Blockchain for peer-to-peer insurance -why it won’t work, and how it could
Will blockchain disrupt the insurance industry?
The general consensus has been, yes — pun intended. While there has been positive movement and publicity in insurance use cases of blockchain technology, there is still much more work to be done. Retail, and not corporate insurance is the focus of most efforts. In retail, some say the disruption has already begun with some new players. But are they really disruptive? Have they truly captured the disruptive potential of blockchain? I’d say these are good first steps. The larger industry players have shown interest in blockchain as well. Transparency, leaner admin, and speed are the goals of most blockchain efforts currently being pursued. Yet, the true promise lies in rethinking the overall business model.
Peer-to-peer insurance has been proposed as one of these business model transformations, and blockchain is touted as the enabler for it to happen. However, peer-to-peer insurance is hardly new and takes us back to the origins of insurance itself. In fact, peer-to-peer insurance, otherwise known in the insurance business as a mutual insurance company, has been around since at least the 17th century.
The Hand in Hand Fire & Life Insurance Society was founded in London in 1696 and structured as a mutual society. Then in 1752, Benjamin Franklin founded the first successful and still operating mutual, Philadelphia Contributionship for the Insurance of Houses From Loss by Fire. So after this brief insurance history lesson, you may wonder where lies the innovation in peer-to-peer insurance and what role does blockchain play? In fact, that’s what most industry experts have been arguing for a while every time some hip startup in this space hits the news.
What many of them fail to grasp is that although the model is not new, the underlying social mechanisms of community and trust — which made this model successful in the past, have long been eroded. Consider first, the size these organizations have taken. And second, the changes in what one may consider as a “community” — shifted from physical to digital ecosystems. Do we feel a higher sense of community with our neighbors or with our social media contacts? Who would we rather have stay in our home, someone we don’t know but lives a few doors down or someone from Airbnb? Some of you may say neither, but you can hardly deny the social shift. Blockchain is a further enabler of this trend; its potential lies not only in the considerable administrative ease, but in its transparency. Blockchain offers the promise that the math keeps everyone in a network, or modern day community, honest.
Nevertheless, despite how much technology may help, every community still needs a community manager or managers, which need to be incentivized in some way to organize and administrate. In this respect, in retail insurance at least, any peer-to-peer insurance offering in the near future will still be structured very much like a traditional insurance company to manage such a large community of peers. Moreover, in retail insurance, peer-to-peer stumbles on to a chicken or the egg problem in terms of volume. The math becomes tricky without a very large volume of individuals (or peers) or without having in place the appropriate financial reserves to begin with. Finally, an enormous challenge with retail peer-to-peer insurance relates to the long term, or at least medium term, client engagement needed to deliver the security promised by an insurance policy and its underlying risk model. While generally, insurance clients tend to keep their policies for quite a few years — technology has been dramatically reducing the switching costs for people. If they find themselves slightly unsatisfied, individuals now quickly try and turn to a new service that better speaks to them.
These challenges, among various others, all lead us back to either a very traditional insurance company with a fancy user interface, or an unsustainable business model showing losses year-after-year but backed by ridiculous amounts of venture capital money. So then you may ask: where will the disruption start? While the focus has been so far on the retail insurance sector (health, car, home, etc.), I believe the blockchain disruption will actually begin at the corporate insurance sector. This may not appear interesting to the average person, but it should and it will.
Let’s review the three main challenges I presented above: administration, volume, and engagement. Any company, no matter the size, will always require at least one person, internal or external, to handle administration. Any legal company will be required to — at the very least, keep some form of accounting to file taxes, buy some form of insurance, and pay social charges. This role is and will continue to be essential for oversight, it will simply be a better and leaner oversight.
Regarding volume, in the corporate insurance sector, a few large companies, with diverse risk profiles and enough volume by themselves, could bundle together as peers and insure themselves. In fact, self-insurance through captives, is already done by most of the world’s largest corporations.
Finally, comes long term engagement. Unlike the retail space, where as individuals we usually buy off-the-shelf or slightly tailored services, companies of a certain size will engage in a partnership rather than a seller/buyer relationship. The rules and parameters of a new working relationship are negotiated and agreed after careful consideration. Time, effort and resources are invested by all, making the switching costs from an established partnership higher. There is a false perception that blockchain eliminates the need for this type of work. In reality, blockchain requires a clear definition of the parameters in a relationship (or network) in order for these to be effected without delay.
Many further challenges remain to be tackled, but blockchain opens the door to the possibility of transforming the corporate insurance business model to a SaaS (Software as a Service) model. An insurance company would offer a platform with the risk management intelligence to allow a selected group of medium or large companies to pool together and self-insure, while easily managing this among themselves through an intuitive and user-friendly interface. Other specialized insurance services could then be offered as an additional consulting service. This model, termed “servitization”, is not new and has been followed and studied by large tech companies such as ABB for decades. The insurance business will start looking, and reacting, more like a tech company. In the end, this is what digital transformation is really about.
As with any transformative new technology, only 5% of the transformation has to do with the technology itself. The remaining 95% of the transformation has to do with re-thinking the underlying structure and processes to support a new business model.
Technology in the end is the easy part; the hard part is the human side. Digital transformation is not about the technology, but about people. Not just people as individual clients, but the people that allow these industries to operate and innovate. Blockchain is nothing more than a tool; if and how we use it — and the value we create with it, remains to be seen.