Blockchain Technology: A New Dawn for the Insurance Industry in Kenya
In today’s world of endless possibilities and risks alike, insurance cover is gradually becoming a necessity rather than a matter of compliance. However, despite the insurance industry proving itself capable of easing the burden of risk and loss, it is marred by challenges and controversies that still render potential consumers skeptical. Fraud and the middlemen menace remain the key problems that have to be eliminated. To win this battle, it is time that the industry embraces the new evolutionary solutions that blockchain technology has to offer.
Blockchain is a form of technology that works much like a physical chain made of data. Each link in the chain is called a block, and is owned by a specific user. If a user is authorized, then they can add a link to the chain, meaning they add data in the form of a block. Once that block is added, then it is just like adding a link to a physical chain. It is irrevocably attached to the blocks before and after it. At its core, blockchain is a way to safely store data. It may also be referred to as distributed ledger technology (DLT).
Why Blockchain Technology?
Generally, technology has infiltrated and is proving inevitable in every socio-economic sector. The insurance industry is no exception and insurance companies need to embrace emerging digital trends to their business models in order to not only grow but also reduce the risk of being driven out of business.
Secondly, the industry has grappled with age-old problems such as fraud, data entry, verification errors and long processing periods on claims. Insurers have to sift through numerous documents and information in order to determine the most suitable policy and premiums payable. This paperwork process may be prone to errors in verification. It also translates to longer processing periods once a claim has been raised, leading to declining customer satisfaction.
Insurance fraud on the other hand costs the industry losses to the tune of billions annually. Crafty clients take advantage of the lack of interoperability of insurers and raise claims with multiple insurers on the basis of a single loss. Brokers and other middlemen also charge unreasonably high rates and pocket the premium paid.
Blockchain technology promotes accuracy and transparency of transactions which in turn builds trust between the insurers and the customers. It operates as a digital ledger in which data entered is encrypted making it impossible to alter or delete. It allows for information sharing across a network real time making it possible to monitor and verify each step of a transaction and every piece of data entered.
The technology is expected to minimize fraudulent claims and loss adjustment expenses with a massive, decentralized database that leverages real-time data sources. Costs can also be lowered through blockchain technology using “smart contracts” which automatically enforce terms when certain conditions arise. Smart contracts are personalized contracts that connect real-time information from multiple systems across physical documents and activities, which in turn trigger processes like claims, payments and reimbursements. Further, insurance businesses would benefit from cost savings through improved efficiency across the insurance value chain increasing the security of the policyholder’s data.
In light of technological advancements in all major sectors of the economy, service providers have now been racing to keep up with insurance technology development. Most insurers however remain focused on two overarching goals: growing top-line sales while bolstering bottom-line profitability. Standing in the way of insurers achieving these objectives are a wide range of challenges. Not all of them are within the industry’s control, such as the recent cap on interest rates and catastrophe losses. All the same, how effectively insurers anticipate, prepare, and adapt to their shifting circumstances, both strategically and operationally, is well within their control, and can help differentiate them in the market. The insurance industry must evolve to stay competitive, which means streamlining processes and meeting the demands of digital-savvy customers. Blockchain technology can help insurance companies overcome today’s challenges and create transparent operations built on trust and stability.
How blockchain is redefining the Insurance Industry
- Claims settlement - in Kenya alone, unclaimed insurance money runs to the sums of hundreds of millions. Sometimes it is not possible to find the proper beneficiary for a claim arising from insurance contracts. However, with blockchain-based smart contracts this problem can finally be addressed. Funds could automatically and proactively be paid out based on news of an accident or death, without waiting for the beneficiary to come forward with a claim. This technology may also be incorporated to medical insurance, when a patient checks into a hospital, treatment records will automatically be added to the blockchain, and the insurance company will pay out. As such, the need for complicated forms and back-and-forth communication will be drastically reduced.
- Improved record keeping - by making a client’s records immutable, digitally accessible and transparent, underwriting errors are minimized, generating quotes becomes an easier automable process and claims fraud and privacy violations decrease substantially.
- Market friendlier premium rates - due to the inherent security of the distributed ledger, new clients can be quoted and on boarded faster than ever before. In the sector of medical insurance, once blockchain is fully integrated into the industry, prospective clients will be able to unlock access to their own medical histories so that an insurance service provider can generate a quote automatically based on the assessed risks that have been identified in the individual client’s ledger history.
- Fraud Prevention – blockchain technology promotes interoperability among multiple insurers. This enables them to track records of insurance claims and prevent fraudsters from benefiting unjustly from the same loss. Claims can be cross-referenced internally and across various insurers to previous claims, repairs, and even accident photos, making verification automatic and near instantaneous. Further blockchain will also aid in fraud prevention by:
- validating authenticity, ownership, and provenance of goods as well as authenticity of documents e.g., medical reports;
- checking for police theft reports, claims history as well as a person’s verified identity so as to detect patterns of fraudulent behavior related to a specific identity;
- proving date and time of policy issuance or purchase of a product/asset; and
- confirming subsequent ownership and location changes.
- Reduced administrative cost - blockchain may reduce operations cost through automated verification of policyholder identity and contract validity, auditable registration of claims and data from third parties. Payouts for claims will be via a blockchain-based payments infrastructure or smart contracts.
- Security for client information - through the decentralized digital repository of a blockchain, insurers can verify the authenticity of customers, policies and transactions by cross-referencing to the records. The technology makes it hard for hackers to corrupt and steal files. Since the system is pegged on a public ledger, blockchain can potentially eliminate suspicious and duplicate transactions by logging each transaction and prompting the user to authenticate their transaction.
- Improved risk management – with blockchain technology, risks can easily be calculated by analyzing big data to gauge or determine the probability of these risks occurring.
Blockchain technology is limited by the amount of computing power available to quickly validate each new transaction and data and the expertise and experience needed to create the blockchains and implement the necessary systems to use this technology are still in their infancy. In addition, the speed and stability of this technology requires substantial capital investments to be viable, there may be further concerns about data privacy and the technology creates challenges for regulatory authorities since transactions will span across a diversified geographical space.
The legal framework governing the insurance industry in Kenya includes primarily the Insurance Act (Amendment) 2006, Chapter 487 Laws of Kenya. The institutional framework includes; the Insurance Regulatory Authority (IRA) which was established with the mandate to supervise and regulate the insurance industry players and the office of the commissioner of insurance established to strengthen the government regulation under the Ministry of Finance.
The key players in this industry are insurance companies, reinsurance companies, intermediaries such as insurance brokers and insurance agents, risk managers or loss adjusters and other service providers . In addition, there is also the Association of Kenya Insurers (AKI) which is a consultative and advisory body to insurance companies and the Insurance Institute of Kenya (IIK), which is a professional body and deals mainly with training and professional education.
Implementation of blockchain has a long-term horizon as it depends on network effects as well as on defining the regulatory conditions. Before initial implementation steps are taken, the benefits and limitations of the technology need to be fully understood by all the stakeholders in the insurance industry. Considering all the above, now is the best time for the insurance sector as a whole and for individual insurance players to further investigate the technology and its potential.
In addition, to achieve blockchain-specific benefits, intensive cooperation between the insurers, manufacturers, customers, and other parties shall be necessary.
 Blockchain: An insurance focus. Milliman White Paper, Michael A. Henk & Robert T. Bell
 Blockchain in Insurance – Opportunity or threat? Copyright © McKinsey & Company
Blockchain: An insurance focus. Milliman White Paper, Michael A. Henk & Robert T. Bell.
 Insurance Regulatory Authority, (2010). Statistical Bulletin.