Blockchain: A backend solution to insurance fraud, waste

Today’s property insurance industry stands at a crossroads. Process inefficiencies and the growing threat of fraud are making current business models increasingly unsustainable. And external developments like the extreme weather conditions caused by global warming are complicating matters even further.

Insurance agents are trying to adjust, but as they work to adopt new tools that promise greater efficiencies, they’re ultimately left shuffling between disjointed systems that only complicate their processes. Policyholders bear the brunt of this inefficiency by experiencing delays, disputes and rising costs.

Fortunately, blockchain technology could be the singular backend solution. By leveraging blockchain’s decentralized and immutable nature, the property insurance industry could leverage these attributes to enhance efficiency, trust, and ultimately, the customer experience.

Storms on the horizon

To better grasp the impact blockchain could have on the insurance industry, it’s important to contextualize the challenges that are plaguing its current business model.

Manual, time-consuming processes that often lack ‌transparency among involved parties‌ drive inefficiencies. The need for multiple intermediaries, complex paperwork, and manual data entry slow throughput and increase the likelihood of error. All too often, policyholders pay the price in the form of lengthy claim processing times and higher premiums. But it also impacts the insurers as well. The tedious nature of these tasks does more than gum up the works; it increases the risk of fraud due to the lack of visibility into the entire process.

Despite agents’ best efforts, fraudulent claims and activities still cost insurers billions of dollars each year. Current insurance systems frequently struggle to detect and prevent such fraud due to data fragmentation, the difficulty surrounding cross-industry collaboration, and the potential for information manipulation.

The rising frequency and severity of natural disasters around the world is further exacerbating these problems. These disasters result in thousands of priority claims that simply cannot be processed fast enough with the industry’s current business model. Indeed, major insurers are pulling back from the housing market in California for these exact reasons.

The threat of fraud also grows as criminals take advantage of the chaos caused by natural disasters to perpetrate their activities, resulting in huge losses for insurance companies.

So, where does blockchain come into the picture?

Blockchain and efficiency

Smart contracts represent one area in particular in which blockchain technology can benefit the insurance industry. Smart contracts, or self-executing agreements built on the blockchain, allow policy terms to be predefined and executed automatically once the agreed-upon conditions are met. This dramatically reduces the steps required for processing as well as cutting administrative costs and accelerating the entire claims process. Additionally, blockchain provides a level of transparency that ensures all parties involved have access to the same information, minimizing disputes and further expediting settlements.

The insurance giant Lemonade is a great example. It has already started putting the blockchain to work through the creation of the Lemonade Crypto Climate Coalition. The coalition is dedicated to building and distributing at-cost, instantaneous, parametric weather insurance to subsistence farmers and livestock keepers in emerging markets. The coalition’s decentralized application layer and smart contracts deliver affordable, instantaneous insurance payouts, alongside faster recoveries than traditional processes.

Blockchain also enhances trust between insurers and policyholders. When insurers embed smart contracts within the blockchain, they can foster a sense of fairness and ensure all parties adhere to their respective obligations.

Finally, blockchain’s ability to remove multiple layers of review across various middle-people paves the way for a more efficient, cost-effective, and customer-centric insurance ecosystem.

Blockchain and fraud prevention

Blockchain technology enhances anti-fraud measures by providing a transparent and auditable record of all transactions. Since each transaction is linked to its full prior history, the result is an unchangeable lineage of information. Such immutability and transparency enables insurers to identify patterns and detect any suspicious activities more effectively.

The decentralized nature of blockchain also facilitates collaboration among insurers, law enforcement agencies and regulatory bodies by enabling real-time data sharing and verification. This reduces duplicative efforts, and improves fraud investigations.

By leveraging blockchain, insurers can build a robust ecosystem in which fraudsters face increased scrutiny, deterrence and swift action, protecting both the industry’s integrity and also the interests of honest policyholders.

Amid an unpredictable insurance landscape, blockchain’s ability to provide a more streamlined and trustworthy insurance experience will ultimately benefit everyone involved — insurers, policyholders, law enforcement agencies and regulators alike.

John Wu is president of Ava Labs, a tech firm that helps businesses build and scale high-performance, cost-effective, expertly-managed custom blockchains. 

These opinions are the author’s own.

See also:

• Blockchains’ potential for improving insurance processes
• Are there risks with blockchain technology?
• Understanding the impact of automation in claims