How can blockchain really change the insurance industry?

Rage Comment : If blockchain wants to truly change the insurance industry and set industry standards, it must overcome the problem of the nature of insurance protection itself. The nature of the original insurance policy does not allow its structure to operate well on the blockchain. Insurance companies want to reduce these risks, and generally they will transfer risks to the indemnity benchmark on the basis of compensation. In the insurance industry, industry loss warranties (ILWs) and other index trigger protections (such as parametrics) are suitable for the application of blockchain technology because they rely on independent third-party reports. Using terror (such as terrorist attacks) parametric triggers can provide more insurance protection and bring more opportunities.

Translation: Nicole

Can blockchain be the solution? For the insurance industry, distributed ledger technology and smart contracts have sparked a lot of discussion, but adoption has been limited.

The recent catastrophic swap swap completed by Allianz Insurance Risk Transfer (ART) marks an important development in the adoption of blockchain technology, paving the way for more related activities in the future. As with all things, the first step is difficult, and developing industry standards for blockchain faces a huge obstacle: the nature of insurance protection itself.

Surprisingly, industry loss warranties (ILWs) are a key topic of discussion in the global insurance industry blockchain discussion. To take advantage of all the benefits of blockchain technology, insurance protection requires an independent source of data to determine when to pay claims - simply refer to the use of the catastrophe claims index. In blockchain jargon, this is an "oracle". ILWs and other index-triggered protections (such as parametrics) can be fully utilized in a blockchain environment because they rely on independent third-party reports to determine when an event has occurred.

However, most insurance policies are not structured this way. The original insured suffers a loss, the insurance company reviews it, and then pays the corresponding claim. The payment reflects the underlying loss (in the context of the policy). For blockchain smart contracts, basic insurance policies cannot meet the following reasons:

Its workflow simply mimics the existing one and does not improve efficiency.

Losses are self-reported (by nature), providing no opportunity for blockchain solutions to eliminate bias or fraud risks.

Any reduction in costs is not enough to justify the investment in technology.

The nature of the original insurance policy does not lend itself well to being structured to work on a blockchain. Insurance companies want to mitigate these risks, and they typically move the risk to an indemnity basis on an indemnity basis. In some cases, an ILW makes more sense, and is the first opportunity for blockchain to really work.

But what if the original insurance company buys the insurance coverage in some other way? Isn’t that putting the cart before the horse? Why should insurance companies change the way they write policies to accommodate smart contracts? Well, of course they probably won’t. However, there are cases where the application of blockchain makes sense in the original insurance market, and this is where parametrics can help.

The global insurance and reinsurance industry is certainly no stranger to parametric protection, which has played an important role in catastrophe bonds and ILWs. Recently, the use of parametrics has gained some momentum in the original market, covering hurricanes and earthquakes. Although this is just the beginning, such penetration is not enough to prove that the implementation of blockchain smart contract solutions is feasible.

In the long term, with the help of blockchain, we can easily conceive of end-to-end insurance and reinsurance solutions that provide effective protection (including fast claims payment). A frequently discussed topic this year is parametric terror protection.

The nature of global terrorist attacks has shifted from large-scale strikes targeting “trophies” to smaller-scale attacks that threaten lives, rather than physical damage. The result is a protection gap for commercial insureds, who have to live with these losses on their balance sheets. Some companies are beginning to introduce more extensive terrorist protection, but the gap is still very significant. Parametric solutions can fill this gap very quickly, providing protection to the original insured while creating an efficient risk transfer environment through reinsurance. This can also be done on the blockchain.

Verisk Maplecroft acts as an oracle and considers forming a terror parameter trigger using disaster, event type, date, event duration and criminal group (it is necessary to develop hourly clauses to link together independent events that are part of a large coordinated event). The trigger point is 5,000 deaths per year, and 500 deaths in Europe (excluding Turkey). The smart contract only listens to reports in the Verisk Maplecroft system that meet the contract criteria. When the threshold is reached, the protection treaty can be triggered and the insured can receive compensation.

Currently, the insurer will need insurance coverage and will need to enter a smart contract that reflects the underlying insurance coverage parameter Terror ILW that triggers the death toll report provided by Verisk Maplecroft. Of course, this is a valid insurance coverage because the parameter trigger in the ILW shows the primary coverage. Moreover, this can be implemented on the blockchain, reducing the dispute costs and management costs incurred in managing the transaction. Similarly, blockchain can also be applied to reinsurers' retrocession coverage.

Finally, you have a single oracle at each link in the risk and capital supply chain, eliminating base risk, increasing participation by all parties, and an independent third party responsible for reporting loss events. The same approach can be used for solutions involving any end-to-end parameter trigger protection, including East Coast tropical storms and California earthquakes. All of this can be achieved with the speed, efficiency and stability of blockchain infrastructure.

Blockchain technology and smart insurance contracts are not a solution waiting to be solved, rather, they are solving real problems that the insurance industry has just discovered. There are many other ways to solve these risk problems compared to traditional solutions that have been used for decades or more. Using parametric triggers such as terrorist attacks can provide more insurance protection and bring more opportunities.

The insurance industry still has a lot of room for improvement by combining new markets, new protection situations and new ways to control costs.

The trend is taking shape, and it depends on whether the insurance industry can seize this opportunity.