In the insurance industry, blockchain technology is already proving to be a game-changer. With the increasing use of smart legal contracts, insurance companies can now benefit from increased transparency, and efficiency in their operations through the use of parametric insurance.
Smart legal contracts and parametric insurance are both technologies that can be used to automate and simplify certain aspects of insurance contracts and can be used together to create more efficient and reliable insurance products.
Smart legal contracts are self-enforcing contracts that use blockchain technology to automate the execution and enforcement of contract terms. They can be used to create parametric insurance contracts that automatically trigger payments when pre-determined conditions are met, without the need to manually process or assess claims.
But what exactly is parametric insurance?
Unlike traditional insurance, where the premium is calculated based on the characteristics of the insured risk, in parametric insurance the premium is calculated based on the probability of an event.
This means that the indemnity is no longer calculated on the basis of the damage actually suffered and documented by expert reports, but instead, the insured will receive the contractually agreed sum in real time, without the need to prove the damage incurred as a result of the damaging event: the amount is agreed on the probability of occurrence of the predefined event.
Parametric insurance (https://corporatesolutions.swissre.com/insights/knowledge/what_is_parametric_insurance.html) is based on objective and measurable criteria, such as wind speed, precipitation, earthquake intensity or other predefined parameters. If these criteria are met, the policy pays a predetermined amount, regardless of the actual loss suffered by the insured.
Advantages for the contracting parties
Trust and transparency
One of the main advantages of blockchain technology in the insurance sector is increased transparency and security: parties can access the same information and in real time: the risk of fraud and errors is thus reduced.
Not only that. The customer is always informed about the status of his policy or claim, which benefits greater customer trust and satisfaction with the insurance company.
Fraud reduction
Fraud is one of the biggest challenges facing the insurance industry.
With blockchain technology, insurers can benefit from a secure and transparent system that makes it difficult for fraudsters to exploit.
With blockchain solutions, data is stored on a distributed ledger that can be accessed by authorised parties. This allows insurers to verify the authenticity of the data and detect any discrepancies between the data on the blockchain and that presented in the claim.
Speeding up and streamlining claims
Using smart legal contracts, insurers can automate the claims process, making it faster, more efficient and less error-prone.
There will be no need for paperwork (which also benefits ESG targets) and the process will have less administrative costs to manage, making insurance more convenient for the customer as well.
Scalability
Parametric insurance, through the use of smart contracts, can facilitate scalability of insurance business. In fact, they can be easily replicated and distributed across a network of nodes, simplifying the scalability of the processing power of insurance operations.
In the event of a sudden surge in policy demands, smart contracts will handle the increase in demand autonomously, without the need for additional staff. Smart contracts will automatically execute policy terms and manage claims processing, freeing up staff to focus on other critical tasks.
