims can be very time consuming. And the length of time can vary considerably depending on what type of insurance you are seeking a claim for.

For example, if you make a claim related to an auto accident, you have to consider roadside assistance claims, glass claims, physical damage, medical claims, etc. It then takes the company time to review and respond to each of these components, usually involving an entire team of reviewers.

With smart contracts, all of the potential claims made under a given insurance type are pre-programmed to be calculated upon making a claim. Not only are claims processed faster, but concerns about subjective decision making are eliminated.

Policy holder storage

Because smart contacts are kept on multiple ledgers, there is no concern about their being lost or corrupted. And because all of the information is digitized, the risk of data loss or damage is minimized.

Risk assessment

Another major advantage that smart contracts offer is streamlined risk assessment. In the past, it used to take companies a long time to verify a new policyholder’s ID.

But with the use of blockchain, sophisticated risk assessment models are built into smart contracts. This makes the risk assessment process not only faster, but more accurate.

With the use of these tools, risk scoring is made automatic. Because smart contract technology is connected to the credit bureaus, companies are automatically notified of a given person’s credit score.

Parametric insurance

Parametric insurance is insurance that offers payments that are pre-determined in advance, based upon the possibility of a particular type of event. Once the event in question is triggered, the insurance payment can be given.

For example, if someone takes out insurance based upon the possibility of an earthquake of a particular magnitude occurring, the blockchain will be automatically programmed to pay the customer a certain amount of money once it is determined that the event took place.

There is no need for an independent view or any further verification process.

Are there risks associated with the use of smart contracts?

For all their benefits, there are some risks associated with the use of smart contracts. Cyberattacks can happen, of course, and if there is an attack on a particular blockchain, the results can be detrimental to all of the parties involved.

Because any given blockchain is a single, interconnected entity, any change to it affects the entire chain. Therefore, an attack can potentially destroy the information of everyone involved on a given chain.

How can these risks be minimized?

In order to minimize the possibility of something like this happening, experts recommend taking the following steps:

  • Be sure to research best practices regarding the coding of the contracts. There are specific techniques that you can follow to create particularly secure codes that are difficult for people to hack. When you create a code, you will have to choose from the available languages, including Solidity, Vyper, Go or Rust, or others. Do your research on what each of these languages entails before you get started.
  • Conduct a smart contract security audit. There are professional tools available that you can use to audit the security of your contracts. Using one of these tools will tell you whether you need to make adjustments.
  • Take into consideration any particularities of the blockchain that might play a role in potential vulnerabilities. Ensure that no passwords of IDs are accidentally made public.

What other technologies play a role in smart development?

Many different technological advancements are coming together to assist in the creation and further development of smart technology.

AI developments help to create speedy estimates

Another thing that is playing a major role is the development of artificial intelligence. AI helps enormously in speeding up claims, because they provide customers with apps that they can use to help make the claims.

For example, in the event of an auto accident, a customer can simply take a picture of the accident, process it through one of the associated apps, and then an AI-driven algorithm immediately processes an estimate. In the past, agencies had to take time inspecting and assessing damages to come up with a number.

Devices to help calculate customer risk levels

Another trend that is taking place in the auto insurance industry in particular is the development of “telematics.” Telematics devices that are inserted into vehicles that collect data on a person’s driving history to better determine estimates.

If someone is considered to be a particularly aggressive driver, his or her rates will be higher because of being in a higher risk category. Conversely, people who are considered particularly cautious drivers will be given lower premiums.

Drones to assess accident or disaster damage

In addition, the use of drones is becoming increasingly common in the industry. Drones can assess damage more easily than humans in many cases and can be programmed to provide data accurately.

In instances where property has been damaged by natural disasters, for example, drones can be used to access places that are difficult for people to reach, and can report findings back to agencies which can then be processed to make claims estimates.

Increased use of chatbots and more information channels

Companies are also utilizing more ways of transmitting automated information to their customers. Social media is being increasingly utilized, as well as SMS messages and a greater variety of other information channels.

In addition, companies are frequently using chatbots to answer customer inquiries. Chatbots can be programmed to answer many series of questions stemming from a particular situation.

They are becoming more and more personalized so that individual customers can be recognized and their data accessed immediately.

Technology is continuing to develop

Despite the fact that there are still some risks present in the insurance industry, technology is enabling many aspects of insurance policy functioning to be streamlined, more efficient, more accurate, and safe from the possibility of fraud. Smart contracts in particular have been a major game changer for the industry.

The technology will surely continue developing, which will make processes easier for companies and customers alike.

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August 22, 2023
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