Launching a Blockchain-based Insurance Product

Implementing insurance products on a blockchain system has many potential advantages, as we have explained previously. The Black Insurance platform provides a complete eco-system for insurance industry stakeholders and end-users to interact through smart contracts and digital tokenized assets. The actual smart contracts that represent an insurance policy have to be well designed but are not overly complex. In fact, the agility of new product design is one of the many advantages the blockchain brings to the rather old-fashioned insurance industry. But how does creating an innovative insurance product on the Black Insurance platform actually work? To understand this process, let’s first look at traditional insurance products.

The Traditional Process for Creating Insurance Products

The insurance industry consists of many interacting stakeholders, as illustrated above. On the end-user side, customers can purchase insurance coverage through a broker. The broker, in turn, interacts with a so-called managing general agent (MGA), a type fronting system for insurers. Insurers are the providers of insurance policies. Finally, reinsurers cover the risk and act as underwriters.

Product design is done by insurers, typically large well-known companies. Thus, as seen in the above diagram, product design is located two steps away from the actual customer. On the other hand, brokers are in daily contact with insurance clients and are ideally placed to detect market needs. Should a broker have a clever idea for an innovative insurance product, he will first have to convince an insurance company to take on such an endeavor. As most innovators will know, it is not easy to get large companies to commit to brilliant ideas, especially so in the very traditional insurance industry. The whole process from idea to market may take months or even years, with plenty of good ideas lost in the process.

In addition, investment in insurance product is limited to a select few institutional investors, leaving behind smaller retail investors.

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Designing a Product on Black Insurance

The Black Insurance platform not only changes the way insurance policies are implemented and underwritten, it also changes the whole process of getting a new product to market.

Let’s consider the example of a broker that detects an opportunity for an innovative product. Through his daily contact with clients, the broker realizes that companies have started to worry about their cryptocurrency assets. He comes up with the idea to insure companies against certain incidents, such as key loss or cybersecurity attacks. He quickly gets advice from an expert and defines all the key clauses related to due diligence, such as smart contract audits.

Black Insurance automates a number of a number of processes and provides a simplified model for insurance innovators to create new products. Using the Black Insurance web interface and API the broker can create his product. Black Insurance provides the technology stack necessary to create smart contract-based insurance policies directly on the underlying blockchain system.

Furthermore, the platform provides a unified licensing model for virtual insurance companies. As such, Black Insurance will hold the required license, allowing brokers to offer their products through Black. In a sense, the licensed Black platform will act as a cooperative insurer, replacing the insurance company in the traditional model. The first such license scheduled to be provided will allow EU wide cooperation of brokers. Further licenses will be obtained at a later date.

Getting Investors Onboard

Capital raising on the Black Insurance platform is organized through syndicates. A Black syndicate may include a specific product in its portfolio. As Black Insurance acts as a social platform, it is easy to make the required connections. Once a syndicate is on board, the broker together with the syndicate form a virtual insurance company using the Black provided licence for its operation.

Underwriting follows the crowdfunding model. Each syndicate offers its own Black syndicate token to investors. Syndicate tokens are security tokens and represent a share in the investment portfolio of the respective syndicate. Accredited investors can obtain these shares by purchasing the token directly or through accredited secondary markets. Various models are possible for syndicates, ranging from a basic model, in which the token behaves like an interest-bearing bond to a more complex model, which may pay out dividends through a syndicate-specific cashflow model.

Different syndicates may specialize in different types of products, offering portfolios with different risk and reward characteristics to investors.

Thorough Vetting

It is clear how the above model simplifies and accelerates the product innovation process. It also allows access to the exclusive world of insurance product generation to different stakeholders and innovators. In a similar way, insurance investment is opened up to a wider audience.

In the traditional model, both of these dimensions are subject to certain control and regulations for good reasons and it would be imprudent to do away with these safeguards completely. For this reason, Black Insurance requires investors to comply with accredited investor requirements and subjects them to KYC verification.

Furthermore, brokers can only offer a product through the Black Insurance platform once they fulfill certain criteria. First of all, brokers need to pass KYC vetting. Secondly, brokers must convince a syndicate to participate in their endeavor. The syndicate may or may not ask the broker to partake in the potential risk their product may expose. Finally, brokers must provide references from their local market to back up their credentials as successful insurance professionals.

The Advantages of the Black Model

The Black Insurance model presents a number of advantages in terms of insurance product design, compared to the traditional industry model.

The role of product designer is returned to those in daily contact with end-user clients, namely insurance brokers. This should result in products more suited to their clients, in terms of individual needs and local markets. The decision o whether a product is developed is placed with the capital, in the form of syndicates and their investors. They decide whether to believe in the business plan or not, whereas currently this decision is up to a few select individuals at large insurance companies.

Furthermore, the whole process of creating new insurance products is simplified and unified, resulting in much faster idea to market speeds and cost reductions.

In addition, investment opportunities are opened up to a wider audience, potentially attracting new capital to the insurance sector.

All this is achieved without tearing down time-proven safeguards and protection mechanisms, protecting investors and end-users from unnecessary risks and regulatory uncertainty.