Can blockchain prove an insurance policy is legit?

In cases of fraudulent insurance policy issuance, the technology behind cryptocurrency may offer a solution to better protect the public, brokers, and insurers.

Provincial insurance regulators issued warnings earlier this year about a lawsuit between the directors of TruStar, a managing general agency (MGA) now in receivership, and its former CEO.

The directors’ lawsuit outlines their investigation of a fraud scheme in which the former CEO is accused of, among other things, confirming to brokers the existence of insurance coverage when no coverage was in place. The directors’ statement of claim, which has not been proven in court, suggests the alleged behaviour had been taking place for years, and that the scope of the scheme is in the millions. It’s unknown how the former CEO intends to defend himself against the accusations.

Despite TruStar being licensed and in good standing with regulators at the time, it appears insureds were led to believe they held policies that ultimately did not exist. So, their risks went unprotected.

Such deception can be difficult to detect. A search on regulators’ sites for an MGA in trouble or unscrupulous employees would not show improprieties until it was too late. Nor would a typical insurer audit reveal anything.

Auditors select a subset of an insurer’s existing policies, so non-existent policies that were never reported to insurers would not be candidates for review. Armed with trust and determined to misuse it, a fraudster is difficult to detect or stop until considerable harm has taken place.

Blockchain provides a potential solution to better protect the public, brokers and insurers.

Blockchains are the foundation upon which cryptocurrencies are built. ‘Blocks’ of data are stored on computer networks, with each block containing a record of the previous block. The data blocks are linked into a chain, known as digital ledgers, in which the details of all prior transactions are incorporated into each new transaction.

Doing that creates an immutable record, and any attempt to change a transaction by someone on one block would be immediately rejected by the blockchain, because the transaction histories on all other blocks would no longer match. A fraudster could change their block, but not every block that’s ever been added across the entire network of users, and that discrepancy would immediately identify a fraudulent transaction for rejection.

Applying blockchain to insurance

Here’s an insurance example. To help ensure a policy exists and is legitimate, insurers would run details of in-force policies through an encryption process to scramble them into a randomly appearing string of characters. This process can be reversed with a private key in the form of a password (that’s the ‘crypto’ part in cryptocurrencies).

The encrypted string of characters would be broadcast to all blockchain participants, each of whom confirms the string was created in accordance with the blockchain’s rules.

Once confirmed by multiple participants, the string would be added to a public blockchain ledger (unconfirmed transactions are immediately rejected). That would happen each time an insurer issues a policy.

Insurers would similarly perform this process each time an MGA, or another holder of a delegated authority, reports to the insurer about a policy written on the insurer’s behalf. Encrypted policy details — limits, coverage dates, types of cover, the insured, insurer and more — would become a permanent part of the blockchain. Additions to the blockchain would be digitally signed by the insurer the same way software updates on computers or other devices are signed digitally to ensure their legitimacy.

Policyholders and brokers would be provided with the public address of the policy on the blockchain, together with a password to unlock the information, and could verify the legitimacy of the policy at any time by entering a password.

Certificates of insurance could include a password that acts as a decryption key, so certificate holders could verify that coverage meets their requirements, is valid, and is in force. Further, reductions in aggregated limits due to claims against policies could be reported to the blockchain, so certificate holders could be sure the limit on the certificate is available. These steps would guarantee coverage is in force.

The technology to do this exists now.

Implementing this would require the cooperation of software vendors and buy-in from insurers. And a network effect would be in play: if only a few insurers adopt this approach, it will prove far less valuable than if most, or all, insurers do.

But there is a good incentive for insurers to sign on. The likelihood their brands will be abused in the commission of fraudulent policy issuance would be substantially reduced, and their policyholders and brokers would have certainty that a policy listed on the blockchain exists and is backed by the insurer.

It’s our duty to ensure that when we say an insured has coverage, the statement is, in fact, true. There can be no exceptions because we are selling a promise. Blockchain can ensure that we keep our word while quickly exposing bad actors. Both of those outcomes benefit everyone involved.

Martin Lynch is director of underwriting at PMU Specialty, an MGA specializing in manufacturing, construction and hard-to-place insurance.

This article is excerpted from one that appeared in the April-May print edition of Canadian Underwriter.