A few weeks ago we explored some intriguing new ideas in insurance that Blockchain technology could make possible. From smart contracts that shift premiums based on monthly biometric data, to objects on the Internet of things that can submit their own warranty claims, there are many exciting possibilities for providers and policyholders alike.
This week, we’re discussing the other opportunities that blockchain can provide in the insurance space. New methods of providing reinsurance or preventing fraud may not excite the general public, but for those in the industry these updates represent huge steps forward, from simple quality-of-life improvements to fundamental changes in the way insurance is provided.
Reducing administrative cost and saving time
A quick refresher on what exactly Blockchain is: As PwC puts it, a Blockchain is a distributed ledger, "with tamper-proof ‘blocks’ of records that can be shared among multiple users." It is deceptively simple in theory, however, the impact on business activities that involve securely storing and accessing large amounts of information (like claims data) could be massive.
Insurance transactions not only involve large sets of information, they also involve many disparate parties- each of whom has their own individual set of information that needs to be verified against every other party’s information. That means that, unfortunately, a lot of information is redundant, and occasionally the information doesn’t match up, resulting in disputes.
Now imagine if, instead of the process above, there was a single set of tamper-proof information that every party had access to; effectively, this would be a single agreed-upon version of the truth. That means no more costly or time-consuming rekeying of information, less room for mistakes, fewer disputes, and in general a process miles ahead of the current one in terms of efficiency.
Fraud detection and prevention
As we've mentioned before, claims information in modern insurance practice is passed among several parties, between the policyholder, the provider, and potentially one or more third parties like TPAs or other service providers. In this decentralized process, the potential for any of these actors to mishandle confidential information is a serious threat.
Blockchain was built specifically to improve decentralized processes like this. All transactions written to a Blockchain are visible to all the relevant and permissioned parties, shared across multiple locations, and are impossible to alter or delete. This increased transparency would allow insurers to automatically detect fraudulent behavior during the claims process, reducing both financial losses and the frequency of expensive manual verification.
McKinsey & Company says “five to 10% of all insurance claims are fraudulent, and the FBI says this results in more than $40 billion in costs to U.S. non-health insurers per year.” With this in mind, the volume of savings could be substantial.
Reinsurance and Blockchain
As PwC put it boldly in their report: “Blockchain was made for reinsurance.” Depending on who you ask, reinsurers either sell wholesale insurance or buy wholesale risk; which means that when high-volume events like CATs occur, they see an enormous increase in claims volume that’s virtually impossible to respond to in a precise and timely manner. This means that, in the reinsurance business, data is king- and the successful management and distribution of that data is key.
Research by PwC shows that blockchain could provide massive improvements in several areas of insurance, reducing processing time for cost of placement and claims settlement, as well as key compliance checks like sanctions, KYC (Know Your Customer), and AML (Anti-Money Laundering) checks. Additionally, given all the cost reduction benefits we’ve outlined above, the transformation could be even greater.
PwC suggests that the efficient data processing, reduction in claims leakage, and fraud prevention that blockchain offers could remove 15% to 25% of reinsurance expenses industry-wide. For those of you keeping score, that’s $5-10 billion in savings, on top of the increases in customer satisfaction and retention thanks to a simpler, less frustrating process.
Barriers to Implementation
In a recent paper, IBM reveals that the existing methods of storing insurance information - the pillars of insurance claims operations - are too complex and fragmented. But organizations that are included in the workflow are reluctant to share their data via the existing technology methods for a variety of reasons:
- The risk of disclosing identifiable information to be associated with a person.
- The legal restrictions of sharing data across borders
- Sharing sensitive loss information with competitors.
- Anxiety over the decentralized nature with no central authority
- Fear of the “free-rider” problem, where larger organizations contribute more and get less than smaller ones.
The transformation that Blockchain offers will not happen overnight. There are still some cultural and legal shifts that need to take place in order to unlock its full potential. However, the benefits that Blockchain can provide for the industry are too great to ignore. For this reason, those of us in InsurTech are not just optimistic, we’re working hard to build the solutions that will drive these changes, and we're thrilled to see what we can do in the fast-approaching future.