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 wholesale over the past decade, the multi-trillion-dollar global insurance industry in many ways, is still stuck in the past.
Despite the rise of online brokers, many consumers still call insurance brokers by phone to purchase new policies. Policies themselves 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 the blockchain 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 capability to be a transformative force for industries like insurance, which requires 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 can overcome the legal and regulatory hurdles to become a default standard in the insurance industry. But the possibilities are endless, and insurance companies and startups alike are exploring insurance applications for the blockchain full-throttle.
- Fraud detection and risk prevention: By moving insurance claims onto an immutable ledger, blockchain 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: Through the blockchain, 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, the blockchain can simplify the flow of information and payments between insurers and reinsurers.
Read on for a deep dive into how blockchain is disrupting the insurance industry. See how insurance giants and startups alike are attempting to use blockchain solutions to prevent insurance fraud, digitally track medical records, and more.
1. Fraud Detection and Risk Prevention
Today, the the sheer complexity of the 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.
The total cost of insurance fraud (not counting health insurance) in the US is estimated at $40B a year. 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.
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.
Insurers currently invest in public and subscription data to prevent fraud, a market that’s expected to top $42B by 2023. This 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.
A proposed counter-fraud blockchain implementation. Source: IBM
Introducing this type of technology would take an enormous level of coordination between insurers to implement. But a blockchain-based effort to counter fraud could begin with the sharing of fraudulent claims to help identify patterns of bad behavior.
That gives you three key benefits:
- Eliminate double-booking, or processing multiple claims from the same accident
- Establish ownership through digital certificates, reducing counterfeiting
- Reduce 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.
Everledger, for example, uses the blockchain to create a ledger of diamond ownership for buyers, sellers, and insurers. The company has digitized 1.6 million diamonds using blockchain technology. Diamonds are laser-etched with a digital fingerprint that includes uniquely identifiable information for each stone like serial number, clarity, and cut. This fingerprint is stored on an immutable ledger.
image credit: Justin Ramos
Say that a diamond jeweler fakes a report that diamonds have been stolen from her store, and files an insurance claim. She counterfeits certificates for the diamonds, and tries to sell the stones as new ones. Since the unique characteristics of each stone have been stored on the Everledger blockchain, when they resurface, the insurance company is notified and can repossess the diamonds.
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 of the blockchain, which can provide insurers and insurees 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
The big difficulty with Property and Casualty (P&C) insurance, which insures items like houses or cars, is gathering the necessary data to evaluate and process claims. Today, this is an error-prone process that involves a lot of manual data entry and coordination between different parties.
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.
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. The tricky bit is that “damages” can be pretty subjective, and insurance revolves around verifying that the conditions for each policy are met.
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 can transform the way that physical assets are managed, tracked, and insured digitally.
A depiction of the insurance claims process run on the blockchain. Image credit: World Economic Forum
Smart contracts on the blockchain can turn paper contracts into programmable code that helps automate claims processing and calculates liabilities in insurance for all players involved. 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.
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. For flight insurance, a smart contract could be linked to an air traffic control database, and automatically trigger compensation when delays or cancellations occur.
Allianz Insurance recently launched a prototype for captive insurance, built on top of Hyperledger’s Fabric blockchain. Allianz’s blockchain connects to Citi’s CitiConnect API to accept instructions and payout contracts and is designed for professional and property insurance. The prototype records policy renewals, premiums payments, and claims processing onto the blockchain, simplifying the flow of transactions between parties. As Yann Krattiger of Allianz has said, “Automated processing replaces the exchange of thousands of emails and massive data files.”
While the blockchain can increase backend efficiency for insurers, it can also lead to a superior user experience for customers. DocuSign, for example, in partnership with Visa recently launched a blockchain prototype that simplifies the process of leasing and insuring a car electronically through the Bitcoin blockchain. Each interaction in the process, from choosing a car to selecting an insurance plan and paying for it, is recorded, updated, and verified on the blockchain. Another space where the inefficiency of tracking and processing claims has been a major drag on productivity is healthcare.
Health insurance today is plagued by a sprawling and inefficient ecosystem of providers, insurers, and patients.
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. 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.
A cryptographically secured blockchain can maintain patient privacy, while creating an industry-wide, synchronized repository of healthcare data, delivering the industry billions in savings a year.
Let’s say that you’re seeing an orthopedic surgeon for a broken leg. Getting the proper treatment is dependent on your physical therapist receiving accurate information about the fracture from the hospital, and prior medical information from your primary doctor. 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. Your therapist’s office manually requests 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 two primary reasons.
First, the back-end infrastructure for medical records is hopelessly outdated. While the global Electronic Medical Records (EMR) market is estimated at $28B, 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 siloes 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 implications for this are dire. In the US, administrative spending accounted for nearly 15% of all healthcare spending in 2016. Costs can range from $20 for processing a visit to a primary doctor to $215 for a surgery. It’s estimated that two-thirds of these costs are related to billing and insurance. Considering that healthcare spending hit a whopping $3.3 trillion in 2016, that’s not table stakes.
Insurance claim denials at US hospitals alone cost $262B in 2017. 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 payments itself is a costly process with a ton of administrative overhead.
Blockchain technology can return control to patients over their medical data, and give them access to it 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.
A system proposed by MedRec for storing medical data on the blockchain.
Anytime 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.
Gem Health is a network for developing healthcare applications and infrastructure on the Ethereum blockchain that gives patients control of their medical data. The company is working to allow patients, providers, and insurers to view a patient’s health timeline in real-time and bring greater efficiency to the claims process. Gem Health has partnered with Philips to build permissioned blockchains that can be used in enterprise healthcare.
Healthcare ecosystem on the GemOS blockchain. Source: Gem
MedRec, another example, 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. 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 the blockchain 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.
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. 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 as set time period, or cover specific risks such as earthquakes or hurricanes.
With data shared on an immutable ledger, reinsurers are 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.
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 three 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.
The blockchain has the potential to upend current reinsurance processes by streamlining the flow of information between insurers and reinsurers on a shared ledger. On the blockchain, 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.
PricewaterhouseCoopers estimates that the blockchain can deliver a reinsurance industry-wide savings of between $5B-$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%-10% of existing insurance premiums.
Allianz, one of the largest European insurers, partnered with Nephila to use blockchain technology to execute a natural catastrophe insurance swap through smart contracts. Catastrophe, or cat swaps, are a financial instrument that transfer risk from an insurer to a reinsurer. A smart contract-powered cat swap can trigger when an event occurs, such as an earthquake in California, and automatically pay out the insurer according to the reinsurance agreement.
As Chief Underwriter of Allianz Richard Boyd has said, “By replacing the human interventions which are currently embedded throughout the entire risk transfer process, frictional delays and the risks of human error are completely removed.”
Meanwhile, B3i is a consortium formed by some of the biggest names in the insurance and reinsurance arenas, to explore the blockchain. B3i’s members include AIG, Allianz, Aegon, and Swiss Re.
B3i recently 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 occurs, such as a hurricane or earthquake, the smart contract evaluates data sources from the participants and automatically calculates payouts to affected parties.
Executing reinsurance policies on the blockchain promises to 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.
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 in the insurance industry. Giant insurance players like Allianz and Swiss Re, as well as newer blockchain entrants in the space 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.