Insurance Applications and Use Cases with Blockchain Technology
Insurance has a place in just about every industry. Dragonchain is very familiar with using blockchain to support processes related to insurance. We briefly touched upon these issues in such fields as healthcare, liability in connected vehicles, and even in real estate where fires and casualty insurance is a mandatory process. Dragonchain even automates insurance processes through smart contracts, oracles, and cron jobs. The applications for blockchain technology that can be applied are much broader than even these listed. Let’s dive into some potential applications to consider when making your company future proof.
It’s important to note that when we talk about implementing blockchain within the insurance industry we aren’t necessarily looking to eliminate intermediaries such as the insurance company. Blockchain technology should be used to increase the efficiency of processes that are currently time-consuming, such as excessive checks or a lengthy claim processing due to lack of resources or priority. More importantly, through decentralization - of identities too - blockchain allows for trustless data sharing between different stakeholders who traditionally not always were inclined to work together so closely.
The role of the insurers is to assume and manage risk in return for a premium from the insured. The premium for each policy, or contract, is calculated based in part on historical data aggregated from many similar policies and is paid in advance of the delivery of the protection. Blockchain technology can automate the ledgering of data from a diverse set of locations while providing immutable records for accounting needs.
There are three main insurance sectors:
- Property/Casualty (P/C)- auto, home, and commercial insurance
- Life/Annuity products
- Private health insurance- written by insurers whose main business is health insurance.
- Life/Annuity and P/C insurers can also write health coverage.
Although each of the sectors has varying regulatory bodies they all operate in much of the same way. Blockchain can improve efficiencies, reduce risk, and cut costs across the board in any sector. Let’s touch on a few.
A common set of standards, known as generally accepted accounting principles, or GAAP, established by the independent Financial Accounting Standards Board (FASB) governs the corporate accounting and reporting for an organization. Blockchain can ensure that companies are following said standards with the use of smart contracts to define terms to any process.
Regulators require insurers to show they can adequately support policies the policies they issue. Annual financial statements detailing the insurers' assets and liabilities, income statements, balance sheets, and surpluses, and changes in accounting throughout the year are included in the insurers' annual statements. Asset valuations, revenues including expenses and profits, and liabilities and reserves, all also need to be documented in financial statements for regulators. Blockchain makes for an ideal environment to track financial components. Dragonchain takes it a step further by allowing for selective transparency to keep private information private, yet provide regulators with the information they need to satisfy regulatory requirements.
An insurance score is a credit rating used by insurance companies to assess a potential insured consumer's level of risk. Developed in the 1990s, the insurance score is used to address personal judgment bias for the underwriter. The score is used in conjunction with other factors depending on what is being insured. For instance, auto insurers will take geographical area, previous crashes, and the age and gender of the driver when determining insurance premiums. Whereas with homeowners insurance they include the home’s age and construction, location and proximity to water supplies for firefighting, and flood risks. Personal information such as income, ethnic group, age, gender, etc. is not considered when calculating an insurance score.
Several studies in 2003, 2004, 2005, and 2007 all came to similar conclusions in that statistically credit scores and insurance scores do bear a strong relationship. The relationship is likely a behavioral one in that most people who manage their finances well tend to manage their risk as well. The result is roughly 50% of policyholders can pay lower premiums because of good credit.
Blockchain-based data sets can assist actuaries when analyzing risk levels for policies. Furthermore, Dragonchain’s loyalty system can incentivize behavior to assist insurers as well as the insured to decrease risks and decrease premiums.
Insurance fraud is any act committed to defraud any point in the insurance process for financial gain. Auto insurance, workers' compensation, and healthcare tend to have the highest incidence of insurance fraud.
Any of the following parties can commit insurance fraud by misrepresenting facts, submitting false claims for injuries or damage that never occurred, and staging accidents: Organized criminals Any party within the insurance sector Ordinary people
In an industry that consists of over 7000 companies bringing in over $1 trillion in premiums each year, it’s no surprise insurance fraud is ripe for insurance fraud to the tune of over $40 billion per year.
According to The National Federation of Independent Business (NFIB), fraud within workers’ compensation can cost insurers and employers $6 billion a year. Fraud seems to touch every industry. Here are just a few.
Auto Insurance Fraud
Auto insurance fraud includes several ways of defrauding all parties including staging accidents, false claims on physical injury and damage, selling salvaged vehicles, and false reports of theft.
Vehicles that have water damage from flooding can be rebuilt and re-sold. However, some re-sellers of such vehicles will switch serial numbers plates hiding the fact that the vehicle was damaged. To combat the problem some states adopted rules that require the words “flood vehicle” be included on the titles of damaged vehicles.
The National Motor Vehicle Title Information System (NMVTIS), a database that assists states in tracking titles, has 98% of states reporting data into the system with Vermont, Kansas, Hawaii, and the District of Columbia in the process of joining.
A robust blockchain-based supply chain system can track car titles, parts, and repairs to protect the insurance companies and the insured against counterfeit parts and high costs.
Every facet of the healthcare system is ripe for fraud and abuse. According to the National Health Care Anti-Fraud Association (NHCAA), it is conservatively estimated that healthcare fraud accounts for 3% of the total $3.6 trillion in healthcare expenditures each year. Some government and law enforcement agencies place the loss as high as 10%.
Any party within the healthcare industry, including physicians, hospitals, nursing homes, ancillary staff, medical suppliers, and more can defraud the system by doing the following:
- Billing for services not rendered
- Upcoding services and medical items
- Duplicate claims
- Unbundling (billing in a fragmented fashion when required to be billed together)
- Performing excessive/unnecessary services
- Resale of legal narcotic/prescription drugs/medical devices.
- Identity theft
Workers Compensation Fraud
The patient can add to insurance fraud through false workers' compensation claims. False claims can include:
- Exaggeration of symptoms
- Working while allegedly disabled
- Not reporting income
- False claims that never occurred
- Claiming non-work-related injury as a work-related injury
The healthcare sector and the workers' compensation sector see overlapping problems with fraudulent claims. Blockchain can address both sectors. A blockchain-enabled supply chain system is pivotal in tracking medical devices and pharmaceuticals. Smart contracts can assist in proper billing and payments to ensure everything is proper. Automated processes will flag duplicate claims and alert when charges should be bundled, or better yet not allow for the separation of charges in the first place.
Catastrophe-Related Property Fraud
When disaster presents an opportunity fraudsters will leap into action with false claims of weather-related damage. Opportunistic fraud has necessitated the use of forensic meteorologists to verify weather conditions for an exact location and time. The certifiable weather records are verifiable in court and can be used to validate claims.
Insurers’ Legal Recourse
To combat fraud insurers can withhold payment against claims but an insurers’ legal recourse is limited by its ability to provide proof for law enforcement and evidence for the courts. Most insurers have established special investigation units (SIUs) to help identify and investigate suspicious claims.
The FBI, the Property Casualty Insurers Association of America (PCI), the National Insurance Crime Bureau (NICB), and the International Association of Special Investigating Units (IASIU) have joined forces to establish education and training programs to help insurers fight fraudulent insurance claims.
Use of Technology to Combat Fraud
Technology is proving pivotal in combating fraud by cutting the time needed to recognize fraud. Advancements in analytical technology, predictive modeling, link analysis, and artificial intelligence, among other tools help uncover fraud. By consolidating databases and sharing information these systems can identify anomalies.
Blockchain Powered Insurance Platform
One of the unique advantages of blockchain technology is that transactions are permanent and unable to be altered. In the case of Dragonchain, more flexibility is offered through a hybrid blockchain approach. This allows for a fully closed and private environment at all times, with selective public exposure when needed.
This can be helpful in disputes with customers or other external parties. For instance, when an insurance company needs to prove to someone that this customer accepted these policies or terms and conditions on any given day and time. Or to prove that you informed a customer on any given day and time about changing terms, without anyone disputing such strong evidence.
Any insurance platform will become a better one by transitioning into a blockchain-powered insurance platform, with trust and transparency at its core. In most cases, this can already be achieved by simple RESTful API integrations with insurers existing IT systems and infrastructure. A proof driven platform is a great way to get started and then expand more with complex automation through smart contracts and fraud detection algorithms.
Whether a company uses artificial intelligence or machine learning, with proof every step of the way, blockchain has all parties covered. As a side benefit, through improving operational efficiency with smart contract automation and detection algorithms, billions of dollars will be saved globally.
As mentioned many times, data is the most valuable asset we have. Insurance companies will play a critical role in - proper, secure, and privacy-friendly - data management.
We discussed one prime example in the above post on connected vehicles. IoT devices in transport - whether it’ll be cars, planes, cargo, or unidentified flying objects... ;-) - capture a wealth of information that insurance companies can leverage. With connected cars, insurance coverage can be handled fully automated, or with minimal checks, due to sensors and IoT devices passing along all required information instantly. Which vehicles were involved in a car crash, who are the owners, which insurance do they have, who was responsible, what is the damage, and so forth.
For a large part, lengthy cumbersome processes can be made drastically more efficient, as long as integration and cooperation between stakeholders (e.g. competitive insurers for data sharing) goes smooth.
Another interesting aspect of this is that insurers could share more data with each other without violating anyone’s privacy or exposing identities by using derived Factors. Blockchain and decentralized identity allow for data management without breaking any legal hurdles or comprising personally identifiable information. Fraud and abuse is a very costly side effect of insurances, and ultimately the good behaving customers bear the costs. One insurance company on its own has fewer data available than two or more combined. And more data allows for more (automated) detection of recurring fraud and abuse cases. Less common fraud and abuse could be identified sooner because the pool of data is much larger by working together, even as competitors. This allows for the consolidation of historic data to identity divergent patterns early on.
KYC and AML
Since we mentioned identities and derived Factors, we can easily jump into the Know Your Customer (KYC) and anti-money laundering (AML) examples. At Dragonchain we have developed a decentralized identity solution named Factor, which is now part of MyFii. This solution is critical to the above mentioned use cases, as this is exactly what allows insurers to safely share customer information. Not just with other insurers, but any third-party integration that may be added over time. Beyond data sharing, it saves costs and resources too, since duplicate processes such as KYC are no longer needed. Blockchain technology and decentralized identities decrease compliance errors and regulatory risks.
Blockchain is slowly making inroads to streamline the insurance industry. With its unique interoperable hybrid platform, Dragonchain stands out as a blockchain leader to integrate traditional insurance databases and systems to each other, as well as to public and private blockchains. Selective transparency secures privacy while providing proof that specific transactions occurred along a set of processes. Factor as an identity solution releases only what is minimally necessary to complete a task. Additionally, Dragonchain’s platform is interoperable with multiple blockchains, insurers can capitalize on an applied security value in the billions within a few months resulting in the ability to provide proof giving them unprecedented protections.
To brainstorm how Dragonchain can automate your insurance process contact Dragonchain today.