Blockchain In Insurance: Reducing Fraud And Enhancing Efficiency

Imagine your aging parent has multiple health issues that require frequent medical appointments, treatments, and medications. Each medical event triggers a confusing claims process in the current insurance scenario.

You end up juggling invoices from healthcare providers, filling out extensive paperwork, and waiting weeks to know if your insurance company has approved the claim. Coordinating between doctors, pharmacies, and insurance agents becomes a second full-time job because there is no system to do it for you.

Now picture managing all these claims in a blockchain-enabled world: Within minutes after your parent checks out of the hospital, fills a prescription, or leaves an appointment, the smart contract automatically checks to see if you have met all conditions to approve the claim.

If they approve your claim, they’ll instantly pay your parent’s digital wallet. If not, you can quickly check on every claim status, which is automatically updated, all in one place. There are no papers to chase, no verification delays, and no contacting multiple providers.

Now imagine that all insurance claims – auto, life, and home insurance – benefit from the same efficiency and transparency. And here is the real kicker – your premiums could also decrease drastically because the system is much more efficient.

This scenario isn’t a distant, utopian vision; blockchain technology can deliver this transformation today. Blockchain-based claims settlement can change insurance claims’ stressful, convoluted, and expensive ordeal into a streamlined, reliable, and user-friendly process.

The market potential is enormous. The global insurance industry, spanning health, property, life, auto, travel, and more, is worth trillions of dollars. The projections have the health insurance market set to reach $4.37 T by 2030.

Blockchain in the Insurance industry
Source: Precedence Research

All that potential adds up to some significant potential for disruption in the insurance industry.

Traditional vs. Blockchain-Enabled Claims Processing: A Comparative Look

Sometimes, the best way to understand an innovation is to compare it to the present system. The insurance industry has been around for centuries. The current claims processing system is unquestionably lacking in efficiency and transparency.

Blockchain technology stands to revolutionize claims processing by solving many of the issues plaguing the traditional system. Let’s look at a simplified comparison of conventional vs. blockchain-enabled claims processing.

Traditional Claims Processing

In the conventional system, when a policyholder needs to make a claim, they typically start by contacting their insurance agent or company directly. This action is the beginning of a multi-step process that involves:

  • Initial Review: An insurance adjuster initiates a thorough review after receiving the claim. This phase requires an assessment of the claim’s validity based on the policyholder’s coverage.
  • Documentation: The claimant must submit all supporting documents, such as police reports, invoices, and photographs. These documents often get sent to multiple departments for further review.
  • Verification: The insurance company may need to employ third-party services for verification. For example, an appraiser will assess the damage in a car accident claim.
  • Approval or Rejection: After all verifications, the insurance company will either approve or reject the claim, which can take several days to several months.
  • Payment: If approved, the policyholder finally receives the claim amount through check or direct deposit.

Blockchain-Enabled Claims Processing

Enter blockchain, and the scenario is dramatically different. The first key innovation to understand is smart contracts.

Smart Contracts:

Smart contracts are self-executing contracts with the terms written into lines of code. They operate on a blockchain network, ensuring that actions occur automatically without intermediaries once they meet the conditions.

With blockchain, smart contracts can automate the initial review process. When a claim meets all predefined criteria, the contract executes automatically, setting the claim process in motion.

Additional claims system innovations that blockchain enables include:

  • Instant Documentation: Blockchain allows for a decentralized ledger where all necessary documentation can be securely and transparently stored. The claimant and the insurer can instantly access and verify this data, eliminating the need for repetitive submission of the same information.
  • Machine Learning (ML) and Artificial Intelligence (AI): ML algorithms can analyze vast amounts of claims data to identify patterns, anomalies, and trends, effectively assisting in fraud detection. AI can further automate and streamline claims by intelligently interpreting data and making decisions based on pre-defined parameters. ML, AI, and blockchain synergy create a more efficient, transparent, and secure environment for processing insurance claims.
  • Third-Party Verification: While some external verification may still be necessary, smart contracts can handle many tasks. For example, a smart contract could automatically validate a car repair invoice against a trusted database of repair costs.
  • Automatic Approval or Rejection: Since all information is transparent and instantly verifiable, the blockchain can approve or reject the claim almost immediately based on the smart contract’s conditions.
  • Immediate Payment: Once approved, the blockchain can trigger an instant payment to the policyholder’s digital wallet, reducing the payment time to minutes or even seconds.

We can sum up the differences from the above comparison as follows. Claims management using blockchain increases:

  • Speed: Traditional systems can take weeks to months, while blockchain can reduce this to minutes or even seconds.
  • Transparency: Blockchain’s transparent ledger system ensures that both parties can monitor the claims process in real-time, something the traditional method severely lacks.
  • Security: The immutability of blockchain prevents unauthorized alterations, reducing the scope for fraud.
  • Efficiency: Blockchain eliminates the need for multiple intermediaries, making the process more straightforward and less prone to errors.

Blockchain also has implications in other vital areas for the insurance industry – fraud prevention and regulatory compliance.

Fraud Prevention

Insurance fraud is a significant concern that costs the industry billions every year. The centralized nature of traditional systems makes it easier for criminals to manipulate records and invent false claims. Blockchain can provide a robust solution to rooting out fraud.

Once information goes into a blockchain, altering it is nearly impossible. Each transaction block links to the preceding block. Any attempt to change information would require altering all subsequent blocks, requiring enormous computational power and attracting attention from anyone monitoring the blockchain.

Committing fraud on the chain is extremely difficult, thereby saving insurance companies— and, by extension, policyholders— substantial amounts of money.

Regulatory Implications

While blockchain promises to be a game-changer, it does not exist in a vacuum. As anyone watching cryptocurrency’s regulatory journey knows, regulatory oversight often clashes with technological innovation in highly regulated sectors. The insurance industry is no exception.

Many countries are already working on creating a legislative framework that accommodates blockchain technologies, working through issues like data privacy and cross-border legal complexities.

Early Movers in Blockchain in the Insurance Sector

Entrepreneurs and investors in the insurance sector are taking note of blockchain’s market opportunity and transformational capabilities in the insurance sector.

Lemonade is a tech-forward insurance company taking a 180 turn from the insurance industry status quo. Lemonade’s positioning is as an insurance provider harnessing technology and contributing to social good.

As an accredited Public Benefit Corporation and B-Corp, Lemonade leverages blockchain technology to provide efficient, affordable, and hassle-free insurance services in insurance products for renters, homeowners, pets, life, and auto insurance. Through their annual Giveback program, which allocates unused premiums to charities selected by their customers, they have donated nearly $5 million to diverse organizations in need.

Change Healthcare focuses on healthcare technology solutions to improve clinical, financial, and patient engagement outcomes. They offer various services and products to streamline healthcare operations, reduce costs, and improve patient care. Change Healthcare’s solutions leverage the HyperLedger Fabric blockchain.

It’s not only startups that are making strides. Consortiums like the Blockchain Insurance Industry Initiative (B3i) provide a platform for various insurance companies to collaborate on developing blockchain solutions, thus creating a more efficient, transparent, and user-friendly insurance ecosystem.

Moving Ahead

The insurance industry is on the brink of a blockchain-powered revolution. Are you ready for the transformation? One day, you may even receive a discount for paying insurance premiums in crypto!

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This material has been prepared for informational purposes only and is not intended to provide tax, legal, or financial advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction.

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