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How to Make a Smart Contract Work for the Insurance Industry

Smart contracts are becoming more and more popular with every passing day. Smart Contracts are the future of the 300 billion dollar insurance industry as they can completely transform how the insurance sector works. Smart contracts are essential for the insurance industry as they assist in increasing profits, decreasing costs, and minimizing risk.

The insurance sector in India is enormous as people, businesses, and government institutions, too, need various sorts of insurance. Despite this, the insurance system is highly complicated and lacks harmony between stakeholders and the parties. Smart contracts can solve this problem if the insurance sector builds smart contracts instead of paper ones.

Meaning of Smart Contracts

Smart contracts are similar to paper contracts. The only difference between a paper contract and a smart contract is that a smart contract is entirely digital. It is a computer program that is saved inside a blockchain. Since smart contracts are held inside a blockchain, they are immutable, i.e., they can never be changed once created, and they are decentralized, making it impossible to tamper with smart contracts. A smart contract pays out when the predefined conditions are met.

Thus smart contracts can completely reinvent the financial sector by reducing risk and fraud and increasing profits.

How Blockchain and Smart Contracts Work?

Image Source: 101 Blockchain

 

Traditionally brokers and carriers transact through a centralized marketplace where contracts and other documents are usually paper-based. After the agreement, these paper-based contracts must be registered, transformed into a digital format, manually processed, and then stored. The brokers and carriers also need a digital copy of these contracts for their records and manually enter the data in their computers.

The data duplication, delays in processing, and restricted location lead to data inconsistencies between the brokers, an increase in the cost of operations, and limited growth opportunities. This problem can be solved using blockchain and smart contracts.

Blockchain acts like a decentralized insurance market where the brokers and the carriers connect. Here a blockchain ledger stores smart contracts and transactions, and the sensitive information is stored in the decentralized, encrypted storage. The decentralization allows all the brokers and carriers to hold the copy of important data, so the data is backed up remotely and secured by encryption. There are no single points of failure.

The nodes in this network expose an internal API to allow the brokers or carriers existing internal systems to integrate. When a broker generates a new risk, they develop a new smart contract placed on the blockchain ledger and references relevant documents and terms. These documents are securely stored outside the central blockchain ledger. 

The broker can then send a real-time quote request over a secure message system relating to the new smart contract and documents to the relevant carriers. The parties can sign the smart contract using digital signatures by writing the hashes of the stored files into the smart contract. This signed contract can then be passed on to all the participants to refer to it in the future for other processes. In this way, blockchain and smart contracts can reduce risks and create trust among the parties.

Benefits of Using Smart Contracts

Blockchain and smart contracts have wholly disrupted the functioning of the insurance system. The various benefits of using smart contracts are mentioned below:

  • Fewer Chances of Fraud

One of the insurance industry’s significant issues is a fraud, but there are fewer chances of fraud due to transparency, thanks to smart contracts. Because of decentralization, there is no single owner, so any inconsistencies in the data due to changes made in the smart contract can be immediately be detected.

  • Automation of Tasks

All the processes involved in Smart contracts are fully automated and securely rendered, so no third party is involved. It also reduces the risk of manipulation by third-party participants.

  • Time-Saving

Smart Contracts do not require any paperwork or additional documents; they use the predefined rules to pay out the claims. It reduces a lot of time, lowers cost, and increases efficiency.

  • No Data Loss and Damage

There are no chances of data loss and damage as decentralization allows the insurers to store the policy documents on various ledgers.

  • Assessment of Risk

Insurance companies can include risk assessment models in their smart contracts, which will rely on a blockchain-based ID system. The time-consuming traditional id verification is replaced by a blockchain based ID system that instantly verifies the IDs and assesses the risk.

Development Process of the Smart Contracts

The development process of the intelligent contracts includes:

  • Token designing.
  • Implementation of the smart contract.
  • Running the tests.
  • The review and acceptance process.
  • The deployment of the smart contracts.

Let’s see how to make smart contracts.

Token Designing

Blockchain allows insurers to design their token to carry out certain functions by determining what functions to perform and what business logic to use. So the first step for making a smart contract is designing your token.

Implementation of The Smart Contract

After you have designed your token, the next step in the development process is the implementation of the smart contracts. In Ethereum, a high-level programming language called Solidity is used for building and implementing smart contracts.

Running The Tests

Deploying the smart contracts to the blockchain system can cause some difficulty while running the tests. Autotests can solve this issue. Autotests check whether the smart contract is working or not by emulating a natural environment.

The Review and Acceptance Process

Smart contracts are deployed to the blockchain only after the review and acceptance. There are particular environments available where developers can verify the code and logic of their smart contracts.

Deployment of the Smart Contract

The final step of the developing process involves deploying the smart contract to the blockchain. After the review and acceptance process, the developers publish the smart contract code on the blockchain, which is invoked when a transaction takes place.

Conclusion

Smart contracts can significantly impact the insurance industry by assisting insurers in reducing costs, increasing profits, minimizing fraud, and streamlining the claim process.

Pirimid Fintech helps institutions in adopting blockchain solutions in their day to day business work. It has rich experience in implementing blockchain technology across the globe.

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