Decentralized Insurance. Part 1. Why?
Just catching the word ‘Blockchain’ can trigger specific feelings in people. Those may vary from the ‘scam’ word, up to the ‘speculation’ and a whole way to the ‘lifesaver.’
Last year we witnessed a bumpy road for the technology with the ICO hype and now see the majority of the Blockchain-based companies either been dead or seriously struggling.
2019 feels teams tend to put more effort into actually building something before trying to raise funds. Various meetups and training sessions around the globe broadcasted the word and insights, the conferences and workshops teach the tools and technics. As an outcome, teams now take a more thoughtful approach trying to build innovative products.
One of the trends lies in the concept of Decentralized Finance (DeFi).
Decentralized Finance (DeFi) is the movement that leverages decentralized networks to transform old financial products into trustless and transparent protocols that run without intermediaries.
The foremost benefit for the consumers is to have a highly accessible financial instrument with attractive revenue schemes and lower costs. Such products function conceptually distinctive from the traditional ones: the logic is implemented in an unchangeable piece of code and gets executed in a deterministic and autonomous manner: no banks, open accountancy, no staff.
And currently, it feels the assurances given were implemented. There is a trust in it, and the volume is continuously growing.
Owning insurance as fun as watching paint dry
We’re all a part of particular communities. We typically join them sharing a common idea or an interest, driven by a purpose or a financial goal. Some communities are free to join, and some having a steep barrier to land at.
The community of insurance policyholders is an exceptional one: it’s highly commercial, and it’s got less grateful members ever. In fact, everyone who’s got insurance wants to get rid of it. But don’t stop simply because they would have no insurance after.
Insurers usually have old and cumbersome tools, lagging way behind the technology’s cutting edge.
And yes, it’s way too expensive.
Don’t we deserve something better than this?
Fix one with the help of another
The principal idea of Decentralized Insurance is moving the trust from insurers back to the community, and moving it undamaged. This shift would mean that what used to be accomplished by a trusted party, would be executed by equally trusted techniques. And primarily, that piece of autonomous code that grants it will work for the mutual benefit of every participant and contributor of the community, with the help of specific incentives or cost cut.
In fact, the idea of sharing the risk between each other is not that new. It’s (been) used in some places. In such communities, confidence was gained, and a consensus was reached by the participation of senior or trusted members.
What’s new here is that we (seems to) having now the tech that is competent in cutting down a human factor and enabling the same trust freely of people or companies.
But how to do it correctly?
Phase 1. Tokenization. Premiums. Claims.
The ultimate benefit of Blockchain is to enable reaching consensus between the parties that are not fully trusting each other, as trust is a key when creating a network of members, people, or companies.
The feasible step to start with would be the tokenization of the critical assets that participate in the insurance value chain, such as premiums, claims, policies, or some internal asset. These records then would be stored in the Blockchain, or, in fact, a distributed ledger where each ownership and transaction is proven cryptographically.
Tokenization can be followed by extraction of the key (typically hidden) decision making, placing logic into the transparent and predictable smart contract. The example would be a pure insurance product such as ‘parametric insurance.’
Parametric insurance is type of insurance contract that insures a policyholder against the occurrence of a specific event by paying a set amount based on the magnitude of the event, as opposed to the magnitude of the losses in a traditional indemnity policy. The policyholder could be immediately paid when an event or circumstance occurred, with no claim to file, no investigation other than confirmation that the triggering circumstance did happen
Phase 2. Funds. Liquidity pool
As mentioned earlier, one of the burdens of insurance lays in its nature: customer engagement is low. That’s a given; the interaction is happening just too rarely.
Typical insurance service sits here at the bottom, so the idea is to push it a few stairs up. I believe two changes can make the trick: tooling and personal financial benefit.
For tooling, it comes pretty easy: powerful financial machine at the user’s fingertips, easy-to-use, hard to ignore.
As for financial benefit, there we’d need a vibrant and rewarding protocol that gives the community members the chance to actively participate in funding stages of the value chain, mainly ticking a few boxes:
- investment opportunities for the contributors, frequent payouts
- fostered community spirit
- attracted capital is backing the insurance risks, effectively lowering the costs of the product
- transparent code assumes the promises in the profit-sharing are fulfilled
After all, it’s a win-win.
Phase 3: Decentralise risk assessment. Claims.
The full-forward approach would be to delegate even more authority to the crowd, including features like:
- claims assessment
- voting on pricing, and possibly on business strategy as a whole
- governance
This would strengthen even more the previously mentioned benefits for the members, essentially building a so-called DAO — Decentralized Autonomous Organisation. Such an organization, in fact, is a batch of contracts where each of them is responsible for specific business logic, like voting rights, funds distribution, identity management, decision making etc, etc.
That’s not an easy task to achieve, especially taking into account the compliance part of it. But it’s worth to make, as hardly any insurance company would be able to compete in terms of price, claims processing, speed.
Hard to tell if the idea of insurance decentralization is viable and if so, how deep the rabbit hole is. But yes, there is an inspiring innovation on every step of it.
Perhaps, in a few years, the insurers will act more like service providers, competing with each other in giving their customers the best tools to the products they actually don’t own.
But hey, it’s fun to run an insurance company on your laptop!
