Insurance giants and startups alike are using blockchain technology to prevent insurance fraud, track medical records, file claims, and more.
Insurance has been around for centuries. As early as a thousand years ago, Chinese merchant seafarers were pooling together their wares in collective funds that would help pay for the damages of any individual’s capsized ship.
While technology has permanently changed entire industries over the past decade, in many ways, the multi-trillion-dollar global insurance industry is still stuck in the past with little innovation made in the customer experience.
Despite the rise of online brokers, many consumers still call insurance brokers by phone to purchase new policies. Policies are often processed on paper contracts, which means claims and payments are error-prone and often require human supervision. Compounding this is the inherent complexity of insurance, which involves consumers, brokers, insurers, and reinsurers, as well as insurance’s main product — risk.
Each step in this collaborative process represents a potential point of failure in the overall system, where information can be lost, policies misinterpreted, and settlement times lengthened.
Enter blockchain technology, a cryptographically-secured form of shared record-keeping.
While blockchain technology has been subject to waves of extreme hype often centered around cryptocurrencies like Bitcoin, its true killer applications are likely to be in some of the most antiquated fields out there. It could be a transformative force for industries like insurance, which require the coordination and cooperation of many different intermediaries with different incentives.
Of course, getting there will be no mean feat. Insurance companies and startups working with blockchain technology will have to overcome significant regulatory and legal hurdles before we see anything resembling industry-wide disruption. Skeptics point out that there are serious obstacles for blockchain technology in an industry that has been slow to embrace even cloud computing.
But the possibilities are abundant, and insurance companies and startups alike are experimenting with insurance applications for the technology at full throttle.
These applications include:
- Fraud detection & risk prevention: By moving insurance claims onto an immutable ledger, blockchain technology can help eliminate common sources of fraud in the insurance industry.
- Property & casualty (P&C) insurance: A shared ledger and insurance policies executed through smart contracts can bring an order of magnitude improvement in efficiency to property and casualty insurance.
- Health insurance: With blockchain technology, medical records can be cryptographically secured and shared between health providers, increasing interoperability in the health insurance ecosystem.
- Reinsurance: By securing reinsurance contracts on the blockchain through smart contracts, blockchain technology can simplify the flow of information and payments between insurers and reinsurers.
- Life insurance: Blockchain technology can take the burden of filing a death claim away from family members by replacing the manual process of filing claims with an automated system built on a blockchain ledger.
Read on for a deep dive into how blockchain technology is disrupting the insurance industry.
See how blockchain is transforming other industries in our report on the 58 industries blockchain could disrupt.
Table of contents
- Fraud detection & risk prevention
- P&C insurance
- Health insurance
- Life insurance
- Moving towards a blockchain-powered insurance industry
1. Fraud detection and risk prevention
Key takeaways — fraud detection using blockchain technology
- Insurance fraud costs more than $40B a year and is difficult to detect using standard methods.
- Blockchain’s shared ledger technology can move fraud detection forward by consolidating claims data across insurers.
- By facilitating better data sharing, blockchain technology can save insurers the expense of paying for public and subscription data to prevent fraud.
Fraud detection today
The total cost of insurance fraud (not counting health insurance) in the US is estimated to be more than $40B a year, according to the FBI.
This isn’t just a problem for the insurance companies losing money — insurance fraud costs the average US family anywhere between $400 and $700 in the form of increased premiums.
The sheer complexity of the modern insurance industry creates gaps in visibility that can be exploited to perpetrate fraud. Claims are shuffled from insurees to insurers and reinsurers in a slow, paperwork-driven process that has many moving parts. This creates opportunities for criminals to make multiple claims across different insurers for a single loss.
Fraud detection using blockchain technology
Blockchain technology can enable better coordination between insurers to combat fraud.
On a distributed ledger, insurers could record permanent transactions, with granular access controls to protect data security. Storing claims information on a shared ledger would help insurers collaborate and identify suspicious behavior across the ecosystem.
Today, major insurers invest in data gathered from the public domain and from private companies in order to better predict and analyze fraudulent activities. Public data can be used to identify patterns of fraudulent behavior from previous transactions, but it’s often inconsistent due to the difficulty of sharing sensitive information between different organizations. Developing industry-wide fraud prevention is crippled by the constraints around sharing personally identifiable information — such as name, address, and date of birth.
Introducing blockchain technology to stop fraud would take an enormous level of coordination among insurers, but could be hugely beneficial in the long run.
A proposed counter-fraud blockchain implementation. Source: IBM
A blockchain-based effort to counter fraud could begin with the sharing of fraudulent claims to help identify patterns of bad behavior. That would give insurers 3 key benefits:
- Eliminating double-booking, or processing multiple claims from the same incident
- Establishing ownership through digital certificates and reducing counterfeiting
- Reducing premium diversion, for example, in the case of unlicensed brokers selling insurance and pocketing premiums
For example, blockchain-based distributed ledger technology could prevent double transactions for the same claim being authorized in a similar way to how cryptocurrencies limit double-spending. If someone tries to initiate 2 transactions related to the same bitcoin, these unconfirmed transactions are verified against the blocks of information about this one bitcoin that are recorded on the ledger. Only the transaction with the most number of confirmations will be considered legitimate, while the second transaction will be declined. A similar approach is being used to verify multiple insurance claims related to the same incident.
Less fraud in insurance translates directly to higher margins for insurance companies, which can lead to cheaper premiums for consumers.
Blockchain use case: claimshare
ClaimShare is an app that uses blockchain-based technology to combat double-dipping, a practice where one claimant fraudulently receives a payout from multiple insurers on the same incident. The app was launched by IntellectEU, a tech startup focused on finance and insurance, in partnership with KPMG in March 2021.
According to KPMG, fraud accounts for about 5-10% of the payouts that insurers make. ClaimShare aims to help prevent these payouts by allowing multiple insurers to share data related to claims filed.
Once an insurer files a claim, ClaimShare sorts the information related to the claim into 2 categories: personally identifiable information (PII) and non-PII. The non-PII information is then shared with other insurers in real-time, using the R3 Corda distributed ledger technology. This information is then passed through a confidential computing platform called Conclave, which runs code to compare claims across insurers and detect fraudulent patterns.
Cases of potential fraud can then be linked back to the personally identifiable information for the insurance companies to investigate.
IntellectEU claims that ClaimShare is the first app to tackle the problem of double-dipping in the insurance industry and that its platform could be applied to a broad range of different insurance types.
ClaimShare prevents double payouts for the same incident at different insurers. Source: ClaimShare
Insurance fraud is one of the bugbears of the industry, leading to higher premiums and worse coverage for consumers. Combating fraud is one of the most compelling use-cases for blockchain technology, which can provide insurers and insureds a permanent audit trail that can be used to evaluate claims.
But an insurance audit trail isn’t just useful for preventing fraud, it can also bring automation and efficiency to the claims processing system. We’re already seeing companies experiment with this approach in the property and casualty insurance space.
2. Property and casualty insurance
Key takeaways — property and casualty insurance using blockchain technology
- P&C claims data is scattered across multiple locations controlled by different parties, making claims resolution a challenge.
- Blockchain technology enables automated real-time data collection and analysis, potentially making some types of P&C claims process up to 3x faster and 5x cheaper than at present.
- Automated “smart contracts” can greatly speed up claims processing and payouts, saving insurers over $200B a year.
Property and casualty (P&C) insurance is big business, accounting for a third of all insurance premiums in 2020, or a total of $1.6T, according to Mckinsey.
One of the industry’s biggest challenges is gathering the necessary data to evaluate and process claims. You can think of insurance as a contract that stipulates the premium an insuree pays, as well as the conditions in which the insurer is liable for damages. But “damages” can be subjective, so insurance revolves around verifying that the conditions for each policy are met.
P&C insurance today
Processing P&C claims is an error-prone procedure that requires significant manual data entry and coordination between different parties.
Say that you’ve recently gotten into a car accident and the other driver was at fault. To recover losses, you have to submit a claim to your insurance company. Your insurer needs to examine the claim, and then recover the claim from the at-fault driver’s insurance company — which likely has an entirely different system and process for claims handling.
That’s why property and casualty insurance is such a compelling use case for blockchain technology — it could transform the way that physical assets are managed, tracked, and insured digitally.
P&C insurance on a blockchain
By allowing separate policyholders and insurers to track and manage physical assets digitally, blockchain technology can codify business rules and automate claims processing through smart contracts, while providing a permanent audit trail. A contract is an agreement that is enforceable by law; a smart contract is an agreement that lives on a blockchain and is enforceable by code.
Blockchain technology could make the process of settling a motor claim as much as 3x faster and 5x less costly. Source: BCG
Smart contracts using blockchain technology can turn paper contracts into programmable code that helps automate claims processing and calculates liabilities in insurance for all players involved. For example, when a claim is submitted with an insurer, a smart contract could automatically confirm coverage and trigger a request for manual review for losses that meet specific criteria.
Smart contracts could save P&C insurers more than $200B a year in operating costs and lower their operating ratio by anywhere from 5 to 13 percentage points, according to BCG.
Blockchain can also help P&C insurers in onboarding new clients quickly and more efficiently. When the information of all customers is stored on a ledger-based shared database, any number of insurers could have shared access to that information. Since the information on the database would already have been verified by other insurers, it will save the new insurer time and money compared to verifying all the client information independently.
Blockchain use case: State Farm and usaa
StateFarm, the largest auto insurer in the US, and United Services Automobile Association (USAA), a US financial services group, use a blockchain-based solution to settle subrogation claims in auto insurance.
In auto insurance, subrogation is the process by which an insurance company can reclaim the payout they made to their insured from the insurance company of the driver who was at fault. Usually, subrogation is a manual process where insurers exchange physical checks on a claim-by-claim basis. StateFarm and USAA exchange up to 75,000 subrogation checks annually.
The companies say that their Ethereum-based blockchain solution creates a ledger of all the transactions between two insurers. Instead of manually settling each claim, the blockchain-based ledger tallies up all the claims and executes one net transaction after a specified period of time — while allowing both parties to see the claims and verify them, meaning that trust can be established without ceding control to a third-party.
This technology will allow users to claim their deductibles sooner than using the manual process, says the vice-president of P&C insurance at State Farm, Schuyler Schupbach.
The 2 companies have been testing this technology since 2019 and fully launched it in early 2021. State Farm plans on extending the use of this blockchain-based claims process to other insurers in 2021.
3. Health insurance
Key takeaways — health insurance using blockchain technology
- The need for patient confidentiality means that insurance providers often don’t have access to patients’ full medical history
- Lack of data can lead to insurance claim denials, which costs hospitals $262B yearly and is cited as a significant factor in rising healthcare costs.
- Blockchain technology can encrypt patient information, facilitating the transfer of information while still protecting patient privacy.
A single patient will typically see multiple doctors and specialists over the course of his life. Because there are so many different parties involved in healthcare, it’s difficult to share and coordinate sensitive medical data between them.
Healthcare insurance today
The health insurance industry is plagued by a sprawling and inefficient ecosystem of providers, insurers, and patients. Medical records get siloed within different healthcare providers and insurers, and duplicate and erroneous records across different organizations lead to costly administrative overhead, as well as unnecessary issues for patients.
Let’s say that you’re seeing an orthopedic surgeon for a broken leg. A secretary at your surgeon’s office has to painstakingly request documents from various providers, obtain prior authorization for the procedure from your insurer, and submit a claim. After the surgery, your physical therapist needs information about the fracture from the hospital and prior medical information from your primary doctor, and must manually request documents from each provider. Each link in the chain represents a possible point of failure.
Sharing data and cooperating is currently difficult in the healthcare industry for 2 primary reasons:
First, the back-end infrastructure for medical records is hopelessly outdated
The market for providers of electronic medical records management software is expected to hit almost $40B by 2022, according to CB Insights’ Industry Analyst Consensus. Different providers and insurers rely on different standards and formats for how they store patient data. Medical data often has to be reconciled by hand across hospitals, insurance companies, clinics, and pharmacies. As one study published in the Journal of Medical Internet Research writes:
“Medicine has clumsily entered its digital age via the back door: vast and costly electronic medical records systems have been implemented largely without careful and planned consideration for their impact on the entire healthcare system, including education, practice, workflows, and research.”
Second, rigid privacy laws lead to data silos within organizations
In the US, the Health Insurance Portability and Accountability Act (HIPAA) exists to help secure private patient data, but the negative side effect is that it makes it hard to coordinate patient care across various providers and insurers.
The cost implications for this are dire. In the US, spending on healthcare administration per person is more than 1.5x that of countries like Switzerland, Canada, Germany, and France. The US spends 8% of its total healthcare expenditure on administrative needs alone, due mostly to poor communication practices between healthcare institutions and doctors, redundant and inefficient tasks, and excessive paperwork.
The numbers around costs associated with billing and insurance are even more dramatic. A study in the Journal of the American Medical Association found that the cost of billing and insurance represents more than 14% of all doctor revenue on average, and that figure can get as high as 25% when emergency room visits are taken into account.
Insurance claim denials at US hospitals cost another $262B in 2016. Denials can occur as a result of anything from failure to obtain proper authorization for a procedure to improper data entry. While hospitals recoup roughly 63% of claims that were initially denied by insurers, securing payment itself is a costly process with a lot of administrative overhead.
Healthcare insurance using blockchain technology
A cryptographically secured blockchain can maintain patient privacy while creating an industry-wide, synchronized repository of healthcare data, with potential industry-wide savings worth billions every year.
Blockchain technology could even help return control of medical data to patients, and let them share access to data on a case-by-case basis.
Rather than forcing insurers and providers to reconcile patient data across separate databases, a blockchain system for medical records could store a cryptographic signature for each record on a distributed ledger. The signature indexes the content of each document cryptographically and timestamps it, without actually storing any sensitive information on the blockchain.
Any time a change is made to the document, it’s recorded on the shared ledger, allowing insurers and providers to audit medical information across organizations. Meanwhile, blockchain tech could enable granular permissions settings to comply with regulations, while allowing data to be anonymized and shared for research.
Blockchain use case: anthem
Anthem, the second-largest health insurer in the US, is testing out various blockchain-based applications, including those that would make it easier for patients to access their medical records and data.
The company started testing out a mobile app in late 2019, where customers can access the app, scan a QR code, and grant various healthcare providers access to their health data. Customers can provide this access for a limited amount of time to help improve the privacy of their medical records. By storing a customer’s healthcare data on a blockchain-based public ledger, no single party will own all the data. Instead, customers will essentially control access to their medical data. For Anthem, this technology will help it process “huge transaction volumes,” which can be up to 300,000 transactions a week for patient health data.
One of the most important uses of blockchain in healthcare is that it would help establish “a system of trust between parties,” according to the digital head of Anthem, Rajeev Ronanki. Anthem plans to have all of its 40M members on this blockchain-based data-sharing solution by 2023. Overall, Anthem plans to have “about a dozen uses” for blockchain, including processing medical claims and coordinating benefits with other insurers.
Key takeaways — reinsurance using blockchain technology
- Reinsurance protects insurers when large numbers of claims come in at once, such as during a natural disaster.
- Blockchain technology can reduce risk by facilitating information-sharing and cut costs by automating processes, ultimately saving reinsurers up to $10B.
Insurance exists to help people offload risk and mitigate unexpected events, from natural disasters to health problems. This can be an extremely risky proposition, especially in the event of major disasters like hurricanes or wildfires.
That’s where reinsurance comes in: insurers can purchase coverage from reinsurers to protect themselves during disasters.
Reinsurers provide insurance for insurers in an arcane and inefficient system determined by one-off contracts and manual processes. Depending on the type of reinsurance purchased, it can cover a proportion of an insurer’s risk during a set time period, or cover specific risks such as earthquakes or hurricanes.
The current reinsurance process is extremely complex and notoriously inefficient. With facultative reinsurance, each risk in a contract needs to be individually underwritten, and contracts typically take up to 3 months of wrangling between parties before they’re signed. Insurers will typically engage multiple reinsurers, which means that data has to be exchanged between various parties to process claims. Different data standards between institutions often lead to different interpretations of how a contract should be implemented.
Reinsurance using blockchain technology
Blockchain technology has the potential to upend current reinsurance processes by streamlining the flow of information between insurers and reinsurers on a shared ledger.
Using blockchain technology, detailed transactions around premiums and losses can be updated on an insurer and reinsurer’s computer systems at the same time, eliminating the need to reconcile books between institutions for each individual claim.
With data shared on an immutable ledger, reinsurers can be better equipped to allocate capital for claims nearly in real-time, allowing them to both process and settle claims more quickly without relying on primary insurers for data around each claim.
PWC estimates that the blockchain can deliver reinsurance industry-wide savings of up to $10B by increasing operational efficiencies.
This could trickle down and lead to lower insurance premiums for consumers — it’s estimated that reinsurance accounts for 5% to 10% of existing insurance premiums.
Blockchain use case: B3i
In 2017, B3i launched a prototype of a smart contract management system for Property Cat XOL contracts, which is a type of reinsurance for catastrophe insurance. Each reinsurance contract on the platform is written as a smart contract with executable code on the same shared infrastructure. When an event — such as a hurricane or earthquake — occurs, the smart contract evaluates data sources from the participants and automatically calculates payouts to affected parties.
B3i’s pilot program concluded in September of 2018, after testing and receiving feedback from 40 companies. The consortium closed a Series B funding round for an undisclosed amount in December 2020. It had previously raised more than $26M across multiple investments.
A diagram showing how B3i’s reinsurance product aims to protect data while still making it accessible. Source: B3i
Executing reinsurance policies using blockchain technology can help reinsurance companies allocate capital and underwrite insurance policies more efficiently, bringing greater stability to the insurance industry. Rather than relying on primary insurers for data around losses, reinsurers can query the blockchain directly to provide coverage.
5. Life insurance
Key takeaways — life insurance using blockchain technology
- Life insurance ensures a lump-sum payout to the family members of the insured in the event of their death.
- Blockchain technology can help take the responsibility of filing for an insured’s death claim away from the beneficiaries at a time when they are grieving.
As an instrument for reducing risk from unforeseen circumstances, one of the major use cases for insurance is covering someone’s death. Life insurance is a contract between an insurer and the insured to pay a lump sum amount to the insured’s beneficiaries after their death.
Life insurance today
When someone has lost a family member, filing a life insurance claim is likely not top-of-mind. Sometimes family members are not even aware of the fact that the insured had a life insurance policy in the first place.
The death claim process today is archaic. To claim the life insurance benefits and payouts that they are entitled to, the beneficiaries named in a life insurance policy need to contact an insurer as soon as possible after the death of the insured. The insurer then processes the government-issued death statement and a physician statement to start the claims process. This process can take anywhere from a few weeks to over 6 months.
Life insurance using blockchain technology
Blockchain could help simplify and automate the manual claims registration process when filing a life insurance claim.
One of the hurdles in a smooth claims registration process is the number of participants, such as hospitals, insurers, funeral homes, and beneficiaries involved. Having all of these participants on a blockchain network that is accessible and transparent to all can help solve that problem.
Blockchain tech allows for greater trust among insurers and the insured, by both increasing transparency and using smart contracts that are enforceable by code. With smart contracts, the claims process can be initiated automatically when the information of the death of an insured is entered into a ledger-based database. Since information on a blockchain ledger is independently verifiable between disparate parties, this lifts pressure off of the insured’s family to prove a death through paperwork.
For example, if a hospital enters information into a blockchain-based system that an insured had died, then it could immediately send this information to the life insurer. The beneficiaries would not have to file a claim for the insurer to start processing.
Storing information related to an insured on a blockchain network would also create a verifiable audit trail, which could help reduce instances of claims fraud.
Blockchain use case: metlife
Metlife, one of the largest global insurers, is testing out a smart contracts solution called LifeChain to process life insurance claims in Singapore. The insurance giant’s Asian innovation center LumenLab began testing out its Ethereum-based blockchain solution, where it can initiate a claim based on an obituary printed in the media. For this pilot, Metlife partnered with Singapore Press Holdings, a local media conglomerate, and NTUC Income, an insurance cooperative.
When a deceased’s family members post an obituary in The Straits Times, a local newspaper, they are asked for permission to use LifeChain. If they agree, then LifeChain encrypts the deceased’s National Registration Identity Card (NRIC) number and enters it into the portal. Using a smart contract, the placement of the encrypted NRIC number on the blockchain then begins a search for a life insurance policy against that NRIC number. If a life insurance policy against this NRIC is detected, LifeChain triggers an email to NTUC to begin the claims process.
Moving towards a blockchain-powered insurance industry
While blockchain technology is still in its infancy, there are already a number of promising use-cases and applications for it across the insurance industry. Both giant insurance carriers like Allianz and Swiss Re and tiny blockchain technology startups alike are leveraging solutions.
But despite this strong interest in blockchain technology, there’s still a lot of ground to cover before it can realize its potential impact on the insurance industry.
From an industry perspective, insurance companies need to align around standards and processes related to blockchain technology. While blockchain technology can provide insurers with better tools for collaborating and sharing data, the insurers themselves must be willing to work with each other.
The insurance industry is also highly regulated to protect consumers from abuse and insurance companies from taking on too much risk and going bankrupt. Legal and regulatory frameworks for insurance need to evolve and provide clear guidance for blockchain technology to gain more traction within the industry.
For more on blockchain business impact, check out our report on how blockchain is disrupting financial services.
This report was created with data from CB Insights’ emerging technology insights platform, which offers clarity into emerging tech and new business strategies through tools like:
- Earnings Transcripts Search Engine & Analytics to get an information edge on competitors’ and incumbents’ strategies
- Patent Analytics to see where innovation is happening next
- Company Mosaic Scores to evaluate startup health, based on our National Science Foundation-backed algorithm
- Business Relationships to quickly see a company’s competitors, partners, and more
- Market Sizing Tools to visualize market growth and spot the next big opportunity