Can Blockchain Improve Insurance?

• Author: Singer, Andrew W.
• Position: COVER FEATURE - Cover story

FRAUDULENT CLAIMS CONTINUE TO PLAGUE the global insurance market, but proponents of blockchain technology insist that a solution may soon be at hand. When implementation of these decentralized digital ledgers becomes widespread, some believe fraud could be reduced significantly.

An estimated 5% to 10% of all insurance claims are fraudulent, costing U.S. non-health insurers more than $40 billion a year, according to a 2017 McKinsey & Company report, which suggested that "by serving as a cross-industry, distributed registry of external and customer data, blockchain can be used to identify fraud." Indeed, a 2018 Boston Consulting Group (BCG) report predicted that an "all-blockchain" auto insurer could lower its total operating ratio by 10 to 13 points compared with a traditional carrier, two points of which would be from fraud detection alone.

Others contend that new insurance markets can be accessed using blockchain technology, especially in regions that exhibit high rates of corruption, because blockchains provide more reliable alternatives to current registries. In other words, blockchains could not only increase profitability by reducing current fraud, the technology could grow revenues by tapping under-served, fraud-ridden markets.

In practice, however, reducing insurance fraud through blockchain technology may not be quite so easy. "There's this notion that technology can solve social problems, but it is naive to think that any technology can completely eliminate fraud," said Stephan Karpischek, CEO of Etherise, an insurtech firm that recently built a blockchain platform for flight delay insurance. While fraud is simply a function of human nature, blockchain technology has elements that can support its detection and mitigation, which is no small thing, he said.

HOW BLOCKCHAIN WORKS

Blockchain is often misunderstood. Most frequently, it is confused with the cryptocurrency bitcoin, which is only one application for blockchain--that is, the ability to store and transfer value. Blockchain is much broader, and with the addition of smart contract technology, there are far more possibilities than just cryptocurrencies.

A blockchain is nothing more than a distributed, digital ledger. It has been compared to a dusty, leather-bound ledger in a Dickensian counting house that holds records of every key transaction, but with this distinction: The same ledger is held simultaneously on thousands of different computers (or "nodes") in multiple locations with different owners, and the moment a line is added to one ledger, it appears on all ledgers.

The blockchain can also be programmed with "smart contracts," a set of conditions recorded on the blockchain, so that transactions...