How blockchain and smart contracts will disrupt insurance

With technology evolving at lightning speed, there are boundless opportunities and challenges to the insurance industry. Every day, trade publications publish stories about how new technologies can help insurance businesses fix this or integrate that. There are so many opportunities; sometimes, it seems easiest to do just enough to get by.

The ultimate challenge in tech adoption is determining where to start. For many companies, it is important to begin where the most savings can be created.

With insurance carriers, the starting point is often directly connected to fraud prevention. Why? The insurance industry faces billions of dollars in fraudulent claims and activities each year. A conservative estimate from the Coalition Against Insurance Fraud found that various forms of insurance fraud add up to $80 billion a year in the U.S. alone.

Despite these losses, insurance companies have collectively been slow to adopt new technologies such as smart contracts and blockchain. These two technologies, in particular, can create a transparent way of tracking transactions across the insurance value chain, which would ultimately reduce fraud.

Three key applications

It isn’t so important to understand the technology behind blockchain as it is to understand how it works. Blockchain is a little like Google Docs. It is a ledger that can be viewed and edited by multiple people at the same time. Created in 2008, it was initially intended to manage Bitcoin transactions in a transparent and incorruptible way. Over time, it has proven to be not only applicable to the Bitcoin platform but also for other applications within the financial services and insurance industries.

Blockchain has and will continue to provide unlimited possibilities for insurers.

Three general applications are expected to take root in the insurance industry:

1. Insurance policy execution through smart contracts will bring about efficiencies in underwriting and claims processing. (Smart contracts are self-executing contracts in which the terms of the agreement between buyer and seller are directly written into lines of code. The code and the agreements contained ultimately exist across a distributed, decentralized blockchain network.)
2. Applying the ledger-based mechanism to insurance claims to better manage risk and eliminate the sources of fraud.
3. Creating an efficient flow of information and payments between insurers and reinsurers.

The impact on customer onboarding

As regulations continue to grow around the reliability and integrity of data, customer onboarding is an area where distributed ledger technology can create efficiencies. Imagine a client wants a new policy. With blockchain technology, all this client would have to do is give you access to a link to encrypted data, which will save you time and money as you won’t have to chase down those details.

Since the data exists on a blockchain, it has been verified by other members on the network. But more importantly, in this era when an increasing number of customers want their information to remain private, blockchain puts the customer firmly in the driver’s seat by giving them the power to grant (and revoke) permission to those with whom they want to share their information. This provides the peace of mind of knowing one’s information is safe and cannot be tampered with.

In the past 18 months, a few existing blockchain consortiums have created a working distributed ledger infrastructure for identity management that interested organizations can join. For instance, more than 70 organizations, including financial firms, law firms, tech and cybersecurity companies, have joined The Sovrin Network since it went live in September 2017.

Underwriting applications

Today’s underwriters review applications and evaluate risks. This process will be simplified and faster by offering the insurance policy as a smart contract. It creates an understanding of the applicable conditions and becomes the foundation for automated claims processing.

Fizzy, for example, is an automated parametric flight delay insurance platform launched by AXA in 2017. It records information on policyholders’ delayed flight insurance using smart contracts and connects to global air traffic controller databases then checks on the status of the flights. If a policyholder experiences a delay of two or more hours, as reported by the airport, the smart contract automatically triggers the mechanism for paying the insured upon the receipt of flight confirmation by the policyholder.

Efficient claims processing

The evaluation and processing of P&C claims is complex. It involves data from various systems and requires a lot of coordination among stakeholders. A smart contract — which is built on blockchain technology and intended to eliminate third parties — is an excellent way to manage the process and create efficiencies.

Consider an insurance company with a smart contract in place for a policyholder who has just been in a car accident. The carrier can quickly gather data from several external and internal sources to determine whether a claim should be paid. The insurer also can rapidly check a number of other data points such as smart devices in the car, weather reports, the driver’s records, police filings, and so on. This is all done automatically when the claim is submitted to the system.

Halos Insurance provides another example. This company leverages blockchain technology to enable self-service claim reporting for its policyholders. If a homeowner sees a damaged roof after a storm, the individual can use the Halos Dobby app to upload pictures for insurers as well as roofers.

Managing risk and minimizing fraud

Insurance fraud is on the rise, which is costly for insurers and insureds. Part of the expense comes from a paperwork-intensive claims process. This antiquated process allows criminals to easily make multiple claims to different insurers for a single loss or split the claims and over-represent the damage.

Currently, insurers integrate data with various other public sources to prevent fraud, and this data is leveraged against identify fraud patterns. By adding in blockchain, however, there would be broader access that would allow for better profiling of the transactions to identify bad behavior.

A shared ledger is a great way for insurers to collaborate and track suspicious behavior. It enables insurers to permanently record transactions. It also would be easier to detect key fraud patterns, such as:

1. Double-booking, which is the processing of multiple claims from the same accident;
2. Counterfeiting; and
3. Premium diversion.

Reinsurance applications

In the current scheme of things, reinsurers face a distinct fraud risk. Each reinsurance contract is individually underwritten and can take up to three months to process. Insurers typically get quotes from various reinsurers. This process involves the exchange of data. In a blockchain environment, data is transparent and doesn’t have to be rekeyed. All parties, including the insured, can access the information.

Distributed ledger technology empowers insurers and reinsurers to modernize data transfer by automating repetitive manual tasks, reducing administration effort, and better structuring data. An insurer under a reinsurance contract can process its monthly premium automatically through a smart contract. This also helps reinsurers receive verified real-time data. If a reinsurance deal involves multiple reinsurers, there is a transparent shared view available to each carrier.

The challenge at hand

There are many opportunities to use blockchain to reduce fraud, increase the bottom line, and enhance the insurance experience. But it will take an industry-wide effort to make it as efficient as possible. Several insurance companies have adopted a “wait and see” attitude toward blockchain, but others increasingly want to begin the conversation around industry-wide blockchain standards. Such standards will ensure efficient communication across the industry as more insurers begin to adopt blockchain strategies.

Dheeraj Pandey (Dheeraj.pandey@exlservice.com) is the engagement manager at the operations management and analytics company EXL Service. These opinions are his own.

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