Kevin Wang
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The embers of innovation are beginning to char the massive $1.2 trillion underbelly of the largest industry in the world. Every segment of insurance is under competition by entrepreneurs touting new ways to underprice risk, creating new types of premiums and servicing consumers in a tightly regulated on-demand economy. While most startups attempting to gain traction in the insurance market fall under incremental innovation, Blockchain for insurance could be characterized as disruptive.
The underlying technology of the world’s most adopted digital currency, bitcoin, is quickly becoming one of the hottest topics across a number of industries. More than just a distributed database for bitcoin, Blockchain’s ability to send, receive and store information has the underlying power to disrupt the way businesses process digital transactions.
The implications of decentralized ledger technology (DLT) are astounding: Digital trust is now an ever reasonable possibility; meaning online and offline assets can now be assigned ownership and the transference between those parties can be proven both linearly and cryptographically. Specific to insurance, Blockchain technology has the power to simplify the claims process, alleviate high premiums, help insurers create niche coverage and, most importantly, benefit those who live in catastrophe regions.
Peer-to-peer insurance
Blockchain adoption has the power to transition new and existing models of insurance, including P2P insurance, parametric insurance and microinsurance, into a new digital age. Blockchain is powerful because of its secure platform connecting capabilities.
New distribution methods like peer-to-peer insurance (P2P) could end up restructuring the entire market. P2P insurance empowers policyholders to a greater portion of the premiums rather than the individual private wealth managers working to produce returns for insurance companies. A number of well-funded startups are already beginning to stake their place in the P2P insurance market. One example, Dynamis, is a peer-to-peer supplemental unemployment insurance protocol that uses the policy holders’ social capital to replace underwriters.
Enigma, enables different parties to jointly store and run computations on data while keeping the data completely private. In the foreseeable future, specific P2P insurance platforms may begin to use smart contracts to set claims and match demand between consumers in an online market, solving many of the current issues when transferring digital assets or accessing private data.
Parametric insurance
Another use case for Blockchain is parametric insurance. Instead of indemnifying the pure loss, insurers would agree to pay a certain amount upon the occurrence of triggers within preset smart contracts. For example, if an earthquake were to occur in a given region above a magnitude of 5, the smart contract would automatically pay 20 percent of the insurance claim to policy holders. Contracts require mutually trusted third-party administrators (TPAs) to adjust. As parametric insurance becomes popular, its process will likely improve to play a key role in the widespread adoption of smart contracts.
Product-creating startups like Rainvow can be used to create cross-border risk pools, allowing individuals from all over the world to access its exchange protocol via digital currencies. Rainvow’s Ethereum platform facilitates niche coverages to automatically compensate unforeseen transportation costs on rainy days.
Platform-creating startups like Factom* facilitate highly specific insurance policies. These systems allow TPAs to create triggers or oracles for smart contracts, promising to make parametric insurance easier and more adoptable by insurance carriers.
The fast growth of IoT-based technologies and sensors have fueled startups and corporations, giving access to real-time data that may ultimately give way to new methods of settling insurance disputes. Automobiles could be assigned tokens by their manufacturers; rather than having the incident go through an insurance company, vehicles could adopt tech for cars to assess driving accidents automatically. A fender-bender would trigger instant compensation within the smart contract based on sensor and party data.
Microinsurance
Blockchain has several perceived benefits in microinsurance, as well. It can enable trust between peers to increase transparency for populations living in remote regions of the world. Its beauty lies in its simplicity. The virtual nature of the transactions could side-step governmental bureaucracy to make geographic limitations irrelevant within its context. These features make the future of microinsurance very appealing.
Helperbit, an Italian Blockchain startup, uses the Blockchain protocol to enable philanthropists to donate digital currencies to underfunded, hard to reach nonprofits in remote regions of the world. It even allows people to trace their donation and the manner in which it is used. Their risk assessment platform allows Good Samaritans to pool their money while limiting fraud exposure.
Outlook
The future of insurance could flourish through an intelligent adoption of Blockchain, with applications in digital currencies, fraud solutions and smart contracts. Large insurers have the potential to benefit immensely. However, its implementation will mean that insurance companies will have to change their underwriting process, the structure of the policy, as well as risk underwriting.
Blockchain allows for cheaper, more consumer-oriented products to be developed that could chip away at the premiums collected by large insurance companies. An ideal scenario would be the cooperation between Blockchain startups, carriers, brokers, reinsurers, etc. However, most likely many segments of the insurance industry will be subject to disruption and may follow the way of milk men or lamplighters… a precautionary tale for incumbents in the insurance industry.
*Factom is a portfolio company.
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