Insurance fraud gets more difficult with blockchain
The insurance industry faces massive costs due to fraud. Annually, property and casualty insurers lose $34 billion to fraud and health insurers face even larger losses, with estimates ranging from $77 billion to $259 billion per year.
Blockchain applications can help reduce insurance fraud by improving the provenance of property and assets, while implementing authentication mechanisms that enable insurers to verify the identity of those making claims.
Blockchain in the diamond industry
Let’s consider jewelry fraud, which costs insurers $2 billion per year in fraudulent claims. How can insurers know that a piece of jewelry is in fact worth as much as an owner claims? The industry depends on trusted third-party appraisers to assess the value of jewelry. Appraisals can be documented so they can be used to establish value for insurance purposes.
There is plenty of opportunity for scamming an insurer during this process. Appraisal documents may be forged, an appraiser could collude with owners to overstate the value of an asset, or someone could substitute less valuable jewelry for a higher-value piece. Some in the diamond industry are working on blockchain technologies and protocols to track the provenance of diamonds and to prevent the kind of fraud just described.
The Diamond Time-Lapse Protocol is an initiative that seeks to include manufacturers, sellers, and consumers in an effort to track diamonds. Everledger is one company using blockchain as the basis for recording the provenance of diamonds using the Diamond Time-Lapse Protocol.
The goal is to follow the lifecycle of a diamond from the mine to its sale to a consumer and beyond. When a miner sends an uncut diamond to a manufacturer, it would include a certificate and an image of the rough diamond are recorded in a ledger. A rough diamond expert at the manufacturer would then examine gems and information about the examination, including a video, could be stored on the blockchain.
From that point, several others work with the diamond, including architects who decide how to cut it, the laser cutter who does that work, and multiple craftspeople who finish its processing. All of their work would be documented and stored on the blockchain ledger as well.
When the diamond is sold, the consumer and any insurer would have access to the full provenance of the diamond. Committing fraud with such a well-documented gem is difficult, since the tamper-proof provenance would have to be altered in some way, such as substituting the picture of the diamond with an image of a less valuable one.
Insurers can also use improved authentication to mitigate the risk of fraud.
Imagine someone submitted and insurance claim for a high value diamond. The provenance has been recorded using the Diamond Time-Lapse Protocol so information about the owner is recorded in the ledger. How can the insurer verify that the person claiming to be the owner actually is the owner? This is where a trusted identity management service would be helpful.
IBM recently introduced TrustChain, a block-chain based provenance service for jewelry. In addition to promoting trust about jewelry transactions, the system should be more efficient for investigating and resolving disputes in the supply chain.
Identity on the blockchain
Today, individuals verify their identity using documents provided by a government agency, such as a driver’s license or passport. We trust departments of motor vehicles and passport authorities to verify the identity of applicants.
When transactions are executed digitally, identity documents like a driver’s licenses or passport are not useful. We need a digital equivalent of those documents.
Civic is one company working to create a secure identity platform using blockchain technology. A Civic user begins by presenting documents attesting to her identity. Civic then records that information to the blockchain and sends authentication data to the user, which is stored in an app.
When someone wants to verify a user’s identity, she sends authentication data to the requester. The requester then verifies authenticity and validity of the authentication data.
The integrity of the blockchain, along with trust of the identity provider recording the data, is the key reason this kind of service can be trusted. This kind of identity verification service can help control fraud in the health insurance industry by making it more difficult to make claims on someone else’s policy.
Blockchain is enabling new ways to prevent fraud. Provenance of high value assets can be tracked in a distributed ledger, while the identities of those making insurance claims can be verified using trusted identity providers.
The combination of these two services make it more difficult to make fraudulent claims by falsifying information about an asset or by assuming someone else’s identity.