Imagining Decentralised Insurance
The fundamental principles of the insurance business — assessing risk, calculating and receiving premiums, and paying out on claims — haven’t really changed much in centuries. We’ve seen the model repackaged in different ways, but they have all, ultimately, been cast in the same mould. Digital developments have evolved the industry, but none have disrupted it to the point of a complete revolution.
As unchanging as insurance has been, it is rapidly emerging as an area in which blockchain could have a major impact. Insurance has a surplus of middlemen and needs to be focused more on community and mutual interest.
Much like the business models of Uber or Airbnb, removing the need for middlemen from transactions would reduce the cost for everyone involved — directly connecting those in need with the right product for them (in this case, an insurance payout) through the use of smart contracts. More bullish observers estimate that savings afforded by blockchain in the global re/insurance market could be as high as 10% to 25% — $20 billion to $50 billion each year.
Blockchain-based Insurers Enter the Market
One company generating significant buzz is B3i. An insurance platform built on the blockchain, B3i has garnered huge investment from the likes of SBI Group, with its last funding rounding bringing in a reported $20 million. B3i’s first application is for the reinsurance market — a Catastrophe Excess of Loss product built on blockchain technology. The product is going live for the January 2020 renewal season and promises to utilise distributed ledger technology to improve efficiency, cut costs and remove friction.
With these decentralised insurance programs — often referred to as ‘crowdsurance’ — there is no financial institution that collects and stores money. Furthermore, there are no mediators that decide manually whether a payout is made. All assets are under the control of a smart contract and securely stored on the blockchain. They are not, perhaps, as utopian an idea as complete community insurance — the notion that everyone in the community could cover the property of everyone else, for example — but it is an example of blockchain’s strengths being put to good use in an industry ripe for change.
Another example is Etherisc. The startup’s flight delay insurance application is often cited as one of the earliest working examples of the power for smart contracts to govern areas otherwise reserved for humans. By storing the claims process on the blockchain, the process is automated and visible to everyone, as well as being completely secure. It is very similar in nature to B3i, though its users will be able to earn crypto by sharing information about themselves and their insurable property.
Smart Contracts Over Middlemen
Ultimately, one of the biggest selling points of a company like Etherisc or B3i is the lack of expensive middlemen. They are not insurance companies in the traditional sense, they are protocols which cater for the building of distributed insurance products. They have built a common infrastructure, product templates and a platform for insurance license-as-a-service upon which anyone can create insurance products. These blockchain-based products utilise smart contracts to uphold insurance payouts, rather than offices full of well-renumerated workers.
There are a few reasons that decentralised insurance products look set for enthusiastic adoption. One is that, despite every developed economy being in some way reliant on a functional insurance industry, they are all deeply inefficient. Insurance is dominated by a handful of giants, often feels exploitative of the consumer, and is weighed down by stringent regulation. Regulation will catch up with decentralised insurance, too, but in theory, the use of smart contracts won’t require the close scrutiny under which humans operate.
One potential challenge for a decentralised insurance platform is the reliance on cryptocurrency to make payouts. These currencies have been, to date at least, volatile. This leaves both parties involved in the insurance claim with a high currency risk. One potential solution for this is the use of stable coins, which have been developing alongside the wildly volatile big names like Bitcoin. Another is simply to wait until the huge fluctuation in coin prices stabilises over time, which many expect it will.
The blockchain community will be hoping that the likes of Etherisc and B3i will be able to offer the modernised insurance industry that so many people want to see. Such a far-reaching application of blockchain technology would highlight its potential in other industries, particularly if it can create not only better products, but cheaper ones. Insurance is bureaucratic and, in many cases, ripe for change. Blockchain offers a viable alternative.
