Blockchain-based Insurance on the Way to Radical Innovation

Readers of this blog are used to relatively technical explanations on enterprise blockchain stacks, tokenization models or cross-blockchain communication. However, in this current piece, we want to talk, at a more abstract level, about how different types of innovations can disrupt an industry and where blockchain technology can fit in as an enabler.

Types of Innovation

Black Insurance’s chief operating officer Mart Parve recently mentioned his own classification of Innovation, dividing this space into what he calls “type A” and “type B” innovation. Here are his definitions:

Type A innovations are new products, services or procedures that result in fundamentally new ecosystems and business models.

In contrast, type B innovations digitally transform a current business model.

Basically, what this means is that some innovations (type B) make use of new technology, blockchain in our case, in order to optimize a business model, change the nature of interacting with clients or provide a better user experience. There may even be completely new products involved. However, the nature of the business model still remains the same.

Further reaching innovations (type A) change a whole ecosystem. Stakeholders in a business model may suddenly find themselves without a role and new ones may appear. When a type A innovation is successful, whole industries need to adapt.

Let’s look at a real-world example of this. The music industry has been severely affected by the Internet. Amazon was one of the first companies to successfully take advantage of this. In addition to their original bookselling business, they quickly started selling CDs online. However, the music industry did not change because of this. Record labels still signed up artists, produced albums and sold them. They just changed the distribution channel and changed the buying experience for the end user. It took Apple’s iTunes model to completely change the music industry. Few people buy CDs nowadays, they download individual songs. Streaming services, such as Spotify, took this innovation even further, causing an even bigger change in the industry. The whole ecosystem has changed for everyone involved, from artists and record labels right to the end-user. We hardly buy songs now, but subscribe to streaming services. This has affected the revenue streams of artists, producers, record companies and everyone else involved.

The Factors of Innovation

In order to formalize the above classification a bit, we can use a classification model described by Jorge Lopez. In this model, there are two factors involved in the innovation process. In one dimension, the technology involved might change or advance. This dimension is usually covered by engineers and technology experts. The other dimension relates to changes in the business model and is the domain of business visionaries.

If innovation happens across both dimensions in small steps, we have incremental innovation. If only technology advances significantly, disruptive innovation is the result. Disrupting the business model with existing technology leads to architectural innovation.

Magic happens when the two dimensions are disrupted together, leading to radical innovation.

Radical Innovation or type A Innovation, whatever we wish to call it, is the most rewarding type of innovation, which can lead to the biggest benefits. However, it is also riskier than less ambitious types of innovations.

Innovating the Insurance Business

The blockchain clearly changes the technological basis for many use cases. However, this does not mean it automatically generates new business models and disrupts whole ecosystems.

Black Insurance is an example of radical innovation. The platform challenges the organization of the insurance ecosystem in a number of ways:

• Insurance policies are implemented providing a degree of transparency and automation unheard of in the industry.
• Insurance products can be created by brokers, the stakeholder closest to the client, reducing time to market and resulting in more useful products.
• Insurance syndicates can underwrite insurance products directly through a secure platform.
• Investors can fund syndicates by investing into a syndicates insurance portfolio, opening up insurance investments to a wider audience.
• Most importantly, the way insurances are created and funded may be changed forever, completely removing the necessity for large insurers acting as middlemen.

It is clear that the Black Insurance platform is a challenging project, aiming very high. However, the project is well equipped to manage and mitigate the risks related to radical innovation. Safeguards have been put into place right from the beginning, ranging from the organization as a protected cell company and insurance and investment licensing compliance to technical details, such as privacy-protecting bridges between public and private blockchains.

We fully expect the insurance business to change forever, powered by radical type A innovation.