Fraudulent claims pose the biggest challenge to insurers around the globe. As per a 2017 Mckinsey & Company report, five to ten percent of insurance claims are fraudulent. It costs non-health insurers in the U.S more than $40 billion a year. The report suggests that blockchain can provide cross-industry distributed ledgers of external and customer data to identify and prevent fraud. Blockchain application for the insurance sector can increase profit by preventing frauds as well as revenues by enhancing under-served, fraud-ridden markets.
In practice, blockchain does not hinder fraud, but it makes it easier to trace them.
In its early days, blockchain technology was predominantly used for secure data storage and value transfer, for instance, in cryptocurrencies. However, its applications have now spread to different industries with the addition of technologies like smart contracts.
A blockchain is an advanced form of distributed ledger technology, which can hold records of every key transaction in the network. Blockchain algorithms distribute the ledger simultaneously on several different computers in multiple locations with different owners. It ensures that all transactions occurring in the network appear on all connected nodes. While nodes can see and verify transactions, they cannot alter or change them without consensus.
Additionally, a blockchain solution can also record predefined business conditions using “smart contracts.” With blockchain smart contracts, an application can automatically trigger transactions when participants in it fulfill specified conditions. For instance, if a flight gets delayed, it can trigger payments as per stipulated terms and conditions.
So, do we require blockchain technology to deter insurance fraud, or is it more effective to store all insurance data on a single centralized database?
There are two unique advantages that blockchain provides to prevent fraud. First, a blockchain’s decentralized validation enables it to operate in distrusted situations. For instance, when there is no consensus on who should be the trusted party to run the centralized database. Second, data replication on the distributed ledger makes manipulation significantly more difficult in comparison to a centralized database.
Essentially, the advantage of blockchain technology with smart contract functionality is that insurers no longer need to trust one another. If deployed correctly, it can enable transparent and trustless data exchange between insurers and other agencies. It will significantly increase each insurer’s ability to combat fraud in personal and commercial insurance.”
Blockchain platforms like Hyperledger Indy can enable insurance companies to create and manage identities and personal information in a more effective way. For instance, if a fraudster claims insurance benefits for a dead person, the insurer can immediately access death certificates stored on the blockchain.
Fraudulent jewelry claims cost insurance companies nearly $2 billion a year. However, a provenance tracking platform built on blockchain can track individual gemstones like diamonds right from the mine to end-consumers. In addition, it can disclose the (encrypted) identity and location of each entity involved in the stone’s supply chain to all participants. Authenticating provenance is the key to build trust among stakeholders and mitigate fraud.
Blockchain can also serve as a platform to digitally issue, manage, and track reports encrypted on the blockchain. Using a private blockchain solution, the records can be made available exclusively to insurance companies that require them.
Blockchain technologies have the provision to use different consensus algorithms to confirm and validate transactions and events. For example, a smart contract will trigger a claim if all nodes in the blockchain confirm a specific event using the consensus mechanism, like a delayed flight.
Another important application of blockchain is the removal of human involvement from claims payment processes. Insurance companies cannot deny payouts if an airline flight is late by three hours late. It is because the smart contract will receive flight delay data directly from air traffic controllers and automatically trigger payments if the delay exceeds two hours. Effectively, the combined use of blockchain and smart contracts can automate several critical operations and processes.
Blockchain applications can eventually reduce insurance fraud by as much as 20% to 40%. However, our blockchain experts at Oodles recommend that blockchain should be combined with other technologies like smart contracts, IoT, and machine learning to prevent fraud in a better manner.