When used properly, Blockchain technology offers improved security and trust for auto insurance through decentralization and verifiable automation of digital agreement execution. The Integrated Trust Network (ITN) — a decentralized digital infrastructure for core trust services of governance, authority, identity, & assurance for multi-party business ecosystems — lays the foundation for innovation for insurance. Through the trusted identity assurances the ITN offers, it can save carriers billions of dollars in losses from illegal drivers and premium leakage, as well as manage exposures, laying the foundation for future innovation while solving long-standing problems in the industry.
Blockchain technology is decentralized, meaning that it is not controlled by a single entity with built-in resistance to vendor lock-in. The most anticipated feature of this technology, smart contracts, are digital agreements that run on the blockchain. Because smart contract transactions are carried out without human intervention, they are faster and more secure than traditional contracts. This feature of smart contracts has the potential to transform the insurance industry by simplifying processes, improving transparency, and increasing operational efficiency.
But before these extraordinary benefits can be realized, some foundational capabilities need to be put in place. One of the hurdles in realizing the potential of blockchain is the adoption of a trusted identity that meets the security and privacy needs of the industry to uniquely identify assets, exposures, and transactions across all the players interacting in a decentralized market. Auto insurance, for example, requires transactions across insurance carriers, auto service providers such as body shops or towing companies, auto manufacturers, and more.
Insurance carriers would be better able to understand exposure — and hence price policies — based on the features built-in and maintained over the life of the vehicle. Further, as a vehicle is involved in a collision, towed, serviced, and losses filed, the transactional focus on the vehicle should be maintained and trusted across the relevant parties. In addition to facilitating the transaction, privacy needs to be maintained in accordance with applicable regulations that vary by jurisdiction.
The insurance industry is looking for next-generation solutions to answer the question: How can we conduct transactions across several types of stakeholders without compromising privacy and compliance?
Integrated Trust Network
With the successful deployment of the Integrated Trust Network (ITN), the hurdle to unified identity management and zero-knowledge proofs is overcome. By leveraging Self-Sovereign Digital Twins™ (SSDTs™) for vehicles, licenses, registration, and more, mobile entities can present W3C Verifiable Credentials (VCs) that can facilitate transactions and enforcement of critical functions in insurance as we discuss later. This development provides an opportunity to leapfrog technological generations for an industry embroiled with legacy baggage.
By leveraging the infrastructure and services provided by ITN, the insurance industry can solve several problems and lay the foundation for innovation now. The simple act of identifying vehicles, their status, and their mileage can help solve multi-billion-dollar losses, increase affordability, and provide a foundation for accessible and equitable insurance products.
Illegal Driver Problem
In the US alone, illegal drivers cost over $13 billion in losses annually. Illegal drivers include those without required minimum liability insurance, those without a valid driver’s license, and/or those operating an unregistered vehicle. While most states have laws on the books to prevent illegal drivers from operating on the roads, NAIC estimates there were between 29 and 61 million illegal drivers in the US in 2019.
The current enforcement method — which consists of checking paper licenses, registration, and insurance, is out of date and is the core cause of the problem.. This problem is expected to continue growing as drivers routinely cross state boundaries and get into accidents while lacking any mechanism for verifying their information. By leveraging VCs provided by ITN, the uninsured driver population can be significantly reduced by improved enforcement of current laws across state boundaries. This not only reduces losses for carriers but can make insurance more affordable to consumers. Read more about how this works HERE
Premium Leakage problem
On another hand, insurance carriers take in more risks than necessary when drivers routinely misrepresent miles driven or locations vehicles are garaged. In a recent study at AAIS, we estimated that understating annual miles by 5,000 miles can reduce premiums by as much as 24% in the state of Illinois. Underreporting miles driven by just a thousand miles can reduce premiums by up to 16% annually. As carriers scramble to rectify their exposures such “soft fudges” considered harmless by some drivers can nudge insurance premiums outside the affordability range for the vast majority of the economically disadvantaged population.
Incorrect location — ie. misreported zip code — can also affect the base costs by as much as 24% in some areas. With carriers forced to reduce rating factors, and the emergence of usage-based insurance, accurate mileage is quickly gaining critical mass. In our interviews with carriers, the source and accuracy of reported information (both miles driven and location) are seen as important for maintaining competitiveness in the market. Read more about this HERE
ITN can help solve this problem for the insurance industry. By leveraging SSDTs™ of the vehicles to accurately obtain miles driven and locality information on, say, a monthly basis — carriers can better manage their exposures and stop premium leakage.
New Products for the Future
The innovation would not stop with solving these two problems. We can leverage unique, privacy-preserving, verifiable identity services to develop new products and services in the future. From reducing claims fraud, to pricing vehicles with key safety and ADAS features, to establishing new partnerships across the mobility landscape; ITN can speed up innovation beyond traditional auto insurance.
To successfully transform and prepare for the future, the auto insurance industry needs to leverage a wide ecosystem of partners for collaboration. Collaboration of the future would need to be based on trust with a higher granularity and preserve privacy for both consumers and carriers. An open-source, cross-industry, and standards-based decentralized network such as the ITN, along with consortia partners, are needed to build this innovation infrastructure for the future.