The insurance industry is quickly evolving with the aim to improve efficiency and trust. Blockchain can assist with fraud detection through distributed ledgers, enhancing transparency behind transactions.
Blockchain technology has been adopted by many industries so far, from supply chains and banking to retail and consumer goods. Some insurance businesses, particularly reinsurers, are also moving towards blockchain technology.
WaterStreet Company is a leader in offering P&C Insurance technology and aims to keep you up to date on the latest P&C insurance trends.
What is Blockchain?
Blockchain is a method of preventing fraud by creating a time-stamped and hashed record that is distributed across a shared network.
Each transaction is turned into a set of numbers and letters called a “hash.” Hashes are generated depending on the transaction that came before it. These hashes are consolidated into “blocks.” The blocks are then duplicated and stored across “nodes,” which are all computers participating in the blockchain. As each block connects to the block before it, the chain of information is built with accuracy and in chronological order.
When transactions are stored this way, the record is nearly impossible to edit after the transaction takes place. Forging one transaction means having to forge all previous transactions across distributed ledgers in the blockchain.
How is Blockchain Used by Insurance?
The reinsurance industry stands to improve efficiency and security. PwC claims reinsurers can save between $5-$10 billion through blockchain technology. As reinsurance businesses purchase coverage from other insurance businesses to share risk in the case of a major claims event, transaction data becomes more complicated and vulnerable to fraud.
With blockchain technology, reinsurers add protection to their policies to ensure the accuracy of each transaction. Reinsurers are able to rely on a fool-proof chain of events to always have the data needed to verify a past purchase. Not only is blockchain accurate, it is incredibly efficient for reinsurers to process transactions without waiting on a manual process to verify the history behind a transaction. All data needed is part of the blockchain for the reinsurer to reference rather than waiting on a siloed process to independently verify a transaction.
According to the Coalition Against Insurance Fraud, at least $80 billion is lost to fraud in the United States each year and fraud occurs in around 10% of P&C insurance losses alone.
The number one use case for blockchain technology is to detect fraud. With the combination of hashing and distributing ledgers, blockchain allows a deep level of transparency. If any party attempts to forge a transaction in a blockchain, the forgery clearly stands out.
Many insurance businesses have algorithms in place to detect fraud. Blockchain can further assist in alerting the business if a transaction has been altered. Detecting fraud this way can also help the business detect patterns in fraud, expanding the ability to not only detect a single act of fraud but also larger, more detrimental types of fraud.
In the United States for 2020 alone, there were 3,950 confirmed data breaches with the average total cost of a data breach reaching $3.86 million.
Data security can be enhanced with blockchain technology. When insurers store their transaction data in a centralized location, the data is vulnerable to hacking and phishing attacks. Authorized users with the pass keys to access internal data are the weak point in your system. Instead with blockchain technology, the data is stored across nodes and does not have a weak point for bad actors to break through.
About WaterStreet Company
WaterStreet Company is dedicated to serving all facets of the Property & Casualty Insurance Sector. Many incumbent insurers are held back by dated legacy systems and can aim for better technology to detect fraud.
We understand the importance for carriers and MGAs to adapt to market changes.
Reach out to WaterStreet Company today to request a consultation and demo of our solutions.