The potential of blockchain: From flight-delay to agriculture insurance
Etherisc is building a platform for decentralized insurance applications. The platform aims to allow corporates, not-for-profit groups and insurtech start-ups to provide better products and services through blockchain technology. Etherisc believes that this technology can help make the purchase and sale of insurance more efficient, lower operational costs, provide greater transparency, and democratize access to reinsurance investments.
In particular, blockchain allows the automatic transfer of digital assets from one entity to another without an intermediary — a function often referred to as a “smart contract” — which can reduce operating expenses and improve transparency.
Smart contracts are ideal for insurance. They can remove the need to trust one central authority, align the interests of pools of individuals globally, offer automated systems, bring vast improvements in efficiency, and facilitate risk-sharing. Given current frustrations with claims processes, they also offer significant potential by removing the need to submit paperwork. Pay-outs can be automated when the conditions embedded in the smart contract are met.
This holds particular promise for parametric insurance, for which claims payouts are triggered when certain parameters are met, without the need for manual assessments or decision-making.
Flight-delay parametric insurance
Etherisc created a flight-delay parametric insurance application for passengers, known as the Flight Delay DApp. It was first provided to attendees of Ethereum’s Devcon2 conference held in Shanghai, China.
Despite the limited risk pool, this test case demonstrated that the innovative decentralized insurance policy merited further exploration. We have successfully evolved the product, selling policies to more than a hundred travellers to three blockchain conferences in late 2017, with the insurance licence provided by Malta’s Atlas Insurance PCC.
We compared data relating to the development and operating of our flight-delay insurance and that of a large reinsurer. We found that while our decentralized product required up to three intermediaries, a typical centralized product made use of between six and 12. Our claims ratio was between 60 and 95%, compared to a ratio of 25–60% for a similar centralized product. Furthermore, our operating costs were significantly lower (at 3–5%, compared to 30–40% for the similar traditional product).
One striking aspect is the level of disintermediation achieved thanks to automation, which allowed us to reduce costs. Furthermore, the product is highly transparent. The insurer does not assess flight delays; data is provided by an independent data services company called FlightStats which provides real-time global flight data. Finally, the insurance application is open source and publicly available.
Now, imagine what this could mean for inclusive insurance, specifically for index crop insurance.
Index insurance products use data sources and algorithms for underwriting and pay-out decisions, making them an ideal candidate for demonstrating the benefits of decentralized insurance. When certain conditions are met — be that a flight delay or an extreme weather event — a self-executing piece of code kicks in and claims are triggered.
Today, customized policies for remote farmers to protect themselves against crop loss would likely be unavailable or prohibitively expensive. The Etherisc platform aims to stimulate new risk pools to meet this challenge. By creating templates for insurance products, it can give farmers, cooperatives, donors, buyers or even end-consumers the tools to create, at a far lower cost, their own customised insurance product. For the first time, risk-sharing processes could be placed in the hands of beneficiaries, supported by immutable smart contracts. In comparison to dealing with a remote, traditional insurance company, the customer experience could become direct, immediate and automated.
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