EXECUTIVE SUMMARY
The article is the outcome of a study the authors undertook to find out answers to the scalability issue faced in adoption of Blockchain technology in the insurance industry and on the prevalent concerns of experts in deploying this technology on large scale.
In this article, we have captured the experience of industry experts by speaking to them and focused on how Blockchain becomes a concern in the insurance industry when peer’s network reaches close to their maximum capacity.
The main findings of the study are that the insurance penetration in India which is about 3.76 percent at present and is growing in size with time is increasing the level of users. The magnitude of increase in users and transactions poses challenges in Blockchain technology adoption.To streamline the process each node must be operating on a network where there is sync in processing power from all the parties. If a network exceeds its maximum capacity than the average amount of transaction decreases and affects the business.
The recommendations which emerge are that Blockchain cannot be scaled alone by increasing the block size or decreasing the block time by reducing the hash complexity as is practiced by many organizations now.
Peer groups are dependent on each other for capacity limits and they must plan to evolve the infrastructure of the deprived peer by either investing in them or by providing leveled infrastructure.
1 INTRODUCTION
In the Insurance industry, communication needs to flow between the parties mainly constituted of Insurance companies, brokers, and banks. Earlier every party used to have their database from where they could share information. The database for each of them was centralized. The communication space between these databases was where the inefficiencies lay.Blockchain technology allowed parties to get linked with a shared, secured, and permissioned network, collaborating in ways that reduced inefficiency and streamlined the entire process. Blockchain is a shared ledger technology where everyone in the network (broker, insurer, and banks) can see the status and history of the transactions. It helps businesses work together more efficiently.It is about transparency. All the bodies can see the status of the quotes, confirmation, and payments in real-time. In times of calamities, the Blockchain can process transactions rapidly with community governance. Some of the major use cases of Blockchain in the insurance industry are: fraud prevention, policy creation, claims processing, streamlining routine interactions, risk prevention, on-demand insurance, P2P insurance, reinsurance, and smart contracts.
Emergence of Blockchain
Insurance industry started giving attention to Blockchain from the beginning of this decade in 2011. It is a breakthrough technology that is now largely being adopted in almost all the sectors in India, Insurance companies are now under pressure to make the hard decision of adopting the Blockchain model while letting go of the already established traditional models.
A study published by Tata Communications in 2018 showed that 44% of organizations are adopting Blockchain but at the same time face several universal problems that arise in deploying such new technologies.
Blockchain has two basic functional components:
Validation of transactions
Writing to the Blockchain
Writing operations consume much more energy as compared to reading operations which create stress on the peer network and as a result, the volume of transactions that can be stored per block reduces. The network can handle a certain amount of simple transactions per second (lesser in the case of complex transactions). This means if a network that is operating at close to its maximum capacity, it will be unable to process excess transactions.
Key Highlights of the technology
Decentralized validation: New data is encapsulated in a block that only gets appended to the main Blockchain once consensus has been received upon the action’s validity. This helps in providing trust among the peers involved in the transaction that is occurring even when there is no central administrator. The process of validation requires high power of computation, which is transmitted by the processors in the systems of the peers that are part of the Blockchain. Consequently, it becomes difficult for hackers and lessens chances of fraud done to alter the transactions and related processes.
Redundancy: The unique part about Blockchain is that as soon as any transaction occurs, it is continuously replicated on all the required peers in the network that are a part of the network. Due to this, at one single point of time, data is registered on several nodes with no chance of failure and delay.
Immutable storage: Each block that has data is in sync with the previous block in the line. Since the data is altered in all the required nodes, it is next to impossible for any hacker to alter the data in all the nodes that were replicated with data regarding the transaction plus the succeeding node too.
Encryption: Digital signatures put the peer nodes that are participating in a transaction in a position to authorize which participant initiated the transaction or got themselves registered in the process. With this, Blockchain can be cast as a record keeper of static and dynamic data.
Blockchain Transaction Methodology
Transaction definition
It follows an S-T-R concept where S is Sender, T is Transaction and R is Receiver. In this step, the sender initiates a transaction which is then transmitted to the network.
Transaction authentication
The nodes in the network, which can either be a computer system or a user, will receive the message from the network and authenticate its validity.
Block creation
The transactions that are yet to be completed are put together in the block, which is an updated version of the ledger by one of the nodes in the network.
Block Validation
The validator nodes of that network receive the block on which they work to validate through a repetitive process.
Block chaining
When all the transactions are authenticated, the new block is then attached to the existing Blockchain.
Blockchain Evolution of Models over time
Initially,Blockchain started with Blockchain model 1.0, which focused on the currency. Cryptocurrency’s deployment in cash-related applications such as digital payment systems, remittances, etc. was introduced under this model.
When Blockchain model 2.0 came into being, only then was it adapted by Insurance Industry. This model focused on smart contracts. It was realized that economic markets and financial applications are more than simple cash transactions. Blockchain 3.0 has brought significant changes in its model. Its application has gone beyond finance and market and is workable in the areas of government policies, health, literacy, science, etc.
Application areas in Insurance
Fraud Prevention
All insurers are committing sufficient time and resources to fight fraud. Around 95% of insurers employ anti-fraud technology and out of which 71% say that detecting fraud is the foremost aim of such technology. Insurance frauds are made likely by the lack of shared data across the insurance industry.
Claims Processing
Apart from fraud detection, an industry-wide information database could serve several purposes in the insurance and as a resource through which claims can be processed, paid out, or denied with more speed. For policy creation and claims processing, a record of all the databases that must contain all the information about the claimant like his medical history and procedures and all other required information in one place would make the claims process efficient.
Routine Interactions(Streamlined)
Insurers envision is to create a world where to access information of an insured can be possible in seconds i.e., to store them on a database with a unique identity number. They aim to create prompt and more reliable systems so that routine insurance interaction can become more trustless and pain-free to lessen the countless frauds that happen daily as well as headaches.
Risk Prevention
Insurers have the duty of employing the most inflexible risk prevention and fraud detection tools and the Blockchain is at the frontier of cutting-edge fraud prevention in insurance. The advanced technology can be utilized as a way to make the experience seamless and secure by sharing fraud intelligence among decentralized institutions, and may also minimize counterfeiting, double booking, and document or contract modifications by instituting clear, timeless records of asset ownership. E.g.: IBM is using Blockchain for their insurance platform to increase transparency.
Insurance On Demand
With the employment of smart contracts in insurance, policies are activated and terminated based on predetermined criteria. Through this, there is the quicker establishment of policies based upon a database of required information for on-demand creation of policy and hassle-free claims processing.
Property and Casualty Insurance
It covers risks related to losses or damage caused to property. Collecting data on assets was quite time-consuming and caused many inefficiencies too. With the coming of Blockchain, tracking the whole lifecycle of the asset has become possible. With the help of smart contracts, physical or paper contracts could be digitized. An algorithm could be set for the process of claims following which liabilities could be calculated based upon the standardized criteria. Additionally, the records can be updated in real-time by insurers and policyholders as and when the status changed. Go2 Solutions a firm in claim investigations is trying to simplify auto insurance using Blockchain. Allianz Insurance has partnered with EY for coming with Blockchain-based insurance models.
Reinsurance
The introduction of Blockchain in reinsurance would remove 15-25% of expenses, delivering savings of about $10 billion. This can be achieved only when a Blockchain ledger is adopted. A single policy is divided among numerous insurers, need for streamlining the records would become feasible.
Micro Insurance
It is being adopted globally with around 135 million risks on a global level. The potential market is estimated to boom as Blockchain can help include those who look for specified and affordable types of insurance policies. This would provide a transparent mode of transactions, bypassing corruption, while making it a simple and effective mode.
Parametric Insurance
It is also referred to as Index based insurance. It pays the predetermined amount as and when a specific criterion is met. Blockchain makes it possible for a smart contract to take the place resulting in saving heavy administration costs. Since it requires only certain criteria to be met for a claim to get triggered, a subjective situation does not exist, avoiding any kind of human intervention to process claims.
How Internet of things (IoT) and Blockchain form a ecosystem
Internet of things (IoT) connects a lot of devices, the amount of knowledge generated from every one of the devices can increase considerably. For example, there have been 26.66 billion active IoT devices in 2019 and nearly 127 IoT devices hook up with the web each second. This information is extraordinarily vital for insurers to develop correct figure models and usage-based insurance models.
Objectives and Methodology of the Study:
Objectives
The study tried to find out scalability issues in the adoption of Blockchain technology within the insurance industry. The study sought to get insights on how serious the scalability issue was and to find out ways to resolve and find solutions to the issue of scalability. Further, we tried to find out changes in the insurance industry with the adoption of various Blockchain applications as we foresee major players using the technology in the coming future. The opportunities for the insurance companies available to insurers were also studied.
Methods
The study conducted is based on the combination of primary data and secondary data using qualitative research methods. We approached 12 industry experts for conducting in-depth interviews with them and five experts out of them responded to be a part of the interview process. The experts chosen were those who were conversant and had experience in the usage of Blockchain technology. We administered a questionnaire to these industry experts and collected their responses to enhance our understanding of real life applicability of Blockchain technology. A total of 20 questions were asked, in addition to basic information on the company’s use of Blockchain technology, opinions on the scalability challenge in Blockchain, and various solutions to the problem formed part of questionnaire for in-depth interviews. Table 1 of this article contains the important questions asked in the questionnaire. The responses of the interviews were compiled and some responses have been summarized using descriptive statistics. These are depicted in Figures 1 and 2 of the paper. We did not approach end users as respondents due to little awareness about the subject among them. Since the number of experts were only five we have not applied any inferential statistical methods on data. For secondary data we collected data and perspectives through available research papers in journals, websites, and published reports of technology and consulting companies.
Results and Discussion
The above discussion in detail gave us a broad overview of the potential applications of Blockchain technology in the insurance sector. The strengths of Blockchain technology are mainly related to its technological aspects while these aspects have certain limitations that can easily disrupt its functionality. Based on our exploratory research, below mentioned components can get triggered to handicap the process partially or completely. We looked at the following two components during the study.
Severity aspect in terms of Technological design
Severity aspect in terms of scalability, energy consumption and performance triggering elements
Responses of Industry experts
The questions posed to were centered on finding out answers to the following questions as shown in table below
Table 1: Questions put to industry experts
| · Usage of Blockchain technology in the organization |
| · Process for which usage was done? |
| · Recognition of block in a Blockchain approach. |
| · Restrictions in keeping any particular type of records in a Blockchain. |
| · Scalability as an issue in Blockchain. |
| · Issues faced by the organization in scalability. |
| · Solutions to the problem of scalability |
| · Steps has your company taken to check the same |
| · Challenges faced in Blockchain adoption in the organization. |
| · Limitations in technological design and impact on the overall industry. |
| · Rating on a scale of 1 to 5, the severity of both the above factors |
| · The impact of these setbacks on the insurance industry. |
| · Core requirements for a business Blockchain. |
| · Network-specific conditions for using Blockchain technology in the organization? |
| · Cost efficiency of using Blockchain on large scale. |
Blockchain has huge reliability on the technological design which is directly determined by the coding that is done and the programming language is used for the same. Any coding flaw can puncture the functionality which further can create a security threat.
Scalability, Energy Consumption, and Performance
Unlike the traditional systems at present, the number of transactions that could be handled per second is extremely low as compared to traditional systems. The computational power required to validate a new block is high.
On average it can take from a few seconds to several minutes for a transaction to complete depending on the capacity of the network. Since the data is replicated in this process on each network node, every node must have a leveled capacity. These nodes consume a high amount of energy and require such powerful hardware that is extremely expensive. See Table 2 below for trigger outcomes.
Table 2: Outcomes of triggers causing possible disruption
|
Factors |
Technological Design |
Scalability, Energy Consumption, and Performance |
|
1 |
Weak coding invites hackers. They can intercept the communication channels of the Blockchain. | Every node in the network has a separate limit to storage capacity. Blockchain requires a large amount of data to be stored.
Sync between the peers is not possible without them leveling up. |
|
2 |
Bugs in the protocols can hamper the functioning. Protocols in Blockchain are complex programs. | Every transaction when first carried out is first broadcasted to all nodes. This process
consumes a slot of network resource which as a result increases the propagation delay |
|
3 |
Bugs in Smart Contract similar to bugs in protocols can result in compromising of data. | Blockchain is a power-hungry model. It requires nodes to be able to support networks with powerful systems. |
|
4 |
Flawed code from developers can result in unprotected consensus algorithms. | If a single party owns more nodes they can attempt to disrupt the network. |
Severity assigned based on data received from industry experts who were respondents on 5 pointer scale (For business delivery in Insurance sector). See figure 1 and figure 2 below:
Severely Impacting Elements (Impacting Insurance Industry)
It was observed that both of these triggers can puncture the whole functionality of Blockchain. Any coding flaw will change the structure of the Blockchain and the inability to scale with the capacity of nodes in the network will also handicap the whole system. Determining which of the two triggers is more severely impacting is important especially in the insurance industry wherein the times of calamities, the Blockchain can complete processes rapidly with community governance.
Impact Of Scalability, Energy Consumption, and Performance on Insurance business
In the insurance industry contractual relations involve to and fro of many sensitive data that customer and insurer both wants to protect this data at any cost. Also apart from this, insurers these days always have pressure to deliver services successfully in lesser time than competitors. For this, they need to make sure that the business process is flawless.
Smart Contracts
Nodes in the network verify every transaction, this then puts a limit on how many smart contracts actually can be processed in each block, and then this determines how large can be a smart contract application that directly affects the overall performance of the network at different levels.
Claims Processing
Claims processing in the Insurance industry is generally scheduled with Smart Contract protocols.
When a network operates at maximum capacity, the quantum of transactions that can be processed gets limited. Even if the gas limit for transactions per second is increased, the existing limit lowers the figure significantly.
Issue of scalability and surge in claims during COVID 19
Scalability issue is not an everyday issue. It generally comes with a wave of a sudden surge in the quantum of transactions. The outbreak of COVID-19 stemmed from an impulsive rush in the applications for claims processing. This resulted in putting pressure on those nodes that have lower capacity as a result, processing time was severely disturbed as mentioned by GIC in a report.
According to a news report by Business Standard on Health insurance claims during covid pandemic insurers saw a surge in claims amidst COVID-19. Although the growth rate slowed down during the phase of July-December, the number of claims that arose during the outbreak is comparatively high.
During February 2020, health insurers received 908,849 claims that were related to Covid. These claims summed up to Rs. 13,752.41 crores. They settled 761,676 claims which summed to Rs. 7,141.33 crores. This accounts for 15% of the total premiums that were accumulated till January. See Figure 3 below which shows claims surge due to Covid 19 in various months of year 2020.
By July 2020, around 81000 cases were reported for claims. This count doubled and reached 160,000 in August. The slope became steep and the count crossed 475,000 by October and by November, it reached beyond 576,000. By the end of the year, it was 664,488 numbers of claims per month which summed to Rs. 9,989.89 crores.
On average, Covid related claims that were received throughout the year were around Rs. 1.51 lakhs, while the average claims that were settled were Rs. 93,758.17 crores.
CONCLUSION
In this study, it was seen how rapidly the Blockchain as a technology has got the attention of the insurers and the race in adopting this technology first in different levels of applications by them.
The challenges arise when insurers decide to embrace Blockchain technology without reflecting upon the fact whether or not they are mature enough for its adoption for everyday processing. Present infrastructure in India amongst companies is still uneven and adoption of Blockchain technology demands having a peer-to-peer network. Every party to the network has nodes connected to these networks and these nodes are running on systems of different capacities. To streamline the process each node must be operating on a network where there is sync in processing power from all the parties. If a network exceeds its maximum capacity, then the average amount of transaction decreases and affects the business.
There are temporary solutions available for the companies where they can add buffer capacity either by increasing the block size or reducing the block time thereby reducing hash complexity. But Insurance companies cannot rely only on this solution in the long run. The permanent solution to this is that all the parties to the peer network must plan collectively to evolve the infrastructure of the deprived parties by either investing in them or by providing leveled infrastructure.
For greater capacity, Blockchain takes a lot of power. This necessitates a higher level of investment in current infrastructure. The question we need to answer if Blockchain is employed on a wide scale, will it be
