A primer on the technology behind Bitcoin and how it might transform the insurance industry.
By Wesley Todd , Carly Cohen
It is no secret that we are living in the golden era of disruption. Whether your disrupter of choice is Airbnb, Uber, or Amazon, there is no denying these and others have successfully created new markets that have upset existing markets and displaced leading providers.
A lesser known, but no less impactful, disrupter is bitcoin. Bitcoin, a cryptocurrency and payment system, emerged on the scene in late 2008, interrupting the banking industry. The bitcoin system is peer-to-peer and allows for transactions to take place directly between users without an intermediary. The elimination of an intermediary results in smaller fees for merchants than those imposed by credit card processors.
Bitcoin continues to disrupt the financial industry nine years after its creation. Perhaps more importantly, the technology underpinning the digital currency, called blockchain, is emerging as a disrupter in its own right. Blockchain technology can be applied to many different industries, and there is great potential for it to disrupt our very own insurance industry.
Blockchain Technology Explained
A blockchain is a data structure or database that makes it possible to create a digital ledger of transactions and share it among a distributed network of participants. Entries in the ledger are synchronized to all ledgers in the network. In traditional blockchain scenarios, participants tend to include banks or securities firms.
The blockchain uses a decentralized validation process to store records and transaction data. Instead of using a central authority to validate a transaction, when someone seeks to add new transaction data, each participant on the network runs algorithms to evaluate and verify the proposed transaction. If a majority of the participants verify and agree to the transaction, it will be approved, and a new block is added to the chain (hence the term “blockchain”). The complexity of the validation process has proven difficult for hackers to simulate, increasing the appeal of the technology.
A blockchain network can be public or private. Bitcoin, for example, uses a public blockchain network, meaning anyone can participate and contribute to the ledger. On the other hand, permissions can be created so that participants see only the appropriate transactions. Whether public or private, blockchain networks are secured using cryptographic technology, such as scrambling text or using hash algorithms.
Another appealing feature of blockchain technology is its redundancy. Because the blockchain is usually replicated throughout the network of participants, safeguards exist and are built into the process. This is different from transaction technology that does not use blockchain. In those instances, the organization uses its own system and must have in place its own redundancies and safeguards.
It is easy to see why blockchain is an industry disrupter. In the banking industry, for instance, blockchain’s shared database technology increases the speed and reduces the cost of settlement and clearing activities by automating back-office functions and linking systems across the industry.
Blockchain Technology and Insurers
Blockchain use cases have been identified in the banking industry, and the insurance industry has been taking note of the technology, as well.
In October 2016, a group of Europe’s largest reinsurers launched the Blockchain Insurance Industry Initiative (B3i) to assess how blockchain technology can be established as a viable tool for the industry. Reinsurers are exploring whether the technology can be used to develop standards and processes for industrywide usage.
In June 2015, insurance behemoth Lloyd’s of London issued a lengthy emerging risk report on bitcoin titled, “Bitcoin: Risk Factors for Insurance,” which was commissioned to assess the risks involved in insuring bitcoin operations. While Lloyd’s does not officially endorse insuring bitcoin in the report, it notes that the technology behind bitcoin, including blockchain, is maturing.
As blockchain technology continues to progress, it is increasingly important for insurers to continue to monitor its development and consider use cases and potential innovations in the insurance industry. Let’s explore four reasons that the insurance industry might adopt blockchain technology.
1. Fraud Detection. Fraud is an ever-growing threat in the insurance industry. According to the Coalition Against Insurance Fraud, fraud syphons away $80 billion per year across all lines of insurance. Fraud comprises about 10 percent of property-casualty insurance losses and loss adjustment expenses each year, which equates to an astounding $32 billion each year. These numbers mean that fraud accounts for five to 10 percent of claims costs for U.S. insurers. As fraud continues to grow and affect insurers and policyholders alike, it is increasingly important to identify new and different ways to combat fraud.
Fraud in personal injury insurance potentially could be thwarted using blockchain, e.g., in staged car accident schemes, which usually involves two people intentionally crashing their cars into each other to cause damage. The “victims” of these car accidents then go to fraudulent personal injury clinics that file claims for therapy treatments that are never performed. Claims such as these are made against multiple policies held by different insurers, making it difficult for the insurers to identify the fraud.
However, when cross-industry data is shared via blockchain, it becomes easier to detect schemes. Using blockchain, insurers can isolate incidences in which one insured files multiple claims with multiple insurers arising from the same incident. Similarly, insurers can use data in their blockchain to identify fraudulent personal injury clinics that are churning out large numbers of claims. This is just one small example that can have a huge impact.
2. Increased Efficiency. Perhaps the most obvious use case for blockchain technology in the insurance industry is for increased efficiency. During the application process, for example, policyholders may experience delays related to verification of identity. A cross-industry blockchain database can automatically verify policyholder identity during the application process.
One startup company has created an early-stage blockchain solution that could prove handy in the application process. The solution allows a customer to enter his identity data just once. Going forward, the customer can grant different companies access to that identity data during the contracting process. By taking advantage of this type of technology, insurers can provide a seamless experience for new customers and enhance policyholder satisfaction.
A cross-industry blockchain database also can automatically verify services provided to the policyholder by doctors, contractors, and other vendors. Insurance companies often are bogged down by delays in communicating with various vendors, especially doctors, to ensure that services provided to the policyholder are legitimate. Blockchain can alleviate this bottleneck in the claims handling process, increasing efficiency and saving man-hours across industries.
3. Faster Claims Handling and Back-Office Transactions. Insurance companies can make payouts for claims via a blockchain-based payments infrastructure, which is similar to bitcoin’s infrastructure but with heightened security. Because of the time savings associated with processing payments through a blockchain-based infrastructure, policyholder satisfaction during the claims handling process likely will improve.
Similarly, blockchain can be used to process payment for repairs, which often is a lengthy process that is slowed down by the use of an intermediary. Insurance companies also can pay their wide range of vendors via the blockchain-based payments infrastructure, creating a more streamlined process for handling accounts payable.
4. Improved Data Quality. The insurance industry operates on the principle of risk, and data is crucial to accurately assessing risks. As a result, collection and processing of data are extremely important in this industry, and so, too, is the assurance that the data is accurate.
Blockchain technology will contribute to improved data technology in the insurance industry because of a unique feature: immutability. Unlike in traditional databases, data in the blockchain cannot be altered. Put in simple terms, in a blockchain, every block has a hash and also contains the hash of the previous block in the chain. Every block is immutable and is linked to the chain of previous blocks. Each block also is timestamped by the network using a digital fingerprint. Any attempt to change data is apparent because the new fingerprint does not match the old one. As a result, it is nearly impossible to tamper with the data without risking detection, resulting in more reliable data for insurers.
Insurers, take note. Now is the time to understand and evaluate this evolving, groundbreaking technology and explore the endless possibilities for use cases. The reasons discussed above only scratch the surface of the possibilities that can result from use of blockchain technology in the insurance industry. It appears that not only will blockchain disrupt the insurance industry, but also it will transform it.
Experts caution that the implementation of blockchain technology in the insurance industry could be years away, mainly because its success depends on industrywide adoption together with the collaboration of competitors, suppliers, policyholders, and many others. There are regulatory considerations, including privacy and security matters. However, making efforts now to understand both the pitfalls and potential benefits is key.
As innovators in the insurance industry, learn about blockchain technology; educate yourself, your peers, and your colleagues; and stay on the cutting edge of this innovation that might disrupt and transform our industry. It will take a few innovative and forward-thinking insurance executives like yourself to pave the way for the transformation.