[NOTE: This is an updated version of the same piece you can find on ConsenSys’ web site.]
A few years ago, I hit upon an idea that may well change the nature of insurance within a decade. I explained it to a group of people in the insurance industry back then, and they took several pages of hand-written notes. Since then, not much has happened. But I want to open-source the idea here so everyone can have it.
Look at today’s insurance landscape. At the 30,000-foot level, it’s investors on one side, natural insurance buyers on the other side, and insurance companies in the middle. The companies make products and market them heavily, using branding and lobbying to maintain their grip as market intermediaries. They sell products — contracts that specify how much a buyer pays in premiums and how much an insurance company pays under what circumstances. These contracts are both mass-produced and custom-made, giving buyers the worst of both worlds. Try making a change to one of your insurance contracts! It can take about as much time as getting a new one altogether.
Now think of it differently. Think of the market for insurance products as broken into small bits, each of which is $1,000 worth of insurance for one month. They can be for life, fire, accident, liability, travel, etc. A typical insure-bit may only cost a few cents to provide insurance for 30 days. (Presumably, a consortium would taxonomize and standardize the formats for these tokens, so they can unambiguously represent legal contractual agreements.)
Investors create insure-bits. They set the terms and business logic of each one by programming the smart contracts. Investors only create the contracts they are willing to honor. It’s not done by hand — it’s done by software that can watch the contracts in the market, look at past and actuarial data, and decide which contracts an investor wants to offer given his exposure at the moment.
Then, we replace insurance companies with markets where customers shop for insurance the same way they shop for groceries. They put all the units they want into their “shopping cart,” then they pay and transfer the insure-bits to their insurance wallet. If these tokens are in a marketplace where all investors and consumers can see them, we eliminate the middleman, the marketing, and the spread. The cost of making and buying insure-bits goes to the marginal cost of close to zero.
Of course, people wouldn’t sort and select insure-bits by hand. They would specify what coverage they want, and software can buy the tokens they need. The tokens trade at market price at all times, depending on various risk factors that can move prices up or down.
Dynamic Portfolios and Prices
Once we have an insure-bit infrastructure and ecosystem, we get dynamic allocation. That’s right — you could automatically have the exact combination of insurance you need at each moment, and that mix of insure-bits can vary according to circumstances. Your insurance bot could increase your homeowner’s insurance as it learns about potential storms, or it could add to your travel insurance if it knows you’ve just rented a motorcycle. If the value of one of your assets goes up, that could trigger the purchase of more insure-bits. Keep in mind that dynamic allocation also involves dynamic pricing — you’ll find that the insurance you want to buy in a hurry may be significantly more expensive than before, when you didn’t need it.
The Google-ization of Insurance
In essence, this is what Google did to advertising. While advertisers were buying big media campaigns that included banner ads as part of the mix, Google broke every single search word down into its own market and sold the words at market price. This is the atomization of advertising — by breaking everything down into the smallest possible unit, it’s easy for buyers to purchase what they want when they want it, and they can specify in fairly sophisticated ways how much they are willing to pay for various words under various conditions.
Similarly, investors create insure-bits according to demand, and buyers purchase whatever insurance they need. Any insure-bits you have in your portfolio at the exact time of the fire, or the car accident, or the cancellation of your flight determines your payoff. What’s different is the granularity and the automation. Now all market participants take part in a giant game of worldwide insurance, spreading risk and making calculated bets.
Insure-bits can be assembled, modeled, tested, collateralized, securitized, and traded in real time to meet the needs of various investors. The fact that both investors and customers are constantly trading these things has no impact on the market, since a double-spend is impossible and we can determine exactly the conditions that trigger the payouts. Investors may have to put up large deposits to ensure payouts, or they can securitize their holdings with tokens that represent real assets. None of this is particularly different from the way things are done today, but insure-bits moves everything to a real-time basis, which will automate and improve the industry significantly.
This could happen in many other industries. Stop making custom products. Just make a number of small products, turn them into smart tokens with all their rules attached, add the regulatory code, and let the market buy and trade them at will (think: mortgages, tax liens, options, bonds, etc.). Anything that is currently traded in large lumps could be traded as portfolios of tokens that represent the smallest unit of value. This increase in granularity requires less custom work, making markets more efficient.
I haven’t spent much time on it, but I think this general concept eliminates the need for most reinsurance as well. There will always be one-off cases for special insurance, but in general most of the basic insurance and re-insurance use cases can be met with combinations of standard insure-bits.
We’re Going to Need a Better Oracle
Which brings me to the oracle problem. People in the insurance business know that there is still no clear definition of a car accident. If smart contracts are going to pay off when triggered by various events and conditions in the real world, we’ll need oracle services to put that information onto the blockchain.
I won’t go into the details on oracles, because my friend Matt Liston has written a short piece on oracles that will get you started. Oracles will be hard to design, execute, and integrate with smart contracts, but they’ll be important. We’ll start with simple things and working toward more complex solutions. Insurance companies should be putting a lot of effort into oracle services — we’re going to need a lot of them, as each little atom of insurance will have its corresponding oracle to trigger payment unambiguously.
We’ll probably also need a better definition of time. If my car is in an accident, my personal data locker could immediately try to buy more insurance before the market is aware of the event. Cases like this will bring in a new, connected infrastructure that ties oracles, sensors, cameras, published information, witnesses, claims, testimonials, and the Internet of Things all together using a common timeline that helps determine what happens when. This is another set of challenges we’ll need to solve before the insure-bit ecosystem is fully functional. But it sure beats the ecosystem we have today.
Who wins and who loses in this scenario? People buying insurance and those providing risk capital are winners. The losers are the large, branded insurance companies that like to keep the print very small and the contracts very long. Yet, if you think about it, there are opportunities. We’ll use software to do our dynamic allocation, and that software will be tied into our personal data lockers. Could this be a chance for insurance companies to re-invent themselves on the side of the customer, rather than extracting rents as intermediaries?
What about Regulation?
In general, regulation is what’s holding us back. Regulation makes politicians look “tough on crime” and helps them get elected but doesn’t generally provide any benefit to society. Insurance regulations are very heavy, ensuring that only large, existing insurance companies can continue to seek rent in this part of the economy. It’s a shame, because an innovation like insure-bits changes the game completely and lets buyers and sellers set the price of risk.
Nevertheless, if it must be regulated, you can build regulatory compliance into the smart contracts. Several companies are doing this now for security tokens, and I’m sure there are half a dozen insure-tech blockchain companies doing it for insurance. The sad part is that none of this prevents fraud and in many cases enables it. Allowing the insure-bit economy to emerge would make the world economy more resilient while iterating to keep up with the ever-changing needs of customers as technology continues to transform our lives.
Atomization is a common theme in blockchain solutions, promising higher fidelity finance across the board. There are a lot of moving parts to this approach, but it’s very doable. It’s probably 95 percent more efficient than today’s insurance market, and possibly several times better for everyone except the intermediaries. It applies to plenty of other industries as well. The concept of tiny insurance tokens explodes the industry, from monolithic paper contracts to agile smart contracts that are infinitely adjustable both to buyers and sellers. Because the contracts die on a monthly basis, they will continue to improve in quality as time goes on. A crazy idea like this could upend the insurance sector sooner than the CEOs of many large insurance companies may think.
David Siegel is a serial entrepreneur in Washington, DC. He is the founder of the Pillar Project and 2030. He is the author of The Token Handbook, Open Stanford, The Culture Deck, Climate Curious, and The Nine Act Structure. His newsletter is at CuttingThroughTheNoise.net. He gives speeches to audiences around the world — see his speaker page if you would like him to speak at your next event. His full body of work is at dsiegel.com.