One financial planning tool that everyone should have—is insurance. Whether it is
- Life insurance used to protect the financial well-being of your family in the unlikelihood of your early demise,
- Home insurance to cover fire and damage to your home,
- Car insurance to cover the repair of your car in the event of an accident, or
- Liability insurance to cover property damage or personal injury if you are at fault.
Insurance is a financial tool that will protect your savings and investments in the event of loss. However, the industry as a whole has gotten a bad rap in a number of areas. Insurance companies are often viewed as companies whose mission is to cancel or minimize claims for the insured. While we expect that insurance companies will be viable and popular, they often do not meet our expectations. “Many insurance businesses face difficult challenges that seriously threaten their survival and existence,” says Anne in Insurance Analyzer. In their struggle to survive, the public often sees the negative side. (Anne)
Insurance companies are often viewed as untrustworthy since they fail to pay claims, or not live up to promises. The competition for insurance companies is stiff—presenting a significant challenge for insurers to be competitive. While most insurers are well managed, many still struggle to stay profitable, and over time, may mismanage their operations. They eventually get discovered, and customer complaints and dissatisfaction add up resulting in lost customers. The biggest challenges faced by insurance companies “include mismanagement, economic instability, lack of trust, and competition among others.” (Anne)
On the other hand, insurers are constantly faced with fraud. Which cost billions of dollars per year. In the balance to provide the best possible customer service, and to mitigate fraud, insurers must be constantly diligent to stay ahead of the curve in all areas of operations.
While there are many blockchain use cases for the insurance industry, this article will focus on fraud prevention as an area where insurers can significantly reduce costs and provide tools to enhance customer experience.
Insurance Industry Blockchain Use Cases
“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.”—Sam Mire
While there are many options for customers to get insurance online, many customers prefer to use the phone to call the insurance agent or broker. Policies continue to be processed by paper, and this can result in errors. Another result is that claims and payments are susceptible to errors. Let’s face it, the insurance industry is complex, requiring interaction with the customer, the insurer, claimants, payouts, third party investigators, and the list can go on.
“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”. (CB Insights)
Fraud Prevention: Detecting Fraudulent Claims
One of the reasons that insurance companies appear to be slow to payout, or settling claims is due to fraud. Fraud can be found in nearly any area of insurance when a claim is made. Unfortunately, claimants often see big dollars, and will incur fraudulent expenses, or make false claims.
“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,” writes Mire. Moreover, congress has done their part. Nearly every state (48 states plus Washington, D.C.) “categorize insurance fraud as a specific crime,” says Sam Mire. (Disruptor Daily)
Yet, fraud costs the industry $80 billion per year, and may cost the average family up to $700 per year in higher premiums. Furthermore, the auto insurance industry has the most prevalent and costly form of fraud—as a direct result of exaggerated or outright fraudulent claims from automobile accidents. The current system of processing claims is complex and lacks common standards—requiring a repetitive need to reconcile data with large systems. This adds to overall expenses and higher likelihood for errors.
Hong Kong & Blockchain vs. Motor Insurance Fraud. The race is on. Rd. https://t.co/2aRDFOz5M3 via @IB_Asia by Gabriel Olano | #MotorInsurance #InsuranceFraud #Blockchain #Automation #Insurance #InsurTech #CSuite
— SVIAccelerator (@SVIAccelerator) January 10, 2019
Blockchain technology uses a decentralized, secured, and shared form of record-keeping. With blockchain, insurers will be able to create transaction receipts at each points in the process. It can create an immutable and auditable record of all claim activity as each part of the claim adds to the chain on the blockchain.
Moreover, all stakeholders to a claim, including regulators, will be able to view and audit the record. With the decentralized nature of blockchain, and built in redundancy, reconciling transaction costs and risks could fall. The result is that trust in the claims records and processes will improve. (Marvin, Daniel)
Insurance companies serve a vital function in society. The very nature of insurance is to protect the financial well being of the customer who makes monthly payments every month. It is unfortunate that many people will intentionally, or unwittingly, engage in fraud. With these costs in the billions of dollars a year, it is hoped that blockchain can be a digital solution to go a long way in combatting loses and saving countless dollars for the insured every month.
Anne, “6 biggest challenges for insurance companies”, https://insurance-analyzer-info.com/6-biggest-challenges-for-insurance-companies/, July 2019
CB Insights, “How Blockchain Could Disrupt Insurance”, https://www.cbinsights.com/research/blockchain-insurance-disruption/, January 2019.
Marvin, Daniel, “Blockchain can block insurance fraud”, Journal Of Insurance Fraud In America, August 2018
Mire, Sam, “Blockchain For Insurance: 10 Possible Use Cases”, Disruptor Daily, October 2018.