Blockchain-Enhanced Smart Contract for Cost-Effective Insurance Claims Processing

Blockchain-Enhanced Smart Contract For Cost-Effective Insurance Claims Processing

Insurance is a longstanding concept in human society; however, at present, the insurance sector faces an array of challenges due to the major economic transformations of the past few decades. These challenges encompass both macro factors, such as economic instability and regulatory pressures (Anne, 2016), and micro factors, such as distrust, high transaction costs, frequent data leaks, and numerous fraudulent activities (Zhang et al., 2022). These issues have had a profound impact on the insurance sector. To adapt and thrive in this changing landscape, insurance companies are actively seeking new strategies to address these challenges.

Technology is a key driver for the revitalization of the insurance sector in the coming years. According to a survey conducted by Upskill, a leading provider of augmented reality software, 80% of insurance providers consider innovation as a decisive factor in their future corporate success. Furthermore, 60% identify technology as one of the major opportunities for their organizations.

Blockchain, a disruptive technology that enables the decentralized distribution of digital information (Buthelezi et al., 2022), is poised to revolutionize the insurance industry. The inherent qualities of decentralization, immutability, transparency, and validity offered by blockchain hold immense promise for overcoming the challenges faced by the insurance industry (Huang et al., 2022; Zhang et al., 2021). Smart contracts, which are self-executing protocols running on blockchain networks, ensure automated, irreversible, transparent, and traceable transactions. By leveraging blockchain-enhanced smart contracts, insurance companies can streamline backend operations, reduce manual processes, and detect and deter fraudulent claims. As a result, companies can offer more cost-effective strategies, enhance the customer experience, and achieve a stronger competitive position. Although the broader financial services sector is actively exploring blockchain and smart contracts, their application in the insurance field remains in its infancy (Gatteschi et al., 2018). However, the alliance of big data, digital technologies, and insurance provides a robust foundation for the integration of blockchain and its innovations.

This study focuses on the claims settlement process in car insurance, which is one of the most common forms of insurance. The authors provide three distinct contributions. First, following the proposed by Gregor and Hevner (2013) and Hevner et al. (2004) design science research methodology, the authors adopt transaction cost economics (TCE) as the kernel theory to develop two smart contract-based frameworks for claims processing in the insurance industry. These frameworks enhance the overall efficacy and efficiency of car insurance claims processing while ensuring data security and transparency. In particular, the first framework explores potential improvements in vehicle damage claims processing and the second framework highlights possible enhancements in personal injury claims processing through the use of smart contracts. The authors validate the applicability and feasibility of these frameworks through in-depth interviews with key stakeholders, including three insured parties, two claims adjusters, an IT manager, and a car insurance director, from a large insurance firm in China. Second, the authors create another design artifact—an adaptable smart contract template tailored specifically to car insurance claims processing. To achieve this, the researchers identify eight essential activities involved in vehicle underwriting and claims processing, and they develop corresponding smart contract algorithms. This contribution provides a standardized prototype for secure and efficient insurance applications. Third, the authors’ proposed smart contract-based frameworks and template offer practical guidance to practitioners in developing robust systems for insurance applications. By leveraging these frameworks, practitioners can benefit from a standardized approach that ensures security, efficiency, and transparency in the car insurance claims settlement process.