As technology grows more-advanced and affordable, insurance companies are deploying increasingly effective tools to combat fraud. Telematics, wearables and a host of other tools that comprise the Internet of Things are being more widely adopted. Machine learning, artificial intelligence and predictive analysis improve fraud detection by helping make sense of the vast influx of IoT data.
And now comes blockchain. This advanced tool offers yet more potential to transform the insurance industry — and fraud fighting with it. Insurance transactions such as claims and policy applications are more secure and transparent when conducted via blockchain.
Fraudsters will find it virtually impossible to forge or alter documents or transactions sequestered behind the digitally armored blockchain wall. If the insurance industry possesses the will and resources to standardize transactions with blockchain, the system will quickly expose scams and lock them out of the system early in the transaction chain. Complex schemes such as forged medical bills from staged crashes will diminish. One-off claims such as an uninsured driver faking the date of a crash will be exposed. So will anyone offering forged insurance policies such as workers compensation. A new era of security against fraud is possible the more blockchain becomes adopted industry-wide.
Securely share information
Blockchain technology allows insurers and individuals to immediately and securely share information without third-party oversight. Users share a database maintained by a network of secure computers connected to the internet. That database is a decentralized ledger that permanently records transactions in chronological order across that computer network. Instead of each party keeping separate records, which could be lost or altered, the transactions are recorded permanently on the decentralized ledger (blockchain). All parties can access the blockchain ledger.
A blockchain can be applied whenever you have multiple parties that may not fully trust each other but need to share information such as claims or fraud data. Blockchain promises to remove the need to trust a third party. Instead, you trust the network-agreed dataset contained in a blockchain that is visible to all involved parties.1
Note also that Bitcoin and blockchain are different: Blockchain makes cryptocurrency like Bitcoin possible. Bitcoin is simply the most-prominent early use of blockchain.
Let’s use an Excel spreadsheet as an example to show how efficiently blockchain works: Suppose 10 insurance companies want to share claims or anti-fraud information, on an ongoing basis and without using a third-party. An insurer employee might enter its transaction information onto an Excel spreadsheet and send it along to Insurer #2, which also would enter its information, then send it along to Insurer #3 and so on. When an insurer wants to enter a new transaction, it would have the master spreadsheet sent from whoever had it last, then enter the new data onto the spreadsheet. This process is slow and tedious — and familiar to anyone who uses an Excel spreadsheet with a group.
“… a rogue employee or bad actor might change the spreadsheet data without the other parties knowing.”
Now imagine 50, 100, 1,000 or more insurers wish to track that information — vast volumes of claims or fraud investigative data. That includes bills by medical providers or detailed auto policyholder information. Accurate and timely tracking of the sought-after information is now virtually impossible with a spreadsheet, and creates a host of issues. First, only one insurer can control and input information on the spreadsheet at any time. Second, a rogue employee or bad actor might change the spreadsheet data without the other parties knowing. Third, the spreadsheet always has a single point of failure. If the insurer’s computer or server with the latest spreadsheet version was destroyed, so too would the entire spreadsheet.
Blockchain a digital register
Blockchain is like a highly elevated Excel spreadsheet — a digital ledger of transactions or records. Except that blockchain is secure and efficient. When new information goes onto the ledger, it syncs with every user’s computer in real time, no matter how many.
To create the ledger, an employee uses a web interface or app to set up a private blockchain (known as a permissioned network). It requires an invitation to join. Each member of this private blockchain has a private encryption key (like a password, yet stronger). They enter the key on the web interface or app to access the private blockchain and enter transaction information. The network of other computers in this private blockchain confirms the information came from a valid user (using a public encryption key associated with that employee’s company).
Once verified, the transaction information (called a block) is added to the ledger (called the chain), which exists on every user’s computer. All entries on the blockchain are timestamped and electronically linked to prior transactions using cryptographic algorithms. This ensures the data cannot be tampered with, and that the record is absolute and irreversible.
Because the full chain of information exists in duplicate on every computer in that network, it has no single point of failure like the Excel spreadsheet. If a hacker tries to alter information on a single copy of the blockchain ledger, the other networked computers will reject the alteration as inconsistent. So, to tamper with this blockchain, the hacker would need to hack every encrypted transaction in the chain on every separate computer in the network, all at the same time. This currently is impossible. The insurers now have an incontrovertible, irrefutable and real-time record of all transactions — which they can view at any time. No central authority is needed to input, verify or maintain the information. Users of a given blockchain can create receipts at each point in the claim cycle. All parties will have access to verified claims transaction data, thus making fraud that much harder to get away with.
Business blockchains are permissioned networks, not public networks. So each party knows every other party in the network, and is granted permission to transact with each other. Full data transparency, security and trust can be achieved in this way.
Blockchain is peer-to-peer, encrypted and eliminates the middleman to verify transactions. This makes for immense applications of blockchain technology. Some non-insurance examples include the elimination of ride- hailing apps to connect passengers to drivers, using smart contracts that automatically execute without lawyers, and as with Bitcoin, sharing digital currency without banks.
“ … blockchain could create significant anti-fraud advantages for insurers that adopt it.”
Blockchain for combating fraud
Many insurers and other players in the insurance market see blockchain’s potential to disrupt the industry, including combating insurance fraud.
Because insurance is so data-intensive, blockchain could create significant anti-fraud advantages for insurers that adopt it. A number of insurance companies are experimenting. They seek to improve efficiency, lower transaction costs, enhance customer experience, improve data quality, increase trust among parties, and support auditability.2
Most insurers now invest in public and subscription data to combat fraud. This data can help identify patterns of fraudulent behavior from prior transactions. Yet the results often are inconsistent and incomplete due to the difficulty of sharing sensitive and personally identifiable information among different organizations. Blockchain technology can enable better coordination among insurers to combat fraud. It can facilitate the sharing of data and evidence to help identify malicious, fraudulent behavior. Insurers can create a blockchain with specified user access controls to protect the data, and input information that would help insurers across the industry identify potential fraud.
Many obstacles must be overcome before blockchain becomes widely implemented as a widely used anti-fraud tool. Not the least of which is the will to tackle such a large, transformative breakthrough on an industry-wide basis. Other challenges such as government oversight, maintenance requirements and legal issues, like potential transfers of personal data, also must be met. Yet insurers have a strong incentive to adopt and develop blockchain applications3 to combat the estimated $80 billion in fraud across all lines of insurance.4
Moreover, the present method of processing insurance claims is complex and lacks common standards. That leads to a constant need to reconcile data with large systems, and often duplicate processes. This can result in high costs and lengthy processing times — and raises the chances of false positives for fraud investigations.
Blockchain lets insurers create receipts at different points in the claims process. Doing so embeds an immutable and auditable record of all claim activities. And all blockchain parties — including regulators — can review the record. Transaction costs and transactional risk could fall, and trust in the records could increase.
“Through blockchain, insurers also can reduce fraud related to the integrity of a policy or claim or vehicle ...”
Reconcile claims in real time
Independent parties can work with universal data sources, and automatically reconcile claims and policy applications among all participants in real time, with a single view of the entire exposure data chain.5 This results in increased transparency for all participants, simplifying the insurance process and potentially reducing fraud.
Through blockchain, insurers also can reduce fraud related to the integrity of a policy or claim or vehicle by maintaining the integrity of the asset through various owners. Blockchain technology can minimize:
• counterfeiting through digital certificates that would establish ownership;
• double-booking, or processing multiple claims from the same vehicle accident; and
• altering documents or contracts.
Blockchain also can help detect patterns of fraudulent behavior and verify the identity of claimants and policyholders. For example, blockchain can make detection of fraudulent goods easier. Products like electronics, luxury goods, and pharmaceuticals are labeled, and their history and supply chain stored in the blockchain. Users could check for counterfeit products, diverted or stolen goods, and fraudulent transactions, thus making fraud detection easier.
Everledger, one of several companies in this arena, has placed more than 1 million diamonds on a blockchain. It will be nearly impossible for a swindler to lodge false insurance claims for overvalued “stolen” diamonds. Each diamond’s unique characteristics like certificate number, color, and carat are entered on the blockchain. The certificate number is inscribed on the diamond’s crown or girdle, replacing paper certification. Through a computer scanning tool, the diamond’s information is accessed and its provenance determined. Everledger has also added bottles of wine and fine art to a blockchain.
Blockchain can validate the authenticity, ownership, and provenance of goods, and the authenticity of documents such as property titles, land titles, loan documents and medical reports. This could place an even-greater barrier against fraudulent claims for ownership of goods or use of falsified documents in insurance claims.
Digitizing all existing historic land records from across the U.S. and placing them on a blockchain is a daunting task. Yet once all records are entered, this will reduce the time and expense of checking the validity and contents of the records. It also will reduce the risk of fraudulent land records because any changes to the original must be recorded on the blockchain.6
Blockchain also can prevent fraud by providing digital authentication solutions for know-your-customer (KYC) data, whereby customer data is verified and placed in the blockchain. Insurers thus can detect fraudulent behavior related to a specific identity. Insurers also can perform KYC checks, comply with anti-money laundering and anti-bribery requirements, and prevent medical ID thefts. Stronger identity management also means staged crashes will be harder to foist, plus other insurance scams involving cloaked or forged identities.
Customers also can submit the verified data to different insurers for different transactions using the same blockchain tool. Onboarding new customers thus becomes much faster because there is no need to repeat the full identification and verification process. Collaboration on suspect claims also becomes more-open and effective because the data is complete, varied and trustworthy.
Auto and homeowner policies and claims also could be placed on a blockchain, and automatically validated by the network. Only valid claims thus would be paid. If multiple claims are made for the same vehicle damage, for instance, the blockchain would reject the claims because it knows a damage claim already was made.
Claims payouts would automatically be made when certain conditions are met, through the use of smart contracts on the blockchain. Smart contracts are small programs running on a blockchain that initiate certain actions when predefined conditions are met. Because blockchain would streamline the payment process, the cost of paperwork is almost removed — along with the risk of fraud.7
For example, AXA Insurance recently introduced Fizzy, a flight-delay insurance product that uses the Ethereum Blockchain to store insurance information and process claims. Customers can use Fizzy to insure their trips if their flight is delayed by two hours or more. The blockchain stores a record of the insurance contract itself within a smart contract, and also serves as a vehicle for triggering the payment to the customer once the two-hour mark is passed.
The entire process is done electronically and automatically, with no wait, documents or human participation. Fraud is reduced by having independently verified data trigger payment of the claim, as opposed to relying on the customer’s or another party’s version of events.This type of parametric insurance can be especially useful in insuring against natural disasters, with payments being automatically made in the event of triggers such as hurricanes of a certain force.
The applications of blockchain to combatting insurance fraud — and for the insurance industry generally — are numerous. These applications are still in their infancy. Some insurers are taking first steps to implement blockchain for varied operations. Blockchain can make immense and positive changes that make insurance fraud several degrees of magnitude harder to get away with. Basically, blockchain hardens the insurance system. The system will be far more difficult to penetrate, and policyholder data far more secure.
The future of blockchain as a game-changer for insurance, and insurance fraud, is far from assured in these early days of experimenting and study. Yet what is certain is that insurers that successfully adopt blockchain will gain a significant advantage over competitors that do not. This will include the savings from greatly improved fraud prevention and detection.
About the authors: Daniel Marvin is a partner in Morrison Mahoney LLP’s New York office. He focuses his practice on data privacy, data security and cyber-insurance. He also counsels clients in all aspects of data breach prevention, detection and mitigation. Roberto Alonso is an associate in Morrison Mahoney LLP’s New York office. His practice focuses on cybersecurity, privacy and data protection.