State Farm and USAA have reportedly signed a document that’d enable them to exchange funds using a blockchain-based program.
These are two of the biggest insurance companies in the US and their decision to use blockchain for payment purposes will have a huge impact on not just the blockchain industry but also the insurance industry.
The New Program Has Been Developed
The companies worked together to develop a new program that is still untitled. They used Ethereum’s private enterprise version, known as Quorum, to develop the software.
According to reports, the two companies started working on the project in the first quarter of 2018. It took them over a year to complete the software but there’s hope it will be worth the time and efforts.
The two companies kept the program under wraps. In fact, State Farm spoke about the project in the last quarter of 2018 but did not mention USAA’s involvement. This is why the official announcement, made last week, came as a surprise to many.
Why Choose Quorum?
USAA and State Farm are members of the RiskStream Collaborative, hence their decision to choose Quorum came as a surprise to many.
RiskStream Collaborative announced a partnership with R3’s Corda and most experts expected the two companies to choose R3’s Corda as the DLC. While the two firms did not go into much details about their decision to use Quorum, State Mike Field, one of State Farm’s executives, credited Quorum’s emphasis on data privacy as the main reason why the company chose the platform.
He said, “We wanted a private permissioned network that we could invite others to join with strong privacy and security.”
However, he did call Corda a “suitable platform” confirming that it was also considered.
How The New System Will Work
Experts are excited about the potential of this new payment option. The companies intend to use real claims data to process payments. They’re expected to go into production by the end of the year.
This is not the first time a company will use blockchain to process payments. However, this is the first time that two big insurance companies are working together on such a project, making it a big event.
Exact details about the new software are yet to be out, but according to the latest reports both the firms will share a ledger that will replace their existing systems for subrogation.
This is the last leg of the claims process, which can be pretty lengthy and complicated in some cases due to the involvement of other insurance companies.
This is what a transaction will looks like: it involves two insurance companies – the company that has paid the money to the insured and the at-fault’s insurance company.
The company that has paid the money recovers costs from the other company to complete the process. If it sounds too complicated, consider this example:
Ana and Rob get into an accident and Rob causes minor damages to Ana’s car. Ana goes to her insurance company to claim damages. The company pays her the cost of repairs and Ana goes home happy. However, since it’s Rob’s fault, Ana’s insurance company will bill Rob’s insurance company to claim the money it has paid to Ana.
Rob and Ana have to deal with their insurance providers only. Their respective insurance companies will deal with each other to close claims.
The Problem With the Current Process
The current procedure is slow and hence ineffective. These B2B payments are handled on a claim-by-claim basis by insurance companies and often involve the transfer of paper checks and a number of intermediaries.
There is a huge need to come up with a better solution, especially since such payments totaled about $9.6 billion in 2018. This is a big amount that shows the need to have a better solution in place.
The new blockchain system will net out the balance and facilitate a single payment between insurance companies.
Holds a Lot of Potential
The insurance industry has begun to be disrupted by blockchain.
Last month we covered how Accenture and Generali Employee Benefits (GEB) launched a blockchain solution that will enable the provision of employee benefits.
The solution will give quick access to stakeholders within the employee benefits sector, enabling the exchange of information, improving previously manual processes, and offering better provision of insurance and reinsurance for corporate employees.
State Farm and USAA’s system is yet to produce results but hopes are high. Mike Field believes that more companies will soon jump the bandwagon, making the business easier to manage and carry on.
He said, “We could have many carriers participating. The blockchain keeps track of every individual instance and these can be netted at different intervals; weekly, monthly, whatever time frame you want.”