Away from the PDF, towards the smart tool: Smart contracts can provide insurance companies with a great service in claims management. They are not yet established in Germany, but they are in other parts of the world. Why this is closely related to weather events and what local businesses in developing countries can learn. A contribution from August Majer and Thomas Grasnick, Q_Perior.
The agricultural industry can sing a song about it: storms can cause immense damage in a matter of minutes, jeopardizing or even completely destroying yields for an entire year. For the insurance company involved, this usually means a lot of work until all questions have been clarified and all damages assessed.
Because it often takes months or years before the actual damage is determined and the reimbursement contract is finally negotiated. To be more efficient here, as in so many other areas, digital solutions can do a good job, including smart contracts, which have so far been little used in Germany.
What do smart contracts have to do with storms?
To better understand the great opportunities that lie dormant here, it is worth taking a look at developing countries, which are regularly affected by natural disasters and where claims occur just as frequently. Assessing these damages is often beyond the capabilities of local insurance companies because, for example, adjusters must travel long distances or infrastructure is destroyed or in poor condition after storms. The insurer then incurs large costs and expenses, and the insured faces a lengthy process.
Smart contracts can help here. Smart contracts are computer programs that allow the mapping, execution and verification of a contract. This means: If the insurance company and the insured person conclude a contract, certain framework conditions are programmed into it. If one or more conditions are met, this automatically activates the contract.
Agreed framework conditions, for example between the farmer and the insurance company, are implemented directly in the code. If one of the conditions occurs, for example if a flood or storm occurs above a certain level, the process is digitally triggered. There are two ways to do this: Either the injured party uploads photos of their damage to their insurance company’s cloud-based systems, which are analyzed there using artificial intelligence (AI) and deep learning methods.
Or the process is activated automatically and the payment is activated when the conditions specified above are met, for example, when official weather data confirms that the storm in the affected region has reached the specified strength. Both parties benefit from this. Insurance can work much more efficiently. For the insured, on the other hand, waiting times are significantly reduced and urgently needed sums can be paid out much faster.
New trend: parametric insurance
Smart contracts are already being used more widely in many developing countries. In Germany, on the other hand, they have not yet been established. But the signs are changing. The agricultural sector is also a pioneer here, for which it is increasingly important to insure against natural events such as drought and crop failure due to ongoing climate change.
The focus here is mainly on the concept of parametric insurance: it also regulates damages on the basis of previously defined parameters or index values. It is paid when the agreed event occurs, the sum is paid as a lump sum regardless of the actual damage. In principle, parametric insurance can be used for all kinds of failures, including IT or cloud downtime.
Until now, they have been the most widespread in the agricultural sector because the parameters are easy to determine, such as rainfall, the number of hours of sunshine or dry periods. Farmers in Germany have recognized this and are already taking action. Industries that could also benefit from weather data-based insurance include gastronomy, the events and tourism sector, winter service operators or energy providers.
Also, smart contracts are generally not technically complex. They can be easily and efficiently configured with existing tools and linked to respective data sources, such as weather data. However, one thing is a prerequisite: high-performance cloud solutions.
Cloud computing is the basis for the digitization of insurance services. But what is it like in the German insurance industry? In the meantime, good: the awareness of this is there, a lot has already been implemented. At the latest, the corona pandemic has clearly shown how important it is to open up to it. From one moment to the next, digital presence and associated applications were crucial to business operations.
However, the use of cloud applications is still highly fragmented. Some companies are already well along their cloud journey, others rely on hybrid models of cloud-hosted and on-premises solutions.
In other words, you still have the machine in the basement. While it still works for now, the days of isolated local systems are numbered. On the one hand, it will be increasingly difficult to meet requirements, including rising customer expectations in terms of the digital customer journey or response times in handling claims.
On the other hand, insurance companies are also feeling the effects of the shortage of skilled workers: with the baby boomer generation, many specialists and IT administrators will retire and will be difficult to replace. All of this will further accelerate development towards the cloud in the next two years. The industry can benefit from the experience of others, such as the financial industry.
And the technology?
Let’s look at the technology: Anyone who talks about smart contracts quickly gets to the blockchain. Blockchain is already trusted by some as a technical foundation, as it enables decentralized tamper-proof data storage and verification of the admissibility of transactions. Others use the more common distributed ledger technology that spans multiple computers or locations. The technology that individual insurers ultimately use is determined by preference and existing IT infrastructure.
Either way, the time to act has come. Signal Iduna shows, for example, that the industry has recognized the need for digitalization: This spring, the board department with the prospective name “Customer, Service and Transformation” was created for the Director of Transformation, Johannes Rath, to boost digital change. Forward. And the Ergo Group built the “nexible” platform with a flexible framework.
Smart contracts may still be niche in terms of the industry’s fundamental digitization efforts. But they offer interesting advantages, also for the important field of the digital customer journey. This is becoming increasingly important: the digital native generation is becoming an important segment of customers who want to quickly and seamlessly book trip cancellation insurance or insure cars against hail damage.
The high demands of this target group on digitally available products and fast response times in the event of damage must be met. What is not attractive anymore: getting contracts in PDF format, which can be printed, signed and sent as a scan.
No matter which insurance segment you end up with: smart contracts are an elegant solution and an important component for digitization strategies. They are easy to program and generate almost no administrative work in the back office in the event of a claim. They are another example of how the insurance industry can position itself for the future.
About the authors: Thomas Grasnick is an associate partner at Q_Perior and has been supporting insurance companies internationally in designing innovative and dynamic business models for many years. August Majer is a Senior Manager at Q_Perior and has many years of experience advising international insurance companies with a focus on IT.