The main opportunity comes from the ability to optimize workflows and offer better pricing models by moving business processes on the blockchain and using parametric insurance and smart contracts, as well as automate and improve data governance and data compliance by using Web3 storage.
Smart contracts and NFTs
Smart contracts is a term used to describe programs stored on a blockchain that run when predetermined conditions are met. Such conditions in the context of the insurance industry can cover anything that may trigger an insurance event, such as the average temperature or rainfall in a certain location over a certain timeframe, a major hurricane, an earthquake, and many others. To achieve business process automation such contracts can be attached to documents using non-fungible tokens, or NFTs.
NFTs are a type of digital asset that is unique and cannot be replaced or exchanged for another asset of the same type. NFTs are built on top of blockchain technology, and they are often used to represent unique items, such as collectible items, digital art, and other one-of-a-kind assets. In an enterprise context, they need to be considered as a ‘container’ file format, which contains an embedded document that can also carry business logic as metadata. Such metadata can contain simple descriptive information or could contain a business process: from a simple sign-off and document verification up to a complex multi-step sequence requiring the input of many parties and triggering automated payments.
The insurance industry could potentially benefit from the use of smart contracts, decentralized storage and NFTs in a number of ways that will allow the sector to reinvent its value chain entirely, while also increasing revenues.
Automated data governance and compliance
The use of decentralized storage could potentially make it easier for insurance companies to securely store and manage large amounts of customer data, such as policy information, claims data, and other important documents. This could help to improve the overall efficiency and reliability of the industry, as it would make it easier for insurance companies to track and manage their policies, as well as make it easier for customers to access and verify their own policy information. Additionally, the use of NFTs could help to enhance the overall security and reliability of the insurance industry, as it would make it more difficult for policy information and other important data to be lost or tampered with.
Data governance and compliance are critical for ensuring that sensitive data is handled and stored securely and in accordance with relevant laws and regulations. Smart contracts can automatically enforce the rules and policies governing the use and storage of data – for example, automatically granting access only to authorized users, or automatically deleting data after a certain period. Access control mechanisms, such as end-to-end encryption in combination with decentralised encryption key management systems (DKMS), can also be used to ensure that only authorized users are able to access the data.
Business process automation
In the context of the insurance industry, the use of NFTs could potentially enable insurance companies to create unique, verifiable digital assets that represent insurance policies and other important documents which have embedded steps of the business process in the documents themselves. This could make it easier for insurance companies to track and manage their policies, process applications and claims, whereby multiple steps of the business process can execute themselves without human intervention.
There are attempts to build an open insurance platform by connecting centralized applications using application programming interfaces, or APIs. While the use of APIs for interconnectivity is a step forward from segregated systems, a truly open platform needs to be decentralized, and can only be achieved by using blockchain technology. We call a future, where complex decentralized business processes are assembled from building blocks represented by documents carrying their own business logic, ‘object-oriented business process management.’
Parametric insurance
In such an open system, providers of information, risk takers can cooperate in a truly open environment that creates efficiencies, automates processes, reduces costs, and enables the flourishing of parametric insurance. The basic concept of parametric solutions is quite simple: it covers the probability of a predefined event happening (e.g. a major hurricane or earthquake), paying out automatically according to a predefined scheme instead of a lengthy claims adjustment process. External data providers for such triggers (for example, data on flight delays, floods and many others) already exist and in the context of Web3 are called ‘data oracles.’
Conclusion
While Web3 related innovation may threaten existing business models, it offers significant opportunities to leaders with the vision and wisdom to understand that the businesses that have succeeded long term are the ones who grasped the nature of the creative destruction process and the need to embrace proactively the technologies that represent the highest threat to your current business model before your competitors have done so. The use of smart contracts and decentralized data storage are the two areas which may offer the highest scope for efficiency gains and business innovation at the moment.
Source: Digitital Insurance
