10 Use Cases Where We Can See Blockchain In The Insurance Industry
The most significant, essential types of insurance are key cogs in the economic sector and are critical to the well-being of countless individuals and families. The life/health insurance sector in the US alone was responsible for $638 billion in new premiums written in 2015, and the property/casualty sector grew three percent to a record high of $520 billion. But it’s not all roses and lilacs when it comes to the insurance industry. Tellingly, 35% of insurer directors at a PwC forum said that they believe the industry landscape will remain the same, but the players will change substantially in a matter of 5–10 years. 44% said that “most insurers will not survive, at least in their existing form.”
This indicates that, among other factors, innovation and embracing technological differentiators will be key in determining which players have staying power and which will slide into irrelevance. The blockchain possesses the potential to be one of the most impactful developments for insurers and their customers, encompassing use cases that include fraud prevention, reducing administrative costs, asset tracking and assessment, and even new forms of insurance, such as microinsurance.
Fraud Prevention: Detecting Fraudulent Claims
It’s not as if insurers aren’t dedicating ample time and resources to fighting fraud. As much as 95% of insurers employ anti-fraud technology, and 71% of those respondents said that detecting claims fraud is the primary aim of such technology. Legislators have done their part, too. 48 states plus Washington, D.C. categorize insurance fraud as a specific crime. 41 states plus the District have a fraud bureau that deals exclusively with insurance-specific fraud cases.
Yet insurers continue to be burned by fraudsters. One conservative estimate pegs the losses in the industry from fraud at $80 billion per year. It’s not just the insurance companies whose pockets are robbed by insurance fraudsters, either. Insurance fraud costs the average family between $400 and $700 per year in the form of higher premiums. Auto insurance represents the most prevalent, costly form of insurance fraud, and studies claim that 25% of bodily injury claims resulting from car crashes are exaggerated or outright fraudulent. This can mean an extra $200–$300 per year on your car insurance premium alone.
Many forms of insurance fraud are made possible by the lack of shared information across the insurance industry. Limited observation space allows fraudulent claims to slip through the cracks, and whether it is due to competitive instincts, legal concerns, technological shortcomings, or other reasons, insurance companies are often not equipped to sniff out bad claims. If the blockchain can be used as the basis for an industry-wide store of information into which algorithms could be fashioned to detect repeat claims, chronic offenders, and other signs of fraud, it would be a major win for the industry and non-fraudsters who continue to pay out the nose for the cost of false claims.
Expediting Policy Creation and Claims Processing
The healthcare industry serves as a prime example of how errors and inefficiencies in the claims review process can cause exorbitant costs that are ultimately reflected in higher premiums. A 2017 report found that nine percent of medical insurance claims, or roughly $262 billion, were initially denied. Those denials led to $8.6 billion in appeals-related administrative costs, and approximately 63% of those appeals proved successful. Those initial denials not only necessitated additional billions in costs, but they also put at risk approximately $4.9 million per hospital in net patient revenue.
Like any industry, the trend toward convenience, including 24-hour shopping, one-click purchasing, and digitization, is coming in the insurance industry. From policy creation to claims monitoring, it’s only a matter of time until excess human intermediaries must adapt or be forced out, and there’s the reason to think that automation will streamline policy creation and claims processing as much, if not more so, than any other facet of the insurance sector.
In discussions about how the industry can better detect fraud, an industry-wide information database is often mentioned, and this store of shared information could serve several purposes for the sake of insurance. Aside from fraud detection, it could serve as a resource by which claims could be processed, paid out, or denied with greater rapidity. The price one pays for insurance is based upon several factors that can be ever-changing. When it comes to policy creation and claims processing, a catch-all database that contains information including but not limited to accident history, medical procedures, and filing records could create much-needed efficiency.
Streamlining Routine Interactions
Fraud accounts for approximately 10% of the property-casualty insurance sector’s annual losses, constituting $34 billion in losses over a four-year stretch between 2011 and 2015. While this fraud takes many forms, the exchange of false information is a major pain point that leads to costs falling disproportionately on one party and their insurer, ultimately raising premiums across the entire industry. Providing false information on insurance-related documents carries weighty consequences.
If caught maliciously providing false information on a health insurance application, the civil penalty can cost as much as $250,000. When exchanging information post-crash, the penalties for dishonesty are not quite as steep. If law enforcement gets involved and false information is given — which is often the case in an accident — the penalty is up to 1 year in jail, 12 months probation, and a $1,000 fine. For a second offense, the offender risks 5 years in prison, 5 years probation, and/or a $5,000 fine. However, these cases can be difficult to prove and prosecute, and better systems of catching false insurance claims and securitizing routine insurance-related interactions is needed.
Envision a world where the details of one’s insurer were stored on a database, tied directly to one’s verified identity. No longer would one have to jot down information, hoping that the person who rear-ended them did not give them bogus information. Quicker, more reliable systems for making the routine insurance-related interaction more trustless and pain-free would lessen not only countless instances of fraud but headaches.
The insurance industry is massive, consisting of over 7,000 companies collecting over $1 trillion in premiums annually. That makes the industry ripe for rip-off, and fraudsters are estimated to incur a cost of over $40 billion each year on insurers. These immense costs eventually end up costing purchasers of insurance policies, though many don’t realize how much fraudulent claims impact their policy’s price tag.
Insurance companies have the duty of employing the most stringent risk prevention and fraud detection apparatuses, and the blockchain is at the frontier of cutting-edge fraud prevention tools. The technology can be utilized as a method to seamlessly and securely share fraud intelligence among decentralized institutions, and may also minimize counterfeiting, double booking, and document or contract alterations by establishing clear, timeless records of asset ownership.
Insurers of all kinds face inefficiencies that ultimately manifest as increased costs to the policy buyer. With $1.1 trillion in net premiums written in 2016, and a form of insurance for virtually any aspect of life available for purchase, the need for greater efficiency in the industry is ever-present. As it stands, the industry requires humans to pass a policy from quote to underwriting to eventually issuance, costing time, money, and exposing the policy buyer to risk in the interim. Those who seek to employ smart contracts in insurance see the opportunity for built-in “triggers” to activate and terminate policies based on predetermined criteria. This would mean a quicker establishment of policies based on a database of required information for on-demand policy creation, as well as quicker claims processing and payouts.
Property and Casualty Insurance
Property and casualty insurance covers risk related to lost or damaged property, and it accounted for 47% of all premiums written in 2016. The collective P/C insurance umbrella of home, auto, and commercial constituted by far the largest number of insurers in the nation that year, with 2,538 P/C insurance businesses. The sheer size of these insurers’ responsibilities — $533.7 billion in premiums were written in 2016 — is illustrative of the difficulties inherent in assessing claims. Gathering data on assets such as a home or vehicle is notoriously costly and time-consuming, and accounts for many of the inefficiencies in property and casualty insurance.
With the blockchain, a completely new system of tracking the lifetime of an asset could be established, eschewing a fragmented network that varies by insurer for a unified record database built on the blockchain. Smart contracts could digitize paper contracts and process claims based on coded criteria, calculating liabilities for all parties based on universal criteria and standards. Better yet, this record could be updated in real-time by insurers and policyholders when the status of an asset or policy changes.
Reinsurance allows insurers to mitigate their risk by offloading policies on other insurers. However, the offloading process often ends up with tangled wires and inefficiencies. Altogether, reinsurance expense ratios typically account for 5–10% of premiums, an indication that leaps can be made in the efficiency of reinsurance processes. PriceWaterhouseCoopers estimates that the introduction of blockchain technology in reinsurance could remove 15–25% of expenses, delivering an industry-wide savings of $5 billion–$10 billion. The primary way to achieve these savings is through the adoption of a blockchain ledger by which insurers could communicate intel pertaining to reinsured policies. Considering that aspects of a single policy are routinely divvied up between numerous insurers, the need for unification of recordkeeping in reinsurance is particularly great.
Microinsurance is a lifeline covering specific insurance needs, typically for low-income families and individuals, and strong demand for microinsurance has been met with increasing adoption. In 2009, microinsurance covered approximately 135 million risks worldwide. Today, that number stands at 500 million. In Africa, microinsurance coverage — primarily funeral insurance — grew 200% between 2008 and 2012, and the 172 million lives covered in some way by microinsurance in Asia and Oceania represents a 40% annual increase between 2010 and 2012.
The potential market for microinsurance is estimated to be a whopping 4 billion people, and the blockchain can help the industry accommodate those in need of specified, affordable insurance. By facilitating transparent, peer-to-peer contracts and transactions, as well as bypassing often corrupt bureaucracy, the nations that need it most will be granted access to simple, understandable, and effective means of coverage.
Peer-to-peer insurance is a relatively new term, but the roots of the industry — lending with as few intermediaries as possible to reduce waste and eschew profits — goes back to old-school mutual insurance. With a $64 billion valuation in 2015 and an anticipated value of $1 trillion by 2025, P2P insurance is on an undeniable upswing. It’s clear to see why the market is expected to grow: members pool their resources, and unpaid premiums are returned to the members instead of being kept by an investor or insurer as revenue.
This general vision of insuring only what you need if you need it is being fitted to blockchain technology, with members placing their funds in digital wallets and those funds representing the amount of exposure from which they are protected. If a claim is made, their investment is used, and if not, the funds are returned to them. These sort of blockchain-based P2P insurance models are being used for unemployment insurance and a select few other forms of coverage, and more iterations are sure to emerge.
Parametric insurance, aka index insurance, refers to a policy — typically related to weather events — that pays out a predetermined amount only when a specific parameter is triggered. This makes it fairly simple to install the parameters of policy — if X amount of rain falls, the homeowner is paid X — into a self-executing smart contract, and this formula can be followed across the many forms of parametric policies. These parametric insurance policies are uniquely suited to smart contracts built on the blockchain, and adopting the technology could save insurers and policyholders a boatload in administrative costs. Because parametric insurance policies are defined by specific parameters, the subjectivity that is required to determine damages in traditional insurance is not in play, rendering the human element of claims processing virtually moot.