Despite its relative infancy, the potential for blockchain technology to disrupt the insurance industry and change the way we share data, process claims and prevent fraud is intriguing. Statistics indicate that only 17% of California households carry earthquake insurance even though the likelihood of experiencing losses from an earthquake are high; so can blockchain facilitate trust in such a case? Blockchain and Dapps offer the insurance industry great potential in terms of transparency to streamline the payments of claims and premiums.
These two technologies have the potential to enhance the significant digital transformation that is already taking place in the insurance industry. Data is critical and forms the basis of the industry as well as the transformation. For instance, underwriters and actuaries use the ever expanding space of data to build models which help to accurately estimate risk and then price it accordingly. One of the most exciting models that employ blockchain is telematics. Insurers are making use of data from sensors to help price motor risk more accurately thus helping in reducing the premiums for the young and safer drivers. This technology is even finding application in home insurance. Another example is everledger which uses blockchain to create a distributed ledger that contains a record particular details for precious stones. This ledger has come in handy in helping insurers trace the history of each stone (including any records of past claims made on the particular stone) and thus detect and prevent any fraudulent activities.
Many in the insurance industry are currently looking at ways of employing blockchain within the organization rather than exploring the potential of blockchain to impact the whole industry.
Blockchain and Disaster Management
Disasters — natural and man-made — can suddenly and unpredictably devastate communities and cripple regional economies. During fiscal years 2005 and 2014, federal, state, and local governments have faced unprecedented costs for disaster response and recovery.
The federal government obligated nearly $300 billion across numerous departments and agencies disaster assistance. Extreme disasters like Hurricanes Katrina and Sandy caused billions of dollars in damage. The rise in number and increase in severity of disasters is a key source of federal fiscal exposure.
The federal government’s role as the insurer of property and crops that are vulnerable to natural disasters drives a large part of disaster-related fiscal exposures. For example, FEMA’s National Flood Insurance Program (NFIP) is intended to limit the damage and financial impact of floods. However, it has not generated sufficient revenues to pay claims, and as of April 2016, still owed $23 billion of what it borrowed from the Treasury. The Biggert-Waters Flood Insurance Reform Act of 2012 contained provisions to help strengthen the financial solvency of the program, including phasing out some discounted insurance premiums. However, the Homeowner Flood Insurance Affordability Act of 2014 reinstated some premium subsidies and slowed down some of the premium rate increases from the Biggert-Waters Act. While Congress should continue to consider changes to the program addressing the competing goals of solvency and affordability, action such as improving financial controls and the accuracy of full-risk premium rates, overseeing private insurers and contractors, and better managing NFIP are all potential strategies FEMA can use to improve its efforts to address the fiscal exposure of the program and ensure that NFIP funds are used effectively.
In 2006, the Project On Government Oversight (POGO) has identified several systemic failures in, and evaporating oversight controls of, the federal contracting process and recommends that government contracting laws and regulations need to be strengthened because of:
- Poor Planning — To make every effort to get the best results for taxpayers, the government must have an acquisition strategy based on informed market research.
- Inadequate Competition — To better evaluate goods and services and get the lowest practical cost, the government must promote aggressive arm’s–length negotiations with contractors and encourage competition, correcting the current trend of entering into non-competitive contracts in nearly 50 percent of government dollars spent.
- Lack of Accountability — To ensure that taxpayer dollars are being spent responsibly, the government must regularly monitor and audit contracts.
- Minimal Transparency — To regain public faith in the contracting system, the government must ensure that the contracting process is open to the public, including requests for proposals, contract data, and contracting officers’ decisions and justifications.
By deploying decentralized applications (Dapps), users can be connected directly with FEMA and disaster recovery providers directly; by leveraging the ethereum platform, FEMA can register on the blockchain all the property records, that includes ownership, (a big issue in Katrina, due to the fact that Louisiana has Napoleonic Laws to private property).
The Federal Emergency Management Agency (FEMA) is operating a program that waives erroneous disaster payments in the vast majority of cases. FEMA errors resulting from manual processing errors, duplication of payments, failure of personnel to verify loss, and other mistakes.
According to a Department of Homeland Security Inspector General report, the Disaster Assistance Recoupment Fairness Act of 2011 (DARFA) waivers are being granted in nearly all cases. As of June 22, 2012, FEMA adjudicated 7,439 cases totaling $37,094,697 that were initially identified for recoupment. Of that amount, FEMA has granted waivers for applicants in approximately 96 percent of the cases it has reviewed. Specifically, FEMA has granted 7,160 waivers and denied 279 waivers totaling $35,497,327 and $1,594,129, respectively. Additionally, FEMA has expended an estimated $2,589,076 on the program, including planning and implementing provisions of the waiver process, training employees, and conducting waiver activities. For those who weren’t math majors, that means that the government debt waiver program is costing $1 million more than the amount of all program recoveries.
DARFA (see Sec. 565) authorizes FEMA to waive debt owed to the government because of an improper disaster assistance payment if the payment was caused by an error by FEMA, was not the fault of the debtor, and the collection would be against equity and good conscience. A waiver is also dependent on the debtor having a household income of less than $90,000 per year. A household with an annual income of more than $90,000 whose case meets the other qualifying criteria is eligible for a partial waiver. Waivers cannot be granted in cases of fraud by the debtor. The law applies to improper disaster payments made between August 28, 2005 and December 31, 2010.
Improper payments are a major problem for the federal government, but reforms, like the “do not pay list,” are helping. The waiver of millions of dollars in improper payments and FEMA’s inability to recover even when the recipient is found guilty of fraud shows that FEMA needs changes to its claims, payment, and recovery systems to ensure that taxpayer dollars are not wasted. Say what you want about the disaster assistance program, but more should be done to ensure that FEMA is not sending out erroneous checks and that disaster victims receive what they need to restart.
Among the major bottlenecks or current issues facing the insurance industry and FEAM are inefficiencies in processing claims, and complexities and difficulties in understanding insurance contracts. Fraud remains a thorn for many insurers; the UK alone incurs €400 million per year on ‘crash for cash’ car accidents, additionally, data shows that an estimated 5 to 10 percent of all claims are fraudulent which, according to the FBI, costs U.S. health insurers more than $40 billion per year. And while there is an increase in the number of such fraudulent activities, regulations in the insurance industry continue to tighten. And when it comes to customers, the process of claiming in the event of an accident becomes tedious.
The blockchain and smart contract technologies could easily solve a greater part of this crisis. The use of smart contracts is the answer to such a dilemma. Both insurers and customers could find a transparent, irrefutable and responsive way of doing business through the smart contracts. Claims and contracts could be recorded on the blockchain and validated in the network to make sure that only valid contracts are executed and only valid claims are honored. Multiple claims for the same accident could easily be recognized and dismissed or even penalized because the network would recognize that such a claim had already been honored. Once a claim has been validated in the network, a smart contract could easily trigger an automatic and efficient response to process payments. Incorporating the Internet of Things to compliment blockchain technologies could enhance performance. For instance, an IoT car with sensors could easily trigger a set of instructions to release funds for repair of such a car in the event of an accident without the insurer having to intervene manually.
If blockchain were to be adopted across the industry, it would help enhance efficiencies and improve customer satisfaction. It would cut down significantly any cases of impersonification and fraud. A common blockchain database for claims handling and all other insurance related data would ensure insurers compete favorably for clients and stop fraud.
There is, however, a ‘wait and see’ attitude in the insurance industry as compared to the banking industry. Some presume that they do not need a blockchain strategy to remain competitive. But given the potential for disruption by blockchain technologies, it is important that players in the insurance industry monitor the blockchain space for disruption eventuality.
Blockchain presents potential use cases for insurers and Disaster Recovery agencies that include insurance claims for disaster recovery, increasing effectiveness in fraud detection and pricing, and reducing administrative cost. A keen eye on these technologies could define Government policies that would can help guarantee a competitive advantage for insurers particularly in solving issues facing the industry’s recovery efforts both in the short term as well as long term.