How Blockchain Technology Will Mitigate Insurance Fraud

“Systems that live on the internet are constantly exposed to attacks and become more robust. In other words, what we discovered with the internet is that closed and controlled system are not more secure – open systems, open blockchains, are.”
Andreas M Antonopoulos

 

Insurance fraud is a very, VERY big problem in insurance. According to the Insurance Information Institute, fraud adds 10% to all property & casualty losses each year, or approximately $34 billion.

From the same article:

“Fraud may be committed by different parties involved in insurance transactions: applicants for insurance, policyholders, third-party claimants and professionals who provide services and equipment to claimants. Common frauds include “padding,” or inflating actual claims; misrepresenting facts on an insurance application; submitting claims for injuries or damage that never occurred, services never rendered or equipment never delivered; and “staging” accidents.”

In my prior article, I discussed  5 ways in which Blockchain would transform (I used the word revolutionize…either way) the redundancy of the insurance ecosystem, which, would also increase trust among stakeholders. By itself, these 5 improvements I mentioned will drastically change how business is transacted between insurers and policyholders.  In this article, I will discuss two emergent properties of Blockchain technology that I believe will mitigate fraud. It is these two properties that I believe will entice insurers to buy into Blockchain and help it become mainstream.

 

Authentication & Provenance

In our day to day process of buying and selling things to each other, how do we know that what we are buying IS, in fact, what is being sold? Take a diamond for instance. How do we know if the 4C’s (color, cut, clarity & carat weight) are exactly as the seller markets them to us? How do we know if the person or entity selling us the diamond is the actual owner of the diamond? In the vast majority of cases, we don’t know and can’t answer those questions, and we need to rely on third party experts for help. By then, it may be too late. A company in the UK called Everledger is changing that, and they are using Blockchain technology to do the heavy work.

Everledger takes the 4C’s of a diamond along with 14 metadata points via a scan and any laser IDs to register the first link in a Blockchain that can then be used to track the diamond. Think of this as the fingerprint or DNA of the diamond (there can only be 1 correct version). As diamonds are traded globally, buyers can verify the accuracy and ownership of the diamond via the Blockchain. Transactions add new links, and over time, the ability to pass off fraudulent product should drop dramatically. Currently, Everledger  has over 800,000 diamonds registered. Everledger can track the diamond as it is being hawked online at eBay or Amazon (both a big source of fraud) and if diamonds are being transacted over international boundaries. This in no way eliminates fraud, but the Blockchain technology provides so many useful benefits, not just to those of us who wish to not be defrauded, but also to law enforcement and insurers who must deal with the ramifications of the fraudulent transactions.

Everledger has provided us with the use-case required to see what the ramifications of a Blockchain system would do in insurance. As we watch this, so far, it looks quite promising. It is working for diamonds, and Everledger is already planning on expanding this to other fine-articles such as other precious gems, metals, and fine-arts.

If you think that this might be only a useful technology for high-valued items, think again. ZhongAn, a Chinese IoT-Insurance company will look to track the entire supply chain of chickens in China. That’s FIVE BILLION birds a year. And because the technology is flexible:

“The blockchain will also record details of the daily feed given to chickens, their nutritional requirements, and even their daily exercise to ensure they are a healthy produce”

It can even track which tiny chicken sweater each chicken wore each day?

How Might This Translate To Other Areas Of Insurance?

Authentication and provenance are important problems for all areas of insurance. Blockchain is starting out tracking diamonds, but is it too much of a stretch to conceive that we would use the identical technology to fingerprint cars or houses? If we can track 5 billion chickens, is it difficult to imagine a world where we can track all of the global supply of semiconductors as they race from port to port to final product? If we can record the daily feed, nutritional requirements, and daily exercise of those 5 billion chickens, then how hard would it be to track the repair and maintenance records of a used auto I am looking to buy for my teenage daughter?

Blockchain is already a part of insurance. When you look at the potential benefits of this technology, is it hard to imagine that it will become ubiquitous throughout the global insurance ecosystem?

I am betting on it.

 

Each little duckling will be tracked in the blockchain right down to its exercise habits.

About Nick Lamparelli

Nick Lamparelli is a 20+ year veteran of the insurance wars. He has a unique vantage point on the insurance industry. From selling home & auto insurance, helping companies with commercial insurance, to being an underwriter with an excess & surplus lines wholesaler to catastrophe modeling Nick has wide experience in the industry. Over past 10 years, Nick has been focused on the insurance analytics of natural catastrophes and big data. Nick serves as our Chief Evangelist.

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