car wreck
Innovators,  Technology

As industry contemplates DLT, State Farm test drives blockchain technology for auto insurance

Streamlining complex policies and processes, as well as fraud prevention, are also prime insurance uses

On Dec. 10, insurance giant State Farm announced that it is testing a blockchain-based solution to improve the speed and accuracy with which auto insurance claims are settled.

In testing the solution, the largest provider of auto insurance in the United States is following up on several years of study and interest by the insurance industry in ways the distributed ledger technology underlying blockchain and cryptocurrencies can benefit various lines of coverage offered by the multi-trillion-dollar industry.

Specifically, State Farm is looking into blockchain’s use in subrogation, the process by which the at-fault insurer compensates the injured party’s insurer for costs paid to settle a damages claim.

“Today, subrogation is a relatively manual, time-consuming process often requiring physical checks to be mailed on a claim-by-claim basis between insurers,” said Mike Fields, a State Farm innovation executive, in a statement. “You can imagine the time and resources required to complete these transactions.”

Aside from automating the payment process, State Farm’s blockchain solution can create a permanent, easily verified record of each transaction. Not only does that cut costs for the insurers and reduce the potential for errors, Fields said, “it also has the potential to decrease the amount of time for consumers to receive their deductible reimbursement.”

This has the potential to improve another metric auto insurers put great stock in: customer satisfaction. According to the J.D. Power 2018 U.S. Auto Insurance Study, this is an area the industry is already doing very well in, with record-high scores posted in 2018, but there is a substantial reason to keep improving it. “Low prices may attract new customers, but it’s service that keeps them. The auto insurers that increase customer satisfaction across all facets of the customer experience make price just one part of the overall relationship,” the report said.

Subrogation is not the only potential use of blockchain in auto insurance. According to an April 19 article by the Blockchain Council, blockchain can create a shared ledger of data for users and service providers, which can reduce both the insurers’ risk and the potential for fraud.

For example, a distributed ledger containing a car’s history—whether it’s been repaired after a previous collision, contains original equipment manufacturer (OEM) parts, and even its oil change history—would greatly improve insurers’ ability to estimate the Actual Cash Value of a car involved in a collision, automate underwriting and claims processing with smart contracts built into a distributed ledger, and assure buyers that the car they are purchasing is in safe driving condition, according to financial data site ValuePenguin.

Other ways blockchain can improve insurance

The insurance industry’s interest in distributed ledger technology has been growing for several years, particularly in health and life insurance. As Modern Consensus reported recently, several leading health industry insurers are running a pilot project to demonstrate the ability of blockchain technology to speed processes, make data more accurate, and allow the sharing of confidential information.

As in the healthcare industry, a 2016 report commissioned by professional services firm PwC, Chain Reaction: How Blockchain Technology Might Transform Wholesale Insurance, concluded that an offshoot distributed ledger technology, permissioned blockchain, would be most appropriate in the insurance industry. Unlike regular blockchain, which builds a ledger of public transactions created by anonymous sources, permissioned blockchain creates private, data-encrypted transactions only accessible by members of a known and pre-approved network.

Along with health insurance, research firm CB Insights in March cited property and casualty insurance as a type of insurance ripe for disruption by blockchain technology, noting that automated “smart contracts can bring an order of magnitude improvement in efficiency.”

PwC also noted that the many participants needed and often-repetitive steps involved in creating an insurance policy—particularly large, complex “wholesale” policies—and managing claims are prime use cases for blockchain in the insurance industry.

In the same way, the CB Insights report said, smart contracts can simplify the enormous and complex reinsurance market, in which insurers hedge their bets by taking out insurance plans in the event they are hit with excessive claims, such as property damage from a major fire or hurricane.

CB Insights also singled out the field of fraud detection and risk prevention, thanks to the unchangeable nature of blockchain blocks. A 2016 McKinsey report on blockchain in the insurance market said that an estimated five to 10 percent of all claims are fraudulent, and noted that the FBI estimated the losses to non-health insurers at more than $40 billion annually.

And just as blockchain technology can help prevent fraud, it can also streamline and strengthen the Know Your Customer/Anti-Money Laundering regulatory requirements common to both the insurance and finance industries.

In a September blog post, Michael Curry, vice president engineering–IBM Industry Platform, wrote, “processes for KYC compliance, in particular, are costly and time-consuming with the added, and significant, concern of the extraordinary fines for non-compliance today.” Cost savings and time reduction are major benefits, he wrote, noting that a blockchain-based KYC audit can be shared among institutions after being performed once, rather than repeated each time it is necessary.

“For corporations, this can be very tedious, given the amount of certified information and documents they need to provide,” Curry wrote. “By sharing KYC information across banks, the burden can be reduced, translating to faster onboarding and less work for customers.” It also allows the customer to place restrictions on who can see that data.

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Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson has put some 401k money into Grayscale Bitcoin Trust.