Blockchain Insurance: How Distributed Ledger Technology Is Shaping the Future of Insurance

Patrick Szakiel
Patrick Szakiel  |  May 28, 2019

Blockchain has been lodged in the public consciousness for a while now. 

Much of the hype surrounds cryptocurrency and customer-facing applications, but perhaps the greatest impact blockchain can have lies at the intersection of the business-to-business (B2B) and business-to-consumer (B2C) spaces.


5 areas blockchain insurance can improve the insurance industry 

The benefits of implementing blockchain technology include immutable records with easy-to-track audit trails, smart contracts that automatically execute, permission-based records access, and fraud detection. Blockchain technology will affect every aspect of the insurance industry, but it remains to be seen what the timeline will be.

1. Insurance fraud detection

Costing the industry more than $40 billion per year, fraudulent claims are a thorn in the side of insurance providers; it goes without saying that reducing the frequency of fraudulent claims would be a positive development for the entire industry. There are multiple types of insurance fraud, including premium diversion, fee churning, asset division and workers’ compensation fraud. These common schemes have a greater impact during times of disaster, when massive numbers of claims are processed and paid out to policyholders. The potential for a fraudulent claim to slip through the cracks and get paid out is higher during these periods because of the volume of claims.

Fraud detection is one significant benefit of insurance blockchain products. The immutable record provided by a provider’s blockchain prevents multiple claims from being filed from the same accident. Each policy will be housed on the blockchain, and every action taken by the policyholder or insurer will be included in that record. Customers may one day be required to provide biometric information before they can upload data to blockchain. This way, only verified data ends up recorded. This is a top selling point of switching to blockchain, as the records housed there are said to be immutable.

2. Insurance claims processing

Insurance claims processing and management is a portion of the industry ripe for disruption — and blockchain technology in particular.

Physical asset tracking, enabled by the internet of things (IoT), is another way blockchain technology improves claims processing. Physical assets are tracked using internet-connected sensors; changes in an asset’s condition are tracked and added to the asset’s record housed on the blockchain. If a triggering event that falls within the parameters of reimbursement occurs, a smart contract automatically executes and releases funds to the appropriate claim holder. Automating the claims process is a tall task, but multiple insurtechs are working to solve this issue. Companies like DropIn are producing solutions to make claims processing as easy and painless as possible.

Currently, insurance claims processing programs are not leveraging blockchain technology.  If they did, they might be able to streamline the entire claims process by syncing claim actions with the blockchain record associated with a particular asset.

3. Smart contracts in insurance

Smart contracts are a key use of blockchain technology, specifically, the Ethereum blockchain, which was designed for the creation and execution of smart contracts. The insurance industry has particular use for contracts housed on a blockchain that automatically execute. A system like this significantly reduces the amount of staff needed to process and reimburse claims. The technology would be a two-layer system. First, a customer with a claim submits it along with relevant documentation (photos, descriptions, etc.) to their provider via a consumer-facing application on their mobile device. The claim is processed by an artificial intelligence-powered engine, which determines if the claim should be flagged for further review due to fraud concerns or if it warrants immediate reimbursement.

From there, assuming the analytics engine determines the claim is legitimate and warrants reimbursement, it gets recorded in the blockchain as a “triggering event.” This triggers the automatic release of the appropriate funds to the policyholder. Smart contracts might well be the insurance contract of the future.

4. Health insurance blockchain records

Another fascinating possible use of blockchain technology in the insurance industry is in health records. The health records industry is massive, expected to hit nearly $40 billion by 2022. Medical providers launched their electronic records management systems independent of each other and for years, strict laws governing data privacy largely prevented data sharing in the medical world.

With encrypted blockchain records, however, data sharing between medical practices and health insurance providers is streamlined and much easier. HIPAA compliance, which is an impediment to data sharing between health care providers, still needs to be addressed by the new technology.

5. Reinsurance

“Reinsurance” refers to insurance that is purchased by an insurance company. Essentially, it’s insurance for insurers. Reinsurance is necessary in cases of catastrophic events that trigger the payment of many policies on an insurer’s books.

Reinsurance requires a lot of information sharing between the primary insurer and the reinsurer (cedent). This communication is currently stilted by the lack of streamlined and consistent data storage practices, leading to a lot of wasted effort on both sides. Eliminating the difficulties of data sharing and allowing both cedent and insurer access to the same data via permissions on a blockchain would save a great deal of money.


Difficulties in implementing blockchain technology in the insurance industry

There is a multitude of difficulties that accompany an insurance provider’s foray into the world of blockchain. These include the complex insurance contracts that account for precontractual disclosure obligations and other obtuse minutia. Automation requires answers for every eventuality, and all possible customer routes must be addressed adequately prior to implementation.

One way to alleviate problems with blockchain implementation in the insurance industry is to include write-in human intervention escalations when appropriate. The automated paths written into the blockchain should be able to handle the majority of cases, but for situations riddled with ambiguity, a human officer is needed to investigate and make a final determination.


The future of blockchain in insurance 

The widespread implementation of blockchain in the insurance industry is likely a good ways away. The transfer of information to blockchain is difficult, and in the case of a successful 51% attack — where will the backups be housed?

The likely answer is that even post-implementation, critical records will be housed on existing legacy systems or in secure cloud environments to prevent data loss. The blockchain will be the ultimate source of truth, but to maintain insurance against data loss, information will be stored in multiple systems.

The most interesting potential development within the insurtech industry lies in the intersection of all subsets of insurance technology. Ultimately, the future of the industry will involve integrated insurance suites that keep all records on a blockchain, provide automated claims processing and reimbursement (filtered through a fraud-detecting AI application), automatically update regulatory policies and provide customer-facing self-service portals through which nearly all key actions can be performed.

The transitory period will likely see consumers and insurers experience adverse conditions, as the change represents a significant technological shift. Any significant disruption or evolution should be viewed as a growing period, and storms must be weathered for the whole industry to benefit.

Interested in the insurance technology landscape? Check out our article on insurtech!

Patrick Szakiel
Author

Patrick Szakiel

Patrick Szakiel is a Research Specialist at G2 Crowd. He focuses on the vertical software space, with particular emphasis on the legal and education industries, and recently helped launch G2’s Greentech space. You can find Patrick on LinkedIn.