Mapping the Insurance Business onto the Blockchain
We have talked a lot about how the blockchain can revolutionize the insurance industry and how distributed ledger technologies can be put to use in enterprise applications in general. Black Insurance is much more than an efficient and transparent implementation of a software platform for the insurance business that leverages the advantages of blockchain technology. The platform is also a re-modeling of the insurance value chain that moves product design closer to the customer, changes the insurance investment landscape and promotes role changes for certain stakeholders, all whilst fitting within existing regulatory frameworks.
In this article, we have a look at different insurance concepts and stakeholder and map to their traditional definitions to the Black ecosystem and its underlying blockchain model.
Industry Concepts and their Implementation
There are some terms and concepts which are universal to the insurance industry. Let’s look at some basic definitions and how they are implemented in the Black Insurance Platform:
- Insurance Product. A set of conditions and pricing options related to a certain type of polices make up an insurance product. Let’s take a car insurance as an example. The precise conditions of coverage and pricing mapped to potential insurance policy options are described in a motor insurance product. The concept of an insurance product is unaltered in Black Insurance. However, the way the platform allows insurance products to be created and funded speeds up the process and allows for innovative products to be brought to the market quickly.
- Insurers. Insurers are providers of insurance products. Traditionally, insurers are large insurance companies. They represent the stakeholder that is potentially most affected by the Black Insurance platform, as the Black concept empowers brokers and agents to join forces in virtual insurance companies for product creation. These may replace traditional insurers in their current form.
- Insured. The insured is the customer of an insurance product and the person or entity covered by a policy.
- Broker. Brokers are licensed insurance distributors or resellers. They sell coverage of the client’s risk through insurance products. The role of brokers may change dramatically due to Black Insurance, as the platform empowers brokers to create their own insurance products. Being close to the customer, brokers are ideally placed to design innovative products directly and provide coverage for their customers’ needs.
- Insurance Policy. A policy is a contract between an insurer and an insured. This contract defines the conditions of the risk coverage, including the rules for claim processing and insurance premiums. In Black Insurance, policies are implemented as smart contracts on a blockchain. This allows for transparent claims processing and automation.
- Insurance Premium. Premiums are the payment required by an insured to be covered under the terms of a policy. In Black Insurance, this concept is essentially unaltered, but its execution is transferred to a tokenized economy. Premiums are paid in Black utility tokens.
- Insurance Claims. An insurance claim is a payout requested by an insured under the terms of a policy. If an event covered in the policy is deemed to have occurred, payouts are authorized. Claims processing in Black Insurance is done through policy smart contracts. This allows automated processing in some cases, for example by using external data sources to determine whether claim conditions have been met. An example of this is the Rainy Day proof of concept policy.
- Underwriting. Underwriting is the process of covering the risk of an insurance policy. Strictly speaking, the concept relates to the decision making process of the underwriter regarding a single insured. However, the concept of underwriting is closely related to reserve capital (see below).
- Reserve Capital. Every insurance product and the set of policies has to be backed by a mandatory amount of capital, to ensure claims can be processed. This reserve is provided by insurance premiums and investor contributions. The investors essentially “bet” on the insurance product being profitable, in the sense that a smaller amount needs to be paid out through claims than the amount paid in through premiums. Thus, an underwriter invests in an insurance product to cover potential worst-case scenarios with the expectation of a profit. The risk can be further managed by re-insurance, which protects the underwriters from catastrophic loses. In the Black platform, the concept of reserve capital is modernized by tokenizing the underwriting process and opening up insurance investment to a wider audience.
Additional Black Insurance Propositions
In addition to the above concepts, there are a number of terms unique to Black’s vision of the insurance ecosystem:
- Insurance Syndicates. Strictly speaking, the concept of an insurance syndicate is not unique to Black Insurance. However, the actual Black model for insurance syndicates is different enough to deserve being mentioned in this section. Syndicates are managed groups of investors that provide capital to a portfolio of insurance products offered by a virtual insurance company (see below). As mentioned, above, the Black platform revolutionizes the concept of insurance investments through tokenization.
- Tokenized Insurance Investment. We have already explained the Black tokenization models in a recent article. Each syndicate offers its investment option in the form of a Black Syndicate Token (BST). A BST is a security token, representing a share in the corresponding syndicate. A BST is, thus, a profit-yielding security. Implementing this investment model in the form of smart contract-based cryptographic tokens allows the implementation of alternative cash flow and profit distribution models.
- Black Platform Token. Another aspect of the tokenization is the use of the Black utility token as an internal currency for all payments.
- Virtual Insurance Company. Virtual insurance companies (VIC) are one of the most important concepts in the Black Insurance platform. VICs bring together various stakeholders, in order to create insurance products. This allows brokers, for example, to gain access to the funding and licensing required to design their own products. VICs are also a vehicle for accelerating time to market of insurance products and allow bypassing the antiquated model of large insurance companies.
A Silent Revolution
As can be seen in the above list of terms, Black Insurance does not intend to completely remove existing and well-proven concepts. However, subtle and not some not so subtle implementation details and additions provide the basis for disrupting the very traditional insurance industry. Opening up insurance investment to a wider audience, policy automation, and accelerated product creation will improve the ecosystem and provide viable alternatives to brokers and clients alike. Black Insurance strives to modernize and optimize and experienced industry with full regulatory compliance and without tearing down the existing concepts that function correctly.