Insurance giants and startups alike are attempting to use blockchain's emerging technologies to prevent insurance fraud, digitally track medical records, 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 extreme hype, its true killer applications are likely to be in some of the most antiquated fields out there. And it has the ability to 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 hasn’t even fully embraced the cloud.
It’s too early to tell whether blockchain technology can overcome the legal and regulatory hurdles to become the future default standard across the insurance industry. But the possibilities are endless, and insurance companies and startups alike are exploring 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.
Read on for a deep dive into how blockchain technology could disrupt the insurance industry.
Table of contents
- Fraud detection & risk prevention
- P&C insurance
- Health insurance
- Moving towards a blockchain-powered insurance industry
1. Fraud detection and risk prevention
- 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, or enables brokers to sell insurance policies and pocket the premiums.
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, date of birth, etc.
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 accident
- Establishing ownership through digital certificates and reducing counterfeiting
- Reducing premium diversion, for example, in the case of unlicensed brokers selling insurance and pocketing premiums
Less fraud in insurance translates directly to higher margins for insurance companies, which can lead to cheaper premiums for consumers.
Blockchain use case: Etherisc
Blockchain technology startup Etherisc built a blockchain-enabled insurance product that it began testing publicly in October 2017. Its cryptocurrency-based flight delay program allowed passengers to purchase flight insurance using either cryptocurrency or fiat money such as USD and Euros, then receive payouts automatically after a qualifying event. Other products in development include hurricane insurance, crypto wallet insurance, and crop insurance.
Etherisc’s products are powered by smart contracts. A contract is a paper agreement between two or more parties that is enforceable by law; a smart contract is an agreement between two or more parties that lives on a blockchain and is enforceable by code.
The Etherisc smart contract can independently verify claims by using multiple “oracles,” or data sources. For example, when processing a crop insurance claim, Etherisc might compare satellite images, weather station data, and drone videos to photos supplied by the insured. This automated scrutiny can detect fraudulent claims before they’re ever subjected to human review.
Etherisc is still in the early stages (at this time, only its flight delay insurance is licensed) but its example indicates a wider use case for blockchain as a fraud prevention tool.
One significant change in the blockchain insurance model is that anyone can invest, and therefore receive a share of the money generated by the insurance. Source: Etherisc
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 bring automation and efficiency to the claims processing system, which we’re seeing companies experiment with in the property and casualty insurance space.
2. Property and Casualty insurance
- 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 48% of all US insurance premiums written in 2017, or a total of $576B.
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 for the at-fault driver’s insurance company — which 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, which could transform the way that physical assets are managed, tracked, and insured digitally.
P&C insurance on a blockchain
By allowing policy holders 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.
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 a 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.
For auto insurance, a smart contract could be linked to sensors on a vehicle that automatically alert insurers when a crash occurs. The smart contract can then summon medical teams and towing services, launch the insurance claims process, and inform the insured that help is on the way. As new information such as police reports and crash photos comes in, the smart contract can append them to the claim, facilitating a much faster payout process with minimal human intervention.
Blockchain use case: Insurwave
A collaboration of entities — including EY, Guardtime, A.P. Møller-Maersk, Microsoft, and ACORD — launched blockchain-powered marine hull insurance platform Insurwave in 2018.
The platform is now in commercial use and was projected to handle risk for more than 1,000 commercial vessels and 500,000 automated transactions in its first twelve months of operation. The group plans to roll its platform out to other types of business insurance in the future, including cargo, aviation, and logistics.
The Insurwave platform provides real-time information on ship location, condition, and safety conditions for both insurers and insurees. When ships enter high-risk areas, such as war zones, the program detects this and factors it into underwriting and pricing calculations.
Setting premiums for marine insurance is “notoriously complex,” as the enterprise blockchain firm R3 puts it. Products like Insurwave are designed to ease that complexity by building an impossible-to-change audit trail.
Having a reliable store of information about a vessel can speed up the process of making and assessing claims. It can also help increase vessel owners’ and insurance agents’ access to data.
Information like boat movements, weather conditions, and location can help insurers more easily quantify the risk that they’re taking on, as well as help vessel owners better assess what type of insurance they need.
Blockchain technology has already started to succeed in making the process of handling marine insurance more efficient, according to Lars Henneberg, A.P. Møller-Maersk A/S Head of Risk and Insurance:
“Operating around 350 owned container vessels across the world, marine insurance takes up considerable resources for us. Moving it to this platform is helping us automate manual processes and alleviate a range of inefficiencies and frictional costs in the way we have used to trade marine insurance.”
3. Health insurance
- The need for patient confidentiality means that insurance providers often don’t have access to patients’ full medical history, despite the now-$28B medical records market.
- Lack of data can lead to insurance claim denials, which costs hospitals $262B yearly and are 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.
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 procedures 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 the year 2022. 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 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, total spending on healthcare administration 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 Study 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, or 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 using blockchain technology
A cryptographically secured blockchain can maintain patient privacy while creating an industry-wide, synchronized repository of healthcare data, saving the industry billions every year.
Blockchain technology can 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, the blockchain could enable granular permissions settings to comply with regulations, while allowing data to be anonymized and shared for research.
Blockchain use case: MedRec
MedRec is a decentralized content management system for medical records from MIT. Rather than storing medical data directly on-chain, it indexes medical records on the blockchain, allowing records to be accessed by providers who have been granted permission. This is meant to help guarantee patient privacy, while creating an audit trail that makes it easy to find and verify patient information on the blockchain.
A system proposed by MedRec for storing medical data on the blockchain
While MedRec remains an academic project in proof-of-concept stage, it presents a useful model for understanding how medical data can be secured through blockchain technology.
What’s important to remember is that blockchain technology is not a silver bullet for the health insurance industry. Blockchain companies today in the insurance industry need to deal with significant regulatory and compliance hurdles to have any chance of success.
- 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 exist 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.
PricewaterhouseCoopers 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
B3i is a consortium formed in October 2016 by some of the biggest names in the insurance and reinsurance areas to explore the blockchain technology. Members include AIG, Allianz, Aegon, and Swiss Re.
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, and its live launch is planned for the beginning of 2019.
A diagram showing how B3i’s reinsurance product protects 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.
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 overwhelming interest in blockchain technology, there’s a lot of ground to cover before it can make a significant impact on the insurance industry.
From an industry perspective, insurance companies need to align around standards and processes within 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 technology itself must also be developed further. Public blockchains, where everyone has access to each transaction on the ledger, are unfeasible for the insurance industry due to privacy and security concerns. Private, permissioned blockchains are still under active development.
Finally, the insurance industry is 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 succeed.
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