Are Blockchain and Smart Contracts the Future of Insurance?
When you consider the insurance industry, you don’t immediately think about innovation and disruption. But perhaps you should. As it did with financial services, blockchain is poised to transform one of the most staid of all industries.
“The embers of innovation are beginning to char the massive $1.2 trillion underbelly of the largest industry in the world,” Kevin Wang and Ali Safavi wrote in a 2016 piece for TechCrunch. “While most startups attempting to gain traction in the insurance market fall under incremental innovation, Blockchain for insurance could be characterized as disruptive.”
In retrospect, disruptive may even be something of an understatement.
The most obvious place to begin exploring the intersection of insurance and blockchain is the smart contract. As we’ll see, insurance is ideally suited for Blockchain-based smart contracts. Think about it: with a smart contract, claims processing and payouts could become automatic.
It’s not hard to grasp, if you think about it.
“Blockchain has so many use cases for insurance. The most practical one for me is a smart contract. Looking at the ecosystem, if all parties can view the same information from a contract, in real time, the whole claims process will be simplified. This would be for almost all lines of insurance,” Stephen Goldstein of Pivot Ventures wrote in Insurance Thought Leadership.
Of course, the usual challenges of regulatory uncertainty and industry buy-in remain.
But let’s start by looking at the potential. We’ve gathered insights experts across a range of professions, including law, insurance, and technology. Despite various caveats and concerns, most are exceptionally — but cautiously — optimistic.
Key Concept: Parametric Insurance
Any discussion of insurance and blockchain technology begins with parametric insurance. Parametric insurance and smart contracts seem made for each other. It’s not the only type of insurance that will benefit from Blockchain technology, but it probably represents the lowest-hanging fruit.
So, what is parametric insurance?
It uses data sources and algorithms for underwriting and claims, and it’s initiated by and paid to the policyholder based upon a set of specific parameters — hence, parametric — along with a predetermined sum that forgoes the traditional claims process.
Parametric insurance kicks in when a specific event occurs or measurable condition is met — a flight delay, an earthquake, a certain hurricane wind speed, x many days of drought, etc. That event triggers payment of an agreed-upon amount. No claims adjuster to deal with; just automatic payment.
For example, a farmer buys drought insurance. According to the contract, if the temperature tops 100 degrees for more than 100 days, he receives $10,000 payout. With a smart contract, at the end of summer, if the weather had been over 100 degrees for more than 100 days, the contract would be automatically executed and the farmer would automatically get the money. (This example comes from Brian Behlendorf, executive director of the Hyperledger Project.)
No claims process. No other documentation is required for the claim to be settled. This expedited process eliminates most intermediaries, reduces paperwork, can virtually eliminate claims investigations and, in general, increase efficiency and lower costs to the insurer.
IBM — not exactly a disinterested observer, but an expert nonetheless — points to even greater potential, when coupled with the Internet of Things:
“Off-chain data sources (such as IoT device events) capture data on usage related to shared automobiles, homes, commercial spaces, etc. and offer on-demand utilization related policies. This gives rise to a whole new class of on-demand insurance products. Creating a no-touch, frictionless procedure can eliminate human error in the claims process and could potentially save insurers millions every year and produce a better customer experience. Blockchain and parametric insurance have limitless possibilities.”
The law firm Steptoe & Johnson recently wrote a series of blogs and a Georgetown Law Review article on parametric insurance, and they, too, sound excited. “As a result of the reduction in frictional costs, policies that were previously unprofitable because of low margins — due to the low premiums or high administration costs — could become profitable areas for new products.”
They explain that companies could profitably insure low-premium and low-payout events through no-fault parametric policies. Auto insurance payouts would be determined by sensors in cars that would assess damage to the car, driving patterns–including traffic violations — before the incident damage and various other factors. For homeowners, sensors could assess fire damage — and perhaps even the source and cause of the fire.
Other examples of parametric insurance on the Blockchain include — but are not limited to — the following:
- Flight delay insurance: French insurance giant AXA is testing fizzy, flight delay insurance. When you purchase the insurance, it’s recorded on the Ethereum Blockchain. “This smart contract is connected to global air traffic databases, so as soon as a delay of more than two hours is observed, compensation is triggered automatically,” AXA explains. Meanwhile, Etherisc Flight Delay has a product ready to launch that will cover both the business and consumer markets. For the former, it will cover losses of revenue, reputation, and profits; for consumers, it will cover unplanned travel expenses.
- Crop insurance: Germany-based Etherisc is also developing a crop insurance solution to automatically make payments in cases of droughts or floods. Farmers in developing countries often lack access to insurance because of the low margins for insurers. “Blockchain can help to solve this issue, since insurance products for developing countries become profitable, if all processes can be automated,” explains a piece posted on Digital Insurance Agenda’s website an international insurance conference.
- Life insurance: Blockchain technology could make sure beneficiaries get the life insurance payouts to which they are entitled. In the U.S. there is approximately $7.4 billion in unclaimed life insurance money, Dante Disparte the founder and CEO of Risk Cooperative writes in a piece in the Harvard Business Review. A blockchain-based registry could help address this challenge. Currently, because people live longer, policies mature, and family members have no idea where the paperwork is. They may have forgotten there’s even a policy. “A Blockchain-based public ledger would enable the rightful claimants to these proceeds to receive their due, rather than having these unclaimed funds be sold in a secondary market or stagnate.” There’s no need to depend on a grieving beneficiary to file the claim. A smart contract could simply rely on “oracles” to monitor sources of death data. Once the death is confirmed, the payment is made.
Driving Collaboration: Co-Insurance and Re-Insurance
Blockchain technology can simplify the flow of information and payments among insurers and reinsurers. When significant risks are insured by multiple insurers, blockchain technology could enable automatic data interchange among the participating companies, allowing all parties to be notified immediately and, perhaps more important, concurrently.
There’s plenty of activity happening in this space.
The Blockchain Insurance Industry Initiative (B3i) is using Blockchain technology for the administrative handling of reinsurance contracts. It’s still beta, but it anticipates up to 30 percent savings, according to a piece posted to Digital Insurance Agenda. B3i, established in October 2016 by the insurers AEGON, Allianz and Zurich, and reinsurers Munich Re and Swiss Re, now has 15 members from across the globe.
Meanwhile, iXLedger, an Ethereum-based decentralized marketplace for insurance products, is developing a platform to bring together insurers, reinsurers, and brokers, bypassing intermediaries. It’s tokenized, with participants using the IXT (IX token) to buy data and premium services. According to the company, its primary focus “is to streamline processes through an alternative marketplace where insurance companies can interact directly and more effectively to better serve customers and fuel the creation of new business opportunities.”
Marine Insurance POC
In September, EY and Guardtime announced a 20-week proof of concept (POC) of what they said was the world’s first Blockchain platform for the marine insurance sector. It’s slated for full implementation this year. According to EY, it will connect clients, brokers, insurers, and third parties, and capture data about identities, risk, and exposures, and integrates the data with insurance contracts.
In a statement announcing the POC, Shaun Crawford, EY Global Insurance Leader, explained how it works.
“The Blockchain platform supports the marine insurance industry to address the challenges of its complex international ecosystem involving multiple parties, long paper chains and duplication, high transaction volumes, and significant levels of reconciliation — all potentially preventing transparency, compliance, and accurate exposure management. The Blockchain platform connects disparate data and processes to address and mitigate the issues associated with reconciliation and error applicability.”
Kevinsured (Kevin, for short) is an experimental product — a chatbot, really — developed by Spanish start up Traity, in collaboration with Australian insurer Suncorp, to help protect people shopping online via community marketplaces such as Ebay. Currently Kevin insures — for free — any P2P transactions against theft, fraud, scams, etc., up to $100.
It’s free because, right now, Kevin is a pilot, according to its founders. “Our objective was to show transparency and trustworthiness in the way we handle money, we handle policies, we handle balance sheets, we limit leverage, available liquid assets, etc., and to be a project with which other businesses, insurtechs, and insurance companies can get inspired to create more trust in the value chain and financial transparency.”
We’ve already mentioned parametric auto insurance and the automotive industry is ripe for transformation; the potential is staggering. EY predicts a Blockchain to cover financing, ownership, registration, insurance, and service transactions; all those activities could be tracked together.
For example, the Toyota Research Institute (TRI) partnered with MIT’s Media Lab to use Blockchain “to foster a digital environment where users — both businesses and consumers — may securely share driving and autonomous vehicle testing data, manage ride-share and car-share transactions, and store vehicle usage information that could be used in the setting of insurance rates.”
TRI notes that by allowing sensors to collect driving data and store it on a Blockchain, vehicle owners could be eligible for discounts. Of course, the issue of sensors in cars isn’t new, and there’s always the concern that it can lead to rate increases for those unwilling to give unfettered access to their data.
Getting There From Here
We’ve only skimmed the surface of the Blockchain’s potential to transform the insurance industry. But based on what we’re reading right now, it seems inevitable.
Insurers would be wise to pay attention. In his Harvard Business Review piece, Disparte offers this warning: “For an industry that invented the concept of mutualizing and coopetition, insurance can gain enormously from the foundational technology of Blockchain. Failure to act may consign many large players to the continuing trust deficit or, worse, irrelevance.”
And it’s the very notion of collaboration that will be essential, a CB Insights report warns. “From an industry perspective, insurance companies need to align around standards and processes within Blockchain technology. While blockchain technology can provide insurers with better tools for collaborating and sharing data, the insurers themselves must be willing to work with each other.”
And, of course, legal and regulatory frameworks for insurance need to evolve. That applies to any Blockchain discussion. But as the Steptoe and Johnson post points out, this shouldn’t scare off insurers and reinsurers, whose business it is to assess risk and opportunity. “If they can accomplish that, the business opportunities presented by the Blockchain could be extraordinary.”
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