Blockchain innovation is taking hold in the insurance industry. And, it just might be the rocket fuel for transformative change.in the insurance sector.
According to Walid Al Saqqaf, founder of InsureBlocks, a leading educational resource for blockchain in the insurance industry, blockchain technology will become the foundational layer for a new way of doing insurance business. Additionally, when combined with artificial intelligence, Internet of Things (IOT) and machine learning, the possibilities are limitless.
The decentralized nature of blockchain technology allows participants to share data securely and on a confidential basis (when needed) which enables novel customer-centric insurance products and streamlined services that are more efficient and provide greater value to clients.
On one end of the spectrum, traditional insurers have organized to create use cases that reconsider traditional insurance operations on a distributed ledger. On the other end, insurance-tech entrepreneurs seek to disrupt the status quo by deploying blockchain technology to reimagine how insurance products are created, funded, and delivered.
So far, the incumbents and entrepreneurs have launched only a handful of new products and use cases deploying blockchain technology. But, momentum is building.
This article takes a closer look at some of these innovators and considers their different paths towards reforming the insurance industry, starting with B3i, (Blockchain Insurance Industry Initiative), the insurance technology company which was formed initially as a consortium comprised of the leading insurance and reinsurance companies.
Susan Joseph, B3i North America Representative, explains that B3i is planning a robust blockchain-enabled ecosystem, first in the reinsurance sector, and then in commercial insurance. B3i will own the infrastructure and build products and services for its members that automate labor-intensive and inefficient processes.
Its first product, which covers catastrophic excess of loss, will be launched in January with live contracts trading on a production grade system. According to Susan, this is the first large scale blockchain production across the insurance industry that allows reinsurers to transact business with more efficient risk transfer.
In the reinsurance marketplace, the primary insurer routinely cedes some of its risk exposure to reinsurers, including catastrophic risk such as fire, or hurricanes or some other devastation, which is covered in an agreement between the insurer and the reinsurer. Currently, the process is managed by brokers, and largely paper driven with all of the transacting parties reconciling amounts owed independently.
Susan explains that the new B3i catastrophic excess of loss product moves that process to a blockchain, with all parties in the insurance ecosystem participating, including brokers. Smart contracts model rules governing reinsurance of risk exposure for catastrophe excess of loss, and managing the premiums paid by primary insurers. In the next phase, smart contracts will operationalize claims processing on the blockchain, eliminating the need for separate contracts and massive reconciliations; participants will have the ability to trade their risk through the B3i system. Susan further explains that “by reducing friction, customers are better served through the increased efficiency, contract certainty, and better quality data.”
B3i started with a small group of 15 major insurers and reinsurers who were already working on smaller, independent blockchain projects. They came together to explore how they could collaborate, and then invited about 20 additional participants to join, including brokers. In March 2018, B3i incorporated as a limited company registered in Switzerland, and now is in the final stages of a capital raise. B3i is taking a market view as it creates efficiencies in the industry and involves market participants to solve business problems.
Susan sees the broad and far reaching implications of the new B3i blockchain product: “Businesses can operate in the face of big risk because they are able to insure against their risk exposure. Insurers don’t hold onto all the risk either, they reinsure. Blockchain technology will have a direct and cascading positive effect that will impact not only the insurance industry, but commerce globally.”
As a result of B3i’s innovation, businesses that suffer losses from the most destructive disasters will be less likely to suffer twice as a result of disagreements among reinsurers and the primary insurer. B3i’s catastrophic excess of loss product answers the question of who owes what amounts in the event that reinsurers are required to payout on a policy when there has been a catastrophic event.
The Institute’s RiskBlock Alliance, is another industry-led group (comprised of 34 insurers and brokers in the property and casualty space) that seeks to create blockchain-enabled solutions for real-world problems. Christopher McDaniels, president of the RiskBlock Alliance reports that RiskBlock Alliance has created a blockchain-based framework called Canopy, comprised of interconnecting blockchains, each of which pertaining to a different category of the insurance sector (across different geographic areas).
The first application on Canopy enables proof of insurance for auto which allows drivers and law enforcement to confirm insurance coverage in real time. The second application covers first notice of loss which streamlines the initial process of filing a claim. Christopher emphasized that, although the first two applications are exciting, the launch of Canopy is revolutionary, adding “the differentiator here is that with Canopy there is one set of plumbing upon which all applications across the insurance industry can be built.” The first group of insurers, including US Life and Annuity, and Property and Casualty Canada, are currently testing the Canopy technology with an expected launch date this spring. Christopher believes that insurance companies stand to save hundreds of millions with this new technology.
In contrast to B3i’s and RiskBlock Alliance’s blockchain-based applications which make current processes more efficient, insurance disruptors seek to deconstruct the industry altogether with novel insurance products and greater participation by investors and insurance brokers.
What does decentralized insurance look like?
Take the Etherisc platform, for example. Etherisc developed smart contract tools to create bespoke insurance policies on the Ethereum blockchain. The first application, FlightDelay, enables users to obtain insurance against the risk that their flight will be delayed or cancelled. Individuals purchase the insurance policy using a credit card and, in the event their flight is delayed by 45 minutes or more, they are paid automatically without any need to submit additional paperwork.
Another Etherisc application allows Puerto Ricans to insure their homes against hurricane risk for up to $5,000. Under the policy, insureds receive an automatic payout if their homes are damaged by a hurricane, as validated by an agreed upon weather source. The developers of this policy are currently seeking investors to underwrite the risk.
And then there’s Black Insurance: CEO Risto Rossar, an ex-insurance broker, started the company to empower brokers who want to engineer new insurance products. The Black Insurance platform connects brokers with investors to cover the risk. Risto explains that his business model replicates that of Lloyds of London with the very same building blocks: brokers, syndicates and investors. Black Insurance does not take on insurance risk, but rather provides the platform that issues and tracks the products and the underlying loan agreements between the syndicates and the investors. Smart contracts capture the rules governing the loans so that the entire value chain can be automated, everything from the insurance premiums to the interest payments made to investors. Syndicates are formed by insurance professionals who already have a book of business.
According to Risto, it is impossible for brokers to get insurers to change their underwriting principles. But the Black Insurance platform enables brokers to make their own investment decisions. “They will have skin in the game. If they get it wrong, they have the pain, but they also enjoy the success. Now, only the insurer decides which products to offer.”
Risto explains that the insurance industry is dominated by a few players with little motivation to innovate. And, because insurance is a massively regulated industry, the regulations provide additional barriers to innovation. Regulations are not the most difficult obstacles, suggests Risto, “the biggest barriers are the capital requirements. Entrepreneurs need $5-10 million to launch new insurance products. That’s what makes it so difficult, the extreme capital requirements.”
Looking forward, Risto predicts that “the insurance market of the future will not be controlled by big corporations. It will be democratized. Regular people will be able to invest in insurance-linked securities.” Risto anticipates that the first syndicate will be up and running on the Black Insurance platform by the end of 2019.
In the future, when barriers to capital are lifted thanks to decentralized networks, brokers will compete freely to provide new types of insurance products that are more finely tailored to meet society’s changing needs. Investors outside of traditional insurance circles will have unfettered opportunity to underwrite risk and enjoy the upside of insurance-linked investments. Blockchain technology spurs this sea change because of its distributed nature, allowing all participants to be connected on a single platform without middlemen to bridge capital and insurance risk. And, as new blockchain-enabled products and use cases prove their value, more participants in the insurance sector will fall in line, acknowledging that to stay idle is to fall behind.
Walid reports that the insurance sector is abuzz with innovation, and points to Insurwave, a blockchain platform that was developed for marine hull insurance, as a prime example of game changing innovation, as well as Nexus Mutual which advertises itself as, “a decentralized alternative to insurance.” Based in London, Nexus Mutual is building a tokenized community that enables individuals to share risk collectively.
In predicting who the winners and losers will be, Walid suggests that it is the customers who will win because blockchain technology galvanizes backend efficiencies, reducing costs, and ultimately leading to new products that close the protection gap. He explains that if you can bring down the cost basis, you can insure more people. And, when you combine blockchain and IOT you can insure against risk in real time, allowing policies to be modified in light of new and changing risk factors.
Remarkably, traditional participants in the insurance sector are working together to create high value blockchain-based solutions that will impact business processes (and lives) through the delivery of better, more efficient insurance-related services. Insurance-tech entrepreneurs also drive change by creating new, smart insurance products that reimagine the very nature of insurance, including the types of risk that can be covered and who may participate in the creation and consumption of insurance. One hopes that the day will come where traditional insurers and entrepreneurs will come together to exchange information and value on a blockchain, so that everyone can realize and enjoy the true potential that blockchain technology has to offer insurers and their insureds.
According to Walid Al Saqqaf, founder of […]