The Potential of Blockchain in Takaful

Blockchain technology – with its ability to provide complete accountability, transparency and security – can help insurers overcome today’s challenges. Takaful operators too should be willing to innovate and adopt this technology to gain first-mover advantages, says Mr M Khairul Izad of Actuarial Partners.

Despite what you may have seen in the mainstream news, advances in technology have enabled us to enjoy things that were once only accessible to a limited few. Just consider the smartphone. (In fact, you may be reading this on your smartphone right now.) Almost everyone you know now probably owns a smartphone, and within each smartphone contains software or apps that used to cost lots of money but are now available for free (or almost free).

An example is WhatsApp, which has enabled communication with anyone on the planet for free. It has transformed the way we communicate, as well as the way we work and do business (WhatsApp groups are everywhere!).

It is, however, only one example of technology disrupting an entire industry. Today’s technology has the potential to disrupt almost any industry and we are seeing examples of it on a daily basis.

Financial services have also not been spared from this wave of disruption with a myriad of startups and apps popping up. N26 is a mobile bank which operates entirely on your smartphone. It was launched in 2013 and currently has 2.3m customers. The insurance startup Lemonade acquired nearly 250,000 customers within two years.

As practitioners of Islamic finance or more specifically takaful, we should ask if we are on the verge of seeing something similar happen within our sector. Will takaful operators be able to take advantage of these technological innovations in the near future?

Bringing blockchain into the picture

Blockchain technology is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value, according to Don and Alex Tapscott, authors of the book ‘Blockchain Revolution’.

One of the more interesting examples of the application of blockchain technology was presented by Ms Nathana Sharma, a principal faculty member at Singularity University, during the 2018 SU Global Summit. She explained how the technology is being used in the World Food Programme (WFP) to feed Syrian refugees – almost a million of them – in Jordan.

A refugee can go into an aid depot to get food and supplies such as flour and sugar without having to carry an ID card. An iris scanner is used to verify the individual’s identity. The system then pulls up the individual’s identity and also the equivalent of a bank account where they can go and get food and supplies from the store.

Using blockchain technology, this account can be administered for less than 90% of what is usually required using traditional technology. This significant reduction in administration costs means that the WFP can feed more people, and every dollar donated goes further. The programme has been successful and it is being rolled out in more refugee camps.

Blockchain and smart contracts

One of the features of blockchain is that it can also store pieces of code and programming, enabling what is known as a smart contract.

A smart contract is a computer programme, consisting of ‘if-then’ statements, which runs on blockchain. If a specific condition is fulfilled within the smart contract, the next step will be automatically executed.

To create a smart contract, one needs to encode the terms, predetermined rules, or restrictions on the blockchain. When (or if) these terms are met, the code executes on its own. The smart contract also interacts with data from the real world.

Blockchain in insurance products

Implementing smart contracts in insurance products can significantly reduce friction in the customer experience, especially when dealing with claims. When a policyholder is eligible for a claim, a payout will be made automatically without the policyholder needing to do a single thing. Thanks to smart contracts, automated claims are now a reality. This greatly reduces the claim processing time, as well as the claims expenses. As it is on a shared ledger, insurers can record transactions permanently and avoid processing multiple claims from the same accident, thus preventing insurance fraud.

Here are some examples of blockchain technology being used in the insurance industry.


Fizzy is automated insurance using a smart contract for delayed flights developed by AXA. When a person purchases a Fizzy policy, their purchase information is recorded in a smart contract, which is connected to global air traffic databases. In the event of a flight delay of two or more hours (regardless of what the cause is), the compensation is triggered automatically and there is no need for the policyholder to report the claim.


LumenLab, MetLife Asia’s Singapore-based innovation centre, has started testing automated insurance using a smart contract providing gestational diabetes protection for expectant mothers. The experimental product is known as Vitana. Customers download the Vitana app and the underwriting is done on the customer’s mobile phone within two minutes. The smart contract is used to automate not only a claim, but also underwriting.

B3i Property Cat XoL Contract

B3i started as a collaboration of insurance and reinsurance companies aiming to explore the potential uses of distributed ledger technologies within the industry. It has now become B3i Services AG, which is an independent entity. In 2017, B3i launched a blockchain prototype platform for Property CAT XoL contracts. The prototype enables a cedant to request for a quote and allows the cedant, broker and reinsurer to interact on the platform until an agreement is reached. All communication is encrypted so only the relevant party can access and read what it should. The same process applies for settlement of contracts.

At the time of writing, there are currently no known examples of takaful products which are utilising blockchain technology.

Among the reasons for this could be due to the following:

  • Adaptability challenges – some takaful operators may face difficulty in the integration of systems. This is especially true of large operators with legacy systems.
  • High operation costs – using and running blockchain technology may consume substantial computing and processing power, which may lead to higher running costs.
  • Lack of talent – there are still not enough developers with experience in blockchain technology and cryptography.

Any potential on the horizon?

Here are two ideas how takaful operators can leverage blockchain technology in the future.

Hajj/Umrah blockchain product

Several takaful operators are offering Hajj/Umrah products with benefits such as personal accident, accidental death and/or emergency medical expenses. Most of these products work on a reimbursement basis, where the participant needs to file a claim upon return to their home country and wait for the claim to be processed. If this type of product were developed through blockchain, a smart contract could automatically disburse the benefit amount.

Cross-border payments could also be done instantly as there is no need to go through banking networks such as SWIFT.

Surplus distribution

Most takaful products will have surplus sharing between the operator and the participant based on a ratio stipulated in the contract. A smart contract could be developed that enables automatic sharing and disbursements of surplus. Within the smart contract, conditions can be set such as whether to distribute the surplus on a yearly or monthly basis, or if the participant decides to donate the surplus directly to a charity or other beneficiary. Once the smart contract is finalised, it will automatically distribute the payments without any additional paperwork.

With the concepts presented above, it is hoped that takaful operators will soon consider the application of blockchain technology in future product developments. Takaful operators should realise that change is happening at an exponential rate; those willing to innovate and take bold steps will gain first-mover advantages.

Ultimately, the takaful participant stands to gain the most from this innovation as he or she will be able to reap the benefits from greater efficiency and peace of mind. The days of filling out tedious claims forms and having to constantly chase claims payouts may soon be a thing of the past.

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