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From SitePoint: Blockchain in Insurance: Realizing Critical Growth Opportunities

This article was originally published on Blockchain Review. Thank you for supporting the partners who make SitePoint possible.

How a revitalized insurance industry powered by blockchain technology can find much needed growth in the emerging economies of Asia.

After many years of crisis, scandals, low growth rates and declining customer satisfaction, there are compelling reasons for the radical transformation of insurance services to occur.

There are also powerful arguments as to why these transformations will need to begin in the emerging economies of Asia.

The Case for Change

For industry, nations, and consumers the transformation of insurance is more critical today than ever before.

For industry

Limited growth in mature markets and pressures to reduce costs are taking a toll on the insurance industry.

Armed with outdated IT infrastructures, insurance providers have little capacity to reduce spiraling administrative costs or develop cost-effective services for low-income developing markets.

Companies remain helpless to increase their customer base or meet internal growth targets.

Restrictive IT infrastructures have led to poor customer engagement, and ineffective fraud detection methods and pricing structures as well.

So far the industry has been perceived to be fairly reactive to technology, to have issues with IT prioritisation and implementation, and ultimately to be relatively slow to innovate and change. – Chain of a Lifetime

The time has arrived to overhaul the legacy IT systems that continue to cause significant inefficiencies and increased risks.

Seeking out transformational technologies that reduce inefficiencies and enable the delivery of innovative products and services to untapped developing markets around the world is now critical to future competitiveness.

Forget “first the West, then the rest,” it’s about “the rest, then the West…”

It’s important for companies to understand that technology adoption is no longer the exclusive domain of consumers in the West. Technology adoption today often begins in emerging economies and then flows to the west.

Out of the world’s developing economies, the emerging economies of Asia represent an unprecedented opportunity to experiment with low-cost innovation and open regulatory frameworks.

They also represent a vast customer base hungry for new services. Companies that are able to deliver micro-insurance services have the opportunity to tap into these vast markets.

A “first the rest, then the West” approach is now an imperative for future innovation, growth, and success.

For nations

For the hundreds of millions of low-income residents in the emerging economies of Asia, from Indonesia and the Philippines to Cambodia and Vietnam, access to formal financial services, especially insurance, remains extremely low.

Without the ready availability of insurance products and services to all segments of society, the economic progress made by individuals in these and other nations will remain tenuous, and future economic development will be limited.

Insurance plays a key enabling role in wealth creation, and economic growth as coverage is a prerequisite for financial institutions to offer many other types of financial services.

Governments must, therefore, begin to lay the regulatory foundations for the future proliferation of micro insurance services if they are to realize their nation’s financial inclusion targets and overall potential in the new innovation-based economy.

For consumers

In most of the emerging economies of Asia, insurance coverage remains rare. In fact, according to the Asian Development Bank, insurance penetration in Indonesia, Cambodia, and Myanmar is almost non-existent.

In the Philippines, insurance penetration is estimated to be around 4%, relatively high when compared to Indonesia where 1% of insurance needs are currently met. [2]

There is now widespread recognition from those in the development sector that insurance is a vital financial service to help people climb out of poverty, manage various risks and protect valuable assets. [3]

The continued absence of viable products and services means that the livelihoods of millions of individuals continue to remain uncertain.

Insurance can protect the poor against losing their livelihoods and assets due to natural disasters or sudden illness, thus preventing them from falling back into cyclical poverty. – World Bank Insurance Brief

For the small minority of these populations lucky enough to have access to insurance services, low levels of transparency, fairness in charges and claims handling and a severe lack of consumer protection is a significant problem.

Individuals with limited education and familiarity with complex insurance products remain at risk of exploitation unless insurance providers can simplify their offerings and realign their incentives.

Several Problems, One Corrosive Root Cause

Over the last decade, a dramatic shift in trade power has taken place away from the advanced economies in North America and Europe to the emerging markets of Asia. [5]

From nations like China that have developed at a rapid pace to countries that are at the beginning of their economic development journey like Myanmar, the emerging economies of Asia are now a vital part of the world economy.

But offering services to these low-income markets in Asia has remained entirely out of reach for most insurance companies. This despite the massive growth opportunities and a general awareness of the importance of these markets among industry executives.

Why?

The answer is surprisingly simple and can be traced to a single, yet highly corrosive root cause.

Fragmented, old-world IT systems and siloed record keeping infrastructures that lack basic levels of interoperability.

It is the outdated systems utilized by most insurance providers that are creating the spiraling costs and crippling inefficiencies which have in turn prevented insurance companies from developing cost-effective micro-insurance services for low-income customers in the emerging economies of Asia.

Simply put, without the transformation of these systems, insurance companies will become increasingly inefficient and remain unable to access vital growth opportunities.

A Devastating Flow-on Effect

Sky high administrative costs & backend inefficiencies

Administrative expenses and backend inefficiencies are crippling the insurance industry.

With complex contracts between multiple stakeholders that need a significant amount of human processing, the administration of insurance has not only become expensive, but highly inefficient as well.

Underwriting and claims settlement, two critical processes conducted by all insurance companies today involves the time-consuming and often inaccurate evaluation of information.

After a claim is registered, an astonishing variety of tasks must be completed. These include but are not limited to, the retrieval of supporting documentation, performing fraud detection checks, determining which party is liable for the damage, determining the amount of the claim, and communicating back and forth with the customer and other parties involved.

Processes are slow, manual, paper-based, repetitive, expensive and also prone to errors and duplication.

Inefficient client onboarding and compliance processes

Insurance companies must complete several compliance related steps which create significant time and cost delays as part of the onboarding process for new clients. [6]

These include the collection, validation, and verification of key documents such as proof of identity, proof of address and proof of birth. [7]

Compliance officers must also manually check and share enormous amounts of data with third parties and internal due diligence teams which can take a considerable amount of time to complete. [8]

Vast resources are spent by companies to fix needless errors during the compliance process and reconciling data sets across departments and external intermediaries is a massive headache.

Ineffective fraud detection

It is estimated that $45 billion is lost annually to insurance fraud with approximately 65% of fraudulent claims going undetected. [9]

Fragmented and siloed record keeping practices together with record systems that lack basic levels of interoperability have led to a severe lack of advanced data available for risk analysis for fraud detection.

Legacy systems prevent risk and compliance teams from gaining a systemic view of transactions and a complete historical record of a customer, limiting their ability to identify duplicate transactions or those involving suspicious parties. [10]

With a limited ability to detect fraudulent activities, insurance companies must deal with greater risks and expenses and charge higher premiums to their customers.

Blockchain replaces fragmented and siloed record-keeping infrastructures with a unified platform

If you’re like many insurance executives, you may be wondering what all the blockchain fuss is about. The technology continues to garner endless attention yet there remains a lack of understanding among decision-makers within the industry.

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