A recent $2 billion fraud involving India’s Punjab National Bank has highlighted the need for tighter and effective internal controls and transaction monitoring processes for financial institutions — including banks and insurance service providers — which handle hundreds of thousands of client records worth billions of dollars. While banks have already started shifting from the brick-and-mortar mode to the digital era of Fintech, insurers are yet to fully embrace Insurtech as a means of detecting fraud, enhancing claim processing and improving customer experience.
How fraud plays out
Insurance fraud can be triggered both by those selling or buying an insurance contract. While fraudulent issuers sell policies from non-existent companies and churn policies to enhance commissions, deceitful buyers make exaggerated claims, falsify medical history and fake death, kidnapping and murder to pocket the insurance amount prematurely.
The total cost of insurance fraud in the US, excluding health insurance, is estimated at $40 billion a year. This loss translates well beyond insurers, and is taken out of consumers’ pockets: insurance fraud costs US households between $400 and $700 annually due to increased premiums.
The process of purchasing insurance policies and claiming returns is inherently complex as it involves multiple stakeholders — insurers, consumers, brokers and reinsurers. Policies that are processed on paper contracts add to this complexity as claims and payments are error-prone and often require human supervision. Each step in the process involving multiple stakeholders represents a potential point of failure where policies can be misinterpreted, information be lost and settlement delayed.
The answer is on the blockchain
This is where blockchain, which is a digital public ledger, comes into the picture. Put simply, a blockchain is a collection of records, called blocks, which are secured using protocols that prevent third parties from accessing private information. The technology uses a distributed verification system to authenticate transactions. Also, as it is decentralised, no single person or entity has control over the ledger and cannot possibly become a single point of failure. The widely shared public ledger also helps guard against dissonant and multiple systems. Distributed ledgers are a perfect example of Insurtech due to their immutability — blockchain technology prevents the duplication or reversal of transactions.
Since a blockchain is a peer-to-peer network, its distributed verification system is an effective line of defence against those wishing to alter the distributed ledger.
Blockchain can be an effective tool to detect fraud and prevent risks — by putting insurance claims into an immutable ledger, fraudulent behaviour can be tracked down and dealt with immediately. Since the insurance industry is mammoth in size and complex in terms of processes, there are several gaps that can be exploited to perpetrate fraud. Insurance companies operate in isolated “information silos”, that is: very little commercial information is shared with others, let alone with other competing companies, unless absolutely necessary. This allows criminals to make repeated claims from different insurers for a single loss. It also enables brokers to fraudulently sell insurance policies without the right to do so and pocket the premiums regardless.
Our current use case
Addenda’s Blockchain technology, for example, focuses on coordination between insurers to counter fraud. The shared ledger would help insurers coordinate amongst themselves and detect fraudulent behaviour across the ecosystem. The shared ledger eliminates processing of multiple claims for the same accident, and also tracks the claim trends of policyholders across, helping identify cases where contribution or subrogation may arise.
When it comes to property insurance policies, which cover items such as houses or cars, the power of blockchain can automate claim processing and provide an audit trail via smart contracts.
Unlike a paper contract that is signed between two parties and kept in archive units requiring frequent manual supervision, a smart contract lives on the blockchain, is immutable and can be easily accessed by stakeholders with the correct credentials. This leads to automated claim processing, and eliminates the likelihood of human error or collaboration between several stakeholders with shared nefarious interests.
Health insurance is another area where blockchain technology can detect suspicious behaviour and enhance efficiency. As of today, health insurance is plagued by a cumbersome and inefficient ecosystem of providers, insurers and patients. As patients typically see multiple doctors and specialists over the course of their lives, sharing medical data between multiple stakeholders becomes cumbersome. This also leads to creation of erroneous records and duplication, resulting in breach of patients’ privacy and enhanced administrative expenses.
A cryptographically secure shared ledger protects patient privacy and creates a reliable repository of healthcare data, which would save billions of dollars for insurance players, and in return, reduced premiums for patients.
Cryptographically secured and shared medical records can also lead to enhanced transparency and interoperability among health providers and insurers.
The road blocks ahead
Blockchain technology in still in its infancy and a lot of preparatory work is needed before it can be an effective tool for fraud detection and process enhancement for the insurance industry. To begin with, insurance companies need to create protocols to collaborate between one another before leveraging blockchain technology.
Since privacy and security concerns can imperil the insurance sector, players also need to move from public blockchains, where everyone has access to each transaction on the ledger, to private blockchains, such as Addenda, which works on the hyperledger framework. In addition, considering insurance is a highly regulated sector, legal and regulatory framework need tweaking to make blockchain technology a truly transformative fraud-detection and process-enhancement tool for the industry.
We are spending hours every day studying the possibility of improving today’s insurance fraud detection models. If you’re interested in knowing more, feel free to visit www.addenda.tech.