Blockchain illuminates the future of insurance industry

The spark of innovation has begun to ignite the world's largest industry, which has a market value of 1.2 trillion US dollars. The insurance industry is highly competitive, and entrepreneurs are racking their brains to reduce risks, create new types of insurance premiums, and serve customers according to economic needs under strict supervision. Most startups try to gain a foothold in the insurance industry through incremental innovation, but blockchain brings earth-shaking changes to the insurance industry.

The technology behind Bitcoin, the world’s most widely used digital currency, is quickly becoming a hot topic across industries. People are talking not only about Bitcoin’s distributed database capabilities, but also about the blockchain’s ability to send, receive, and store information, which is enough to revolutionize the way businesses handle digital transactions.

The revelation of distributed ledgers is astonishing: digital trust becomes a reality, online and offline assets can be assigned ownership between two parties, and can be transferred to each other, and these processes are cryptographically proven. In the insurance industry, blockchain technology can simplify the claims process, reduce insurance premiums, help insurance companies create appropriate coverage, and most importantly, benefit people in disaster areas.

Peer-to-peer insurance

Blockchain has the potential to transform new and existing insurance models, including peer-to-peer insurance, parametric insurance and microinsurance, and bring them into the digital era. Blockchain is powerful because of its ability to securely connect platforms.

Distributed insurance like peer-to-peer insurance (P2P) will change the entire market. Compared with private financial managers who make profits for insurance companies, P2P insurance allows policyholders to get more premiums. Many startups that have received investment have begun to emerge in the peer-to-peer insurance market. For example, Dynamis, a Wisconsin-based peer-to-peer platform created on the blockchain, recently received $2.6 million in investment from Golden Angels. The company plans to create a platform that allows brokers to interactively evaluate plan options for employers.

The Enigma project allows different participants to jointly store data and perform computations on it while protecting the privacy of that data. In the near future, specific peer-to-peer insurance platforms may use smart contracts to set up claims and match demands between users in online markets, which will solve many of the current problems that arise when people transfer digital assets or access private data.

Parametric insurance

Another blockchain use case is parametric insurance. Instead of paying for pure losses, insurance companies pre-sign smart contracts to pay a certain level of compensation based on triggering conditions. For example, if an earthquake of magnitude 5 or above occurs in a given area, the smart contract automatically pays the insured 20% of the insurance claim. The contract requires a trusted third-party administrator (TPA) to mediate. If parametric insurance becomes popular, it will play an important role in the popularization of smart contracts.

Rainvow is a product-creating startup that creates a cross-border risk pool, with trading protocols accessible to individuals around the world through digital currency. Rainvow’s Ethereum platform facilitates its insurance coverage, automatically compensating for unexpected shipping losses on rainy days.

Platform-creating startups like Factom can help with specific insurance contracts. These systems allow third-party administrators (TPAs) to create trigger events or pre-determined events in smart contracts, making it easier and more feasible for insurance companies to implement parametric insurance.

The development of IoT and sensor technology allows startups and enterprises to access data in real time, which may eventually lead to a new way to resolve insurance disputes. Cars can be assigned tokens by manufacturers, and instead of handling accidents through insurance companies, transportation vehicles can use automotive technology to automatically assess driving accidents. Compensation for minor car accidents can be completed instantly through smart contracts based on sensors and field data.

Micro insurance

Likewise, blockchain has clear benefits for microinsurance. Blockchain enables trust between peers and provides transparency to people around the world. Its beauty comes from its simplicity. The virtual nature of transactions can bypass government agencies, and geographical restrictions become less important. These features make future microinsurance very attractive.

Helperbit is an Italian startup that uses blockchain protocols to allow good people to donate to underfunded non-profit organizations in distant places, and people can also track their donations and how the funds are used. Their risk assessment platform allows good people to avoid being scammed during the donation process.

Outlook

Smart use of blockchain technology, adoption of digital currency applications, fraud solutions and smart contracts will make the future of the insurance industry more prosperous. Large insurance companies will gain huge benefits. However, implementing such a strategy means that insurance companies must change their insurance procedures, policy structures, and underwriting risks.

Using blockchain can create cheaper, more customer-oriented products, reducing insurance premiums for large insurance companies. Ideally, blockchain startups, insurance companies, brokers, reinsurers, etc. will collaborate with each other. However, it is more likely that the insurance industry will be disrupted and eliminated like milkmen and lamplighters, which is something that the insurance industry leaders should be vigilant about.

For more information, please see the special topic "Blockchain and Insurance"