Blockchain brings a new model to the insurance industry

Insurance companies adopting blockchain P2P and/or crowdfunding models – do the benefits outweigh the risks?

In this opinionated article, I will discuss a possible business model for the insurance industry that may be based on blockchain technology and a true peer-to-peer (P2P) and crowdfunding model.

There is a shift in the financial sector. Investment in the fintech sector has risen dramatically over the past five years, with investments increasing eightfold to nearly $20 billion, causing turmoil in traditional companies. The most interesting development in the industry is undoubtedly blockchain. There are already many examples of how blockchain can affect and impact the banking industry, especially in payment services, commodity trading, and security.

Disruptions in the insurance industry are generally considered to be the impact of new technologies such as the Internet of Things and big data. Of course, crowdfunding models and the potential of insurance companies are also considered disruptors. Blockchain has a smaller impact on industry, as the current focus is more on banking. Some documents such as the Ethereum white paper and "Lifetime Chain" provide examples of new products that use blockchain technology but pay little attention to possible new business models.

In a report on the state of the Dutch financial market in March 2016, the Dutch National Bank marked the future sustainable business model as deposited in insurance branches in deep red. The new business model has a high urgency, even though it does not look like it exists in traditional insurance companies. The research focuses more on incremental changes to the current model rather than disruptive changes, which would be equivalent to establishing a new model in an immature field.

Blockchain-based business models for insurance companies

So what could be a new model and how could it be viable? Blockchain could be the enabler of true P2P and/or crowdfunded insurance models, especially smart contracts.

In a new business model, the focus of underwriters will be on matching supply/demand, risk calculation research, business and asset management. Insurance companies will provide a market-like trading platform where users can publish their insurance needs, which can not only standardize products but also meet specific needs.

The underwriters will use their "risk intelligence" and risk models based on the AO. They will publish the expected return after calculating the premium based on their historical data, and then deduct the deviation from the budget. On this published premium calculation, interested investors can bid/subscribe for the required insurance. This can be done as a group in a crowdfunding manner, or as an individual in a P2P manner, depending on the type of insurance demand, the investor's available resources and his or her risk tolerance. So far, this model looks a lot like Lloyd's already has in the insurance industry market, and like the company has set up funding circles in the P2P lending market.

This is where blockchain will play a crucial role. Besides the decentralized ledger being managed, the rest of the time the smart contracts are used to guarantee that investors will pay the clients when they post their insurance needs (although smart contracts are programmed as traditional guarantees, but without the need for banks!). By building on this traditional approach, blockchain makes the management and execution process very simple, almost completely automated, more transparent and cheaper. But in addition to this, investors know their biggest risk gap (i.e. the amount defined by the smart contract).

Insurance companies may also perform a role in damage assessment to verify the validity of insurance claims, but this could easily be outsourced to a third party and with the blockchain connected to another ledger, this verification could be automatically validated.

In this model, although the application of smart contracts in the insurance market will not be limited to P2P product-like insurance, it is used for almost all insurance. In particular, when someone can gather a large number of individual investors willing to invest in the crowdfunding model, the impact on each investor can be minimized when a major event occurs.

benefit

This new business model is beneficial to all parties involved, whether insurers, investors or customers.

Let’s look at the benefits to insurance companies in this business model, where insurance companies are providers of market and risk intelligence:

•As long as the funds required by the client remain on the investing side, the insurance company only needs a small amount of funds.

• Speaking of regulatory approval, in a business like P2P lending, you don’t need a full set of licenses, or even one, and that’s just a loophole in the regulators.

• As for the development of the platform, this can (and should) be outsourced to a third party on a pay-per-use basis, which makes the company more “capital flexible”, creating a very lean, flexible and cost-efficient organization!

On the investor side:

• This brings a new opportunity to invest in lean organizations, making the potential returns higher,

• This opportunity to build through crowdfunding is not only for large institutional investors, but also for private equity investors.

• Gain clear insight into the largest financial risk exposures.

Benefits to customers:

• Insurance will be cheaper than traditional insurance premiums due to multiple investor bids/subscriptions and low operating cost model.

•This model may give customers a very simple way to post specific insurance needs!

•Smart contracts can guarantee the payment of insurance if the event is valid.

challenge

Of course, there are also various problems in this model, some of which need to be solved urgently:

1. First, will regulators accept this insurance structure (direct link between insurance and investor capital, no additional capital in the insurance company)?

2. Can insurance companies create a critical mass of investors to aggregate/diversify risk while paying large sums to customers?

3. Is there a platform that supports this, especially as the need for flexibility requires very specific insurance.

4. Regarding risk calculation – Due to the very special nature of insurance, whether insurance companies have the ability to calculate the risk-return to attract investors.

5. Such a model can gain the trust of customers because, although there is no legal requirement for a solvent third party to participate in the fund reserve, the funds come directly from investors (even if its solvency is guaranteed by a smart contract).

6. They will be of interest to investors who may lose flexibility due to the guarantees of smart contracts.

Summarize

In conclusion, this insurance business model that uses blockchain technology to create a true P2P/crowdfunding model can have many interesting benefits. It can even be said that in this model, we can no longer say that this is an insurance company, but a house of smart capital transactions!
Given the current pressures on the insurance market’s business model, does the answer mean that the pros outweigh the cons? I’d like to hear your opinion!