Blockchain and cryptocurrency? Probably the most exciting topics emerging this century. Insurance? Not so much. We think that it’s time insurance got a makeover and that blockchain is the right tech for the job!
This guide explains how blockchain technology promises to disrupt the insurance industry, how companies are already developing blockchain-based insurance solutions and what implications these developments will have on individuals and companies.
This won't make sense without a quick primer on blockchain itself, so we'll start there. Then we follow up with what this means for industry at large.
That will set the stage for our long-awaited insurance makeover, so let's get started!
A blockchain is a digital ledger that lets people confidently transact with others, without a centralised third-party needing to verify that the transaction was legitimate.
A cryptocurrency is both a digital asset you can trade on a blockchain, and a fundamental blockchain component that keeps many blockchains running.
The two concepts are intricately connected, and a short history of bitcoin will explain how.
The creator or creators of bitcoin (known by the pseudonym Satoshi Nakamoto) thought that digital financial transactions should be more akin to face-to-face cash transactions. You and any other individual should be able to make a trade without a third-party financial institution looking over your shoulder to resolve disputes and to verify that everything's legit.
So the challenge of creating a digital coin was essentially the challenge of creating a powerful verification system the likes of which the world had never seen. The elegant solution they developed was blockchain technology.
At a very high level, verifying a bitcoin transaction requires someone (anyone) with a computer to solve complex mathematical problems. Every time a new batch of transactions needs to be verified, people all over the world rev up their computers and try to solve the problem. These people are called “miners”.
Having so many miners involved in the verification process reduces the need for a centralised third-party while also achieving a network effect that helps to keep the system secure.
What's the incentive for miners to complete this task? Well, the solution to the mathematical problem is represented as a line of code and the lucky person (or conglomerate) who solves the problem gets to keep that line of code. Sound unimpressive? Not until you learn that the line of code is the shiny new asset known as bitcoin, the cryptocurrency that can be traded on the network that spawned it.
It's a virtuous cycle.
It wasn't long before people realised that there's room on a blockchain for more than just a cryptocurrency. Developers and entrepreneurs have taken the source code from the bitcoin blockchain (which Nakamoto open-sourced), and they've been hard at work creating new blockchains powering almost any kind of transaction you can think of.
One of the more notable blockchain developments was the invention of "smart contracts". This tech was largely spearheaded by the next big crypto project out of the gate: Ethereum.
That's because Ethereum's founders realised that not only could blockchains automatically verify whether or not a contract’s terms and conditions have been met, but that they could also be the place where you'd actually define and store those terms and conditions.
All of this points to a future where middlemen and lawyers will have more limited roles. It might not get rid of them altogether, but it should reduce their influence and reposition them as a sort of third-party, providing limited human input when needed.
Here's who else should be worried:
Bye-bye third-party certifiers. Blockchains will allow manufacturers and retailers to monitor their supply chains to ensure their suppliers are following proper standards.
So long energy suppliers. Blockchains will allow individuals with solar panels to sell their excess energy directly to their neighbours instead of selling it "back to the grid" for redistribution.
Farewell media distributors. Blockchains will allow content creators and publishers to license their own work and get paid for it directly.
The insurance industry is full of middlemen, lawyers and contracts – making it ripe for blockchain disruption. The whole industry will become much more streamlined without the need for sales agents, brokers, claims processors and lawyers.
All of this will allow premiums to come down and claims to be processed much quicker. Here's how it will happen:
Quicker and more reliable quote processes. Customers will be able to securely store their pre-verified personal data on a blockchain, reducing the need for someone at each insurance company to verify the information every time the customer wants a quote.
Quicker and more reliable claims processes. If a customer is covered against an event, that event can be automatically verified and the person's claim authorised in real time.
Personalised premiums. Real-time tracking and monitoring (with the customer's permission) will help insurers build profiles for each customer. This will allow them to offer premiums that better reflect each person's unique risk profile.
Real-time risk assessment. Insurers can provide incentives for customers to lead risk-averse lifestyles, and every time a customer does something that reduces their risk, that activity can be automatically logged and verified.
Here are some of the many exciting insurance-focused blockchain projects happening around the world:
New travel insurance products. French insurance giant AXA has launched Fizzy, a "smart insurance" product that pays you if your flight's delayed by two hours or more. Airline data is paired to the blockchain, and a delayed flight will automatically trigger the terms of your smart contract and deposit your cash immediately. No need for you to file a claim.
Insurance for the Internet of Things (IoT). Singapore-based blockchain startup Aigang (AIX) is working on an insurance product for the Internet of Things (connected devices like smartphones, drones and even self-driving cars). Since these things are already connected, it's easier for them to transmit data directly to the blockchain for verification.
Rotating savings and credit associations. Blockchain startup BITPARK (BPC) is developing an insurance alternative that is a sort of an insurance/finance hybrid. It’s a solution that allows people to create their own communities where they can pool their funds and ration them out when one of the members needs assistance. Members can set out the terms ahead of time using a smart contract. Rotating savings and credit associations have been around for centuries and are common in developing countries (minus the smart contracts).
Marketplace for tradeable insurance policies. Blockchain startup Fidentiax (fdX) wants to make it easier for you to sell your life insurance policy. If you have term life insurance, you can sell it to someone who will take over your premiums and receive the payout when you die. They are essentially betting that you'll die before their premiums exceed the final payout. fdX thinks the blockchain will remove the many existing third-party frictions that make it difficult to sell a policy and to receive a fair price.
What could the future hold for Australia?
Since blockchain technology is still in its infancy, it will probably take a while before we start seeing any major developments here in Australia. Australians may soon get a small taste of blockchain-based insurance when Fizzy, the flight delay insurance offered by AIX (mentioned above), rolls out globally this year. We should start to see similar developments as global firms test new solutions and roll them out little by little.
With all of the recent excitement around crypto, it's understandable that no one's mentioning many of the drawbacks to the insurance industry. It’s not all peaches and cream.
Here are some challenges the industry might face on the road ahead:
Blockchain could make insurance obsolete
Insurance is largely based on the idea that everyone pools their money together, and that money is used to pay for the claims of those who need it. Naturally, the people who don't claim are the ones subsidising those who do. It can largely be summed up as safe people subsidising risky people. For example, it is largely accepted that in health insurance, the younger population subsidises the claims made by the older population.
Sure, insurers will conduct risk assessments that offer safer people lower premiums, but these assessments are very general in nature.
A market powered by blockchain would make individualised risk assessments easier to perform, and premiums could start drifting toward the actual cost of the claim that person is likely to make. That means safe people would be paying less and less into the pool and risky people would be paying more and more. That defeats the purpose of insurance altogether.
Unfortunately for blockchain purists (who like to think the tech will reduce the need for government), this may require stricter regulations around how much insurers will be allowed to reward good behaviour. In the health insurance example mentioned above, the Australian government keeps health care accessible to all people by prohibiting insurers from doing any risk assessment on its members. Blockchain may increase the need for such an approach elsewhere in insurance.
Insurance policies come with tons of small print explaining the exact circumstances that validate or void a claim. Blockchain technology will make it easier and easier to track and verify events leading up to a claim.
With blockchain, customers will have their own data secured on a blockchain, containing all of their important information – and they can choose whether or not to open this up to their insurer. But what happens if insurers won't sell you a policy unless you agree to implement ongoing tracking and to give them full access to your data?
One possible solution would be that the consumer would agree to log all relevant tracking information onto a blockchain ledger, but would retain full control over that data. The insurer wouldn't be permitted to gain access unless a claim is made, and even then they'd only see the data related to that claim. These specific conditions could be programmed into a smart contract to trigger automatically, meaning the insurer would get automatic access to the data but only under specific, 100% digitally verifiable conditions that everyone agreed to ahead of time.
In fact, Sydney-based blockchain startup bron.tech is working on technology that could solve this issue. They're using the Ethereum blockchain to create a data storage system where individuals control their data and get to decide who gets to see it and when. It's a perfect fit for insurance.
Most insurers are reluctant to insure cryptocurrency investments. For one, digital assets are difficult to insure in general (the law can't keep up with the speed of tech). Add to that the volatility of cryptocurrency prices, and you have a recipe for a headache of a product and an expensive one at that.
A Google search indicates that a few companies are starting to offer it, although these companies don't appear to be advertising it publically (so we won't name them here). These insurers specialise in insuring large commercial enterprises and high-net worth individuals, so they're probably just doing some trial runs on some extremely large accounts.
Insurers will have to figure out how to insure this booming industry sooner or later unless they want to leave money on the table. So in the meantime, don't invest more than you're willing to lose and keep your eyes peeled as the industry matures.
Insurance has needed a makeover for a while, and it's about to get one. The short term improvements in efficiency aren't exceedingly difficult to anticipate, but it's not as easy to visualise the complete transformation that is bound to occur.
For an industry of middlemen, it's almost certain to look a lot different after this middleman-dismantling technology has had a few years to mature. But the real question is, will everyday Australians be able to manage their risk in this new-fangled future?
Human nature will see to it that they can, and blockchain might just be a big part of it.
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