How Blockchain and Smart Contracts are Revolutionising Claims Processing and Reducing Fraud

Blockchain technology and smart contracts are two innovative tools that have the potential to revolutionise the way claims are processed and reduce fraud in the insurance industry. The traditional process of filing and processing claims is often time-consuming, complex, and prone to errors, leading to delays and increased costs for insurers and policyholders.

However, with the use of blockchain and smart contracts, the insurance industry can streamline the claims process, increase efficiency, and enhance security, ultimately providing a better experience for all parties involved. As per future market insights, by the end of 2021, the global smart contract market generated a revenue of $150.2 million and growing at a CAGR of 23.5% from 2022 to 2032, it is projected to reach US$ 1,515.4 million by the year 2032.

In this blog, we will explore how these cutting-edge technologies are transforming claims processing and reducing fraudulent activities in the insurance sector.

Understanding the Current Challenges in Claims Processing:

1. Inefficiency and delays:

Traditional claims processing in the insurance industry often resembles a complicated process filled with inefficiencies and delays. The complex nature of this system involves numerous intermediaries, each playing a specific role in the claim journey. Here's a breakdown of the key challenges contributing to the inefficiency and delays:

1. 1. Paperwork Overload: The reliance on manual paperwork is a major bottleneck in the traditional claims process. From initial claim submissions to subsequent documentation, the sheer volume of paper-based transactions creates a cumbersome and time-consuming environment. It hampers the speed of processing and increases the likelihood of errors during data entry and validation.
   2. Communication Hurdles: Communication breakdowns between stakeholders, including policyholders, insurance agents, adjusters, and underwriters, are commonplace. The reliance on traditional communication channels such as emails, phone calls, and postal services can lead to delays in information exchange. This lack of real-time communication further elongates the claim settlement timeline.
   3. Verification Complexity: The verification of claims involves a rigorous process of cross-referencing information provided by the policyholder with various internal and external databases. This manual and time-intensive task often results in prolonged waiting periods for claimants. Additionally, discrepancies or inaccuracies in the information further complicate the verification process, leading to delays in resolving.
   4. Intermediary Overlap: Traditional claims processing involves a chain of intermediaries, each adding a layer of complexity to the overall procedure. From brokers to third-party administrators, each intermediary introduces the potential for miscommunication, errors, and additional processing time. Streamlining this convoluted chain is crucial for expediting the claims process.

1. Fraudulent Activities:

While inefficiency poses a significant challenge, insurance companies are equally concerned about the growing threat of fraudulent activities. Insurance fraud is continuously evolving, including a range of deceptive practices that contribute to substantial financial losses for the industry.

1. 1. False Claims: Individuals attempting to gain undeserved financial benefits by submitting false or exaggerated claims pose a constant challenge. Identifying these fraudulent claims within a bunch of legitimate ones requires extensive investigative efforts and resources.
   2. Identity Theft: The digital age has brought about new dimensions of fraud, with identity theft being a prevalent concern. Fraudsters may exploit stolen identities to purchase insurance policies or submit claims, complicating the task of verifying the authenticity of policyholders and their claims.
   3. Collusion and Insider Fraud: Collusion among policyholders, agents, or employees within the insurance company presents another layer of fraudulent activity. Insider fraud, where individuals within the organisation manipulate the claims process for personal gain, requires robust internal controls to detect and prevent.
   4. Staged Accidents and Exaggerated Losses: Sophisticated fraud schemes involve staged accidents or the intentional exaggeration of losses to claim higher payouts. These deceptive practices impact the financial health of insurers and contribute to increased premiums for honest policyholders.

Blockchain Technology for Secure Claims Processing:

Blockchain benefits the insurance industry by decentralisation, securing ledger technology that records and verification of transactions. It enhances transparency, streamlines claim processing, and reduces fraud by providing a tamper-resistant record of information. How Blockchain helps in secure claims processing:

• • • Decentralisation: The traditional insurance sector relies heavily on centralised authorities to oversee and manage the claims process. This centralisation introduces vulnerabilities such as single points of failure, increased susceptibility to fraud, and a lack of transparency. In contrast, blockchain's decentralised nature distributes control and access to information across a network of participants. This not only eliminates the need for a central authority but also democratises access to data, ensuring that every participant within the network has an identical and real-time view of the information.
    • Transparency: Transparency is a fundamental feature of blockchain technology. In traditional claims processing, opacity often prevails due to the involvement of multiple intermediaries and the lack of real-time data visibility. Blockchain provides a transparent and immutable ledger, ensuring that every participant in the network can trace the complete history of a claim. This transparency reduces the scope for disputes, enhances trust, and promotes a more collaborative and efficient claims ecosystem.
    • Tamper-Proof Transactions: Once information is recorded on the blockchain, it becomes virtually impossible to alter or delete. This resistance to tampering ensures the integrity of data, providing a secure and unforgeable record of every transaction. In the context of insurance claims, this immutability guarantees that the details of a claim remain unchanged and trustworthy, reducing the risk of disputes and fraudulent alterations.
    • Auditability and Accountability: The immutability of blockchain records enhances auditability and accountability. Insurance regulators, auditors, and internal stakeholders can rely on the variety of information stored on the blockchain, facilitating more accurate assessments of compliance, financial transactions, and claim histories. This inherent auditability strengthens the regulatory framework surrounding insurance operations.

Revolutionising Claims Processing with Smart Contracts:

The introduction of smart contracts within claim processing is nothing short of a technological revolution. By using the power of automation and the built-in security features of blockchain, smart contracts bring forth a revolutionary shift in how insurance claims are verified, settled, and safeguarded against fraud.

• • Efficiency in Verification: Smart contracts revolutionise claim processing by automating verification through blockchain data. By accessing relevant information, these contracts eliminate the need for manual intervention, ensuring a swift and accurate verification process. By reducing human involvement, smart contracts enhance efficiency, speeding up the overall claims journey and minimising the potential for errors in the verification phase.
  • Automatic Payouts: Smart contracts bring unprecedented efficiency to the settlement process. Once predefined claim conditions are met, these contracts automatically trigger and execute payouts. This automation expedites settlements and significantly mitigates the risk of errors inherent in manual transaction processes, ensuring a seamless and reliable payout mechanism for policyholders.
  • Fraud Prevention: Blockchain's transparent and immutable nature acts as a robust shield against fraudulent activities. Every transaction recorded on the blockchain is traceable, enabling quick identification of irregularities. This inherent transparency significantly diminishes the risk of fraudulent claims, as any attempt to manipulate data is detectable. The immutability of blockchain ensures a secure and trustworthy record, reinforcing fraud prevention measures in the insurance claims processing ecosystem.

The Future of Claims Processing:

The future of claims processing holds a lot of potential and with the upcoming trends, we can expect some progressive things. Here's what to expect from the future of claims processing:

1. 1. 1. Enhanced Customer Experience: The amalgamation of blockchain and smart contracts signals a customer-centric evolution in insurance. Swift claim settlements and diminished administrative hassles redefine the user journey. Blockchain transparency assures policyholders of real-time updates, fostering trust and empowerment. Automated processes reduce complexity, resulting in a more seamless and personalised experience for customers.

1. 1. 2. Industry-Wide Collaboration: As blockchain and smart contracts gain traction, fostering industry-wide collaboration becomes imperative. Establishing common standards and practices ensures interoperability and efficiency across insurers. Shared insights and risk management strategies enhance data security. Collaborative efforts pave the way for an interconnected insurance ecosystem, optimising overall industry performance and responsiveness to evolving challenges.

1. 1. 3. Touchless Claim Processing: The future of insurance sees touchless claim processing redefine automation. Utilising AI and smart contracts, insurers streamline the entire claims journey, from submission to settlement. This transformative approach ensures unparalleled speed and accuracy, reducing human errors. Touchless processing empowers customers with a seamless, hassle-free experience as claims are effortlessly validated and settled, marking a revolutionary shift towards efficiency and customer satisfaction in the insurance sector.

1. 1. 4. Instant Settlement Confirmation: Blockchain, coupled with smart contracts, provides immediate settlement confirmations to policyholders. Once a claim is processed and conditions are met, smart contracts execute payouts in real time. This instant confirmation enhances the speed of settlements and eliminates the uncertainty associated with traditional claim processing. Policyholders receive prompt notifications, offering peace of mind and a sense of security in knowing that their claims have been accurately addressed.

1. 1. 5. Unified Customer Profiles: Blockchain facilitates the creation of unified customer profiles by securely aggregating information from various touchpoints. This comprehensive view enables insurers to better understand policyholders' needs and preferences. Smart contracts, utilising this centralised data, can automatically tailor insurance offerings and communication strategies. The result is a personalised and consistent customer experience across all interactions with the insurer, contributing to higher customer satisfaction and loyalty.

Final Thoughts,

The combination of blockchain and smart contracts establishes itself as a transformative force, growing the insurance industry. The use of this technology signifies an upgrade and a shift towards trust, transparency, and operational efficiency. The secure and transparent nature of blockchain, combined with the automation capabilities of smart contracts, addresses longstanding challenges in traditional claim processing. The industry witnesses a tangible reduction in fraudulent activities, resulting in a heightened financial integrity.