The insurance industry is a huge market. For example, in the United States alone, the volume of net insurance premiums paid in 2019 amounted to $1.2 trillion. However, despite such volumes, the industry is experiencing major challenges that cause insurance companies to lose more than $80 billion dollars every year. Most of the problems are fraud, poor or missing data, and general inefficiencies in business processes.
Blockchain can open up new opportunities in insurance, solve some of these problems and significantly modernize the industry:
- The efficiency of blockchain solutions will make the industry decentralized, transparent and more secure, reducing the processing time of requests and the cost of interactions and monetary transactions;
- The reduction of intermediaries and full transparency of public platforms will significantly speed up business processes, reduce their cost and increase confidence in the system and the industry as a whole;
- Smart contracts will automate document flow, insurance payments, reduce fraud risks, the amount of poor quality data (errors, inaccuracies, gaps) and improve the quality of customer service;
- New types of insurance will emerge: parametric (precision) insurance, peer-to-peer (P2P) insurance, microinsurance and others.
Fraud prevention
Issue. The survey, showed that 95% of insurers use various technologies to fight fraud, due to which they lose more than 80 billion dollars annually. And it’s not just a problem for insurance companies: the average American family loses between $400 and $700 in increased premiums each year due to fraud.
Much of the fraud is due to the sheer complexity and inefficiency of information sharing between different market participants, with each party using its own database and being slow to share information with other companies. As a consequence, when insurance claims move from insurer to insurer and reinsurer, the companies transmit minimal data along with the document. This creates opportunities for criminals to submit multiple claims to different insurers for a single loss.
Blockchain solution. Fraud can be addressed with an industry-wide centralized information repository that will have algorithms to detect chronic offenders, repeat claims, data inconsistencies and other signs of fraud. Similar solutions are already in place in other sectors, such as credit bureaus and real estate multiple listing services (MLSs).
Early successes (case studies):
Everledger. A distributed ledger that records diamond transaction histories for each individual stone, producer, intermediary and buyer. Among other things, the platform allows the verification of information on current and previous insurance claims. This helps to detect, prevent and counteract fraud.
OpenIDL (Open Insurance Data Link). A network built on IBM Blockchain that provides efficient, secure and permission-based statistical data collection and sharing. Offers a secure and reliable blockchain environment for storing and selectively exchanging data (policy, premium and claims) with the American Association of Insurance Services (AAIS) as an advisory organization and authorized statistical agent.
Claims management and processing
Issue. Health care insurance is a prime example of how errors and inefficiencies in the claims process lead to unnecessary and often excessive costs that are ultimately reflected in higher premiums and increased costs of health care services.
For example, Change Healthcare’s 2019 report found that 9% of healthcare insurance claims receive a denial that is followed by an appeal. Each appeal response results in a cost of $118 per claim or $8.6 billion in total administrative costs. Insurers offset these costs by increasing the cost of insurance services.
Blockchain solution. The technology enables a single version of the claims document to be created, managed and populated automatically. Thanks to this, it is possible to achieve effective management of relations with the service provider, increase their transparency, speed and flexibility.
First successes (cases):
Insurwave. Platform for marine vessel insurance. Uses smart contracts to accompany all documents related to the support of ship and cargo insurance processes. Insurwave was developed by Guardtime with the participation of EY, AP Møller-Maersk, Microsoft and insurance industry leaders XL Catlin, Willis Towers Watson, ACORD and MS Amlin.
Customer Identification
Issue. Brokers, insurers, reinsurers, banks and others involved in insurance transactions must comply with KYC (Know Your Customer) requirements for all their counterparties. This is a personal identification procedure involving the collection of personal data about the customer, their assets, health, social status and verification of their identity, which requires time, money and manpower.
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In the insurance industry, the KYC procedure must comply with the global anti-money laundering standards put forward by the Financial Action Task Force (FATF) and the International Monetary Fund (IMF), as well as local legislation, if any. There are no separate rules and standards for the KYC procedure in insurance, but it usually takes place in three stages:
Customer Identification Program (CIP). The minimum verification under CIP includes verification of first and last name, date of birth, address and identification number. It requires the user to provide several paper and/or digital documents: passport, driver’s license, social security card, electricity and other utility bills.
Customer Due Diligence (CDD). The due diligence should identify and validate the customer’s purposes/actions and assess the risk of money laundering and/or terrorist financing. Depending on the perceived risk, the verification may follow one of three scenarios: Simplified Customer Due Diligence (SDD), Basic Customer Due Diligence (CDD) and Enhanced Customer Due Diligence (EDD).
Ongoing User Monitoring. A program for continuous monitoring that keeps track of the current data, user status and compliance of the current risk level with the insurance contract. In some cases, a Suspicious Activity Report (SAR) may be required after a routine check if the user has broken the law, is behaving inappropriately, or is exhibiting strange (atypical) activity.
Blockchain solution. Insurers can create or utilize an existing blockchain solution for KYC, where all documents are recorded in a distribution registry and encrypted using cryptography. The documents would only be accessed using encryption keys (public and one-time private) that are available to the client. Using these keys, the client will grant access to the documents for a limited time sufficient to verify them.
This approach will allow users to retain full control over their data, which is important to comply with a number of privacy and data protection legislation. For example, the rules of the European “General Data Protection Regulation” (GDPR). In addition, the move to blockchain will reduce the time and cost of KYC checks.
First successes (case studies):
PwC and Z/Yen prototype. A solution to speed up the user identification process. The network keeps a record of customer documents and evidence of verification by the authority that issued them. Accelerates the procedure and enables the client to retain control over personal data.
IBM Blockchain Trusted Identity. Hyperledger Indy DLT-based platform for identity authentication in accordance with Decentralized Identity Foundation (DIF) and World Wide Web (W3C) standards.
