By Amit Ghosh, Head of Asia Pacific at R3
Blockchain has been spotlighted as one of the most important technological trends in Australia, but the insurance industry has somehow been slower to embrace blockchain than other industries, such as finance.
Many in the insurance sector are still unsure about its power, or exactly where it can be applied. But to those who follow the technology trend there is no question it can provide massive benefits, most notably in combating fraud.
As the insurance industry in Australia moves towards full digitisation – nudged along by the recent COVID landscape – blockchain is appearing as one of the most important technologies for the sector.
For those unfamiliar with blockchain, it can be best described as a digital ledger that is distributed across a cluster of computer systems that allows information to be stored across a network.
As data is stored across servers in the blockchain, it is completely decentralised, so no single user is calling the shots. Any changes or additions made to the ledger are seen by all parties to the transaction, so information is shared in an instant, seamless and secure way.
Blockchain also prevents the unauthorised modification, addition or removal of data and provides a clear audit trail of changes. Blockchain’s decentralised nature also allows each entity to ensure ownership over their data, without necessarily requiring oversight by a central authority.
Within the insurance sector this way of managing information provides a “single source of truth” as parties (such as insurers, MGAs, brokers, etc,) to a transaction or a shared set of facts are updated in real time.
As a result, blockchain can eliminate the need for the manual reconciliation of facts across the insurance value chain, from policy management and placements, to policy servicing and claims management.
This vastly reduces operational costs often associated with legacy processes, and greatly enhances end-customer experience through quicker processing times.
Insurance fraud in Australia is rife – estimated at more than $2 billion per year. On top of that, only a meagre 15% of fraud cases end up being detected by insurers, resulting in honest customers paying a higher premium on their insurance policies as the cost of fraud is borne by them.
Given blockchain’s decentralised nature and capacity to provide completely anonymous and secure information – or even tokens in place of information – it offers the capacity for insurance companies who would otherwise compete against each other in the market, to collaborate in a new way to fight fraud.
Fraud is currently detected by insurers looking for patterns and behaviours in the data they collect. At the same time criminals look for vulnerabilities in the system to exploit.
Take for example “double-dipping” fraud, where a criminal will submit a claim to multiple insurance companies.
The existing industry-standard solution involves an insurance company looking for unusual behaviour in the data, noticing a pattern, suspecting something is wrong, adding the claimant to a blacklist, then sharing that blacklist with the Insurance Fraud Bureau of Australia (IFBA), which then shares it with other insurers.
The whole process takes effort, man-hours for the investigation, and communication back and forth between all parties. It’s costly to the company, and brings about data-sharing and confidentiality concerns to insurers.
Not only that, it’s time-consuming allowing the criminal to make multiple claims in the meantime and commit multiple instances of fraud. How many criminals do you believe slip through the net?
Blockchain allows for a better solution to the problem. With insurance companies working together over a blockchain network, a unique, anonymous and secure “data point” – in place of the underlying claim details – known as a “hash” can be instantly made visible over the blockchain to all insurers on the network when the claim is made. The hash contains no confidential information, but identifies a claim to be unique.
If this hash has been uploaded by one or more other insurers, and is therefore not unique, the claim is flagged as fraudulent, and all insurers will know in real-time that a claimant is double-dipping.
As a result, all affected insurers involved can halt the payment of that claim and the fraud is stopped. The only additional points this system requires is that claim details are standardised across all insurers in the network, and that a notary such as the IFBA or the Insurance Council of Australia sends the flags to insurers when a double hash is seen.
Subsequently, relevant underlying claim details can be shared in real time across the affected insurers over the blockchain in a safe and secured manner, enabling easy collaboration and reducing the operational time and costs of manual co-ordination across insurers.
This is just one example of how a hash system via blockchain can fight fraud, and there are many others.
Using blockchain means everything is secure, it’s anonymous and it allows collaboration on this key issue without affecting competition or legal requirements between companies. There is no concern about sharing confidential client data to any centralised party, as using a hash in its place addresses this issue.
By its nature this fraud solution requires more than one insurer for it to operate, and to get the full benefit across the industry it requires many insurers to take part.
This initial challenge of getting insurers to come to an agreement and subscribe to the same standards means Australia has been slow in getting this off the ground, compared to other countries.
It also requires a centralised trusted third party such as the IFBA or the Insurance Council to assist in making it happen and managing the set-up.
Like many other industries noticing the power of blockchain and its capacity to address collaboration challenges between competing companies, the insurance sector now has the opportunity to come together, with the help of representative bodies to seriously address the fraud challenges issues that the whole sector suffers from.
R3 is a US enterprise software firm with global operations that specialise in delivering purpose-built distributed ledger technology. Mr Ghosh runs the Asia Pacific division from Singapore.
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