Why blockchain could revolutionize insurance before banks

Baozou Comment : Almost all early blockchain application cases are related to the banking industry, but many people also believe that the insurance field may be a better application scenario for blockchain. Blockchain platform and solution providers are currently exploring more profit opportunities in the insurance field. This study focuses on the reasons and focuses on analyzing the secondary impacts that its changes will bring to the insurance and reinsurance industry, wealth property management industry, and changes in market position.

Translation: spring_zqy

Provenance Blockchain Use Cases

Provenance is a classic example of blockchain use in the insurance industry. This has implications for assets such as jewelry, art, and antiques. These assets are known to be “worth what the customer thinks they are worth.” The immutable blockchain technology provides a solution. Everledger was an early pioneer in using this technology. (The following is a record of our attention to Everledger since July 2015)

However, this firstly belongs to the property and casualty insurance market, and secondly people will certainly take it for granted that it was developed by insurance companies and is a way of adding value rather than an innovative reform.

Separation of insurance and investment

This radical and potentially disruptive idea is still under discussion and development. We have outlined a three-tiered architecture for insurance on Lemonade:

The first layer: brokers. Their job is to collect premiums from clients.

The second layer: insurance companies. Their main task is to handle claims. They receive premiums through brokers and then invest in cash flow to prepare for paying compensation.

The third layer: reinsurance companies. They are the last means of payment to protect the operation of insurance companies. Their responsibility is to have enough funds to pay the claims. In fact, the insurance company does not tell them the claim amount in advance.

The change we are discussing is to completely separate the second and third layers mentioned above using blockchain. For details, please refer to the following words of Olivier Rikken:

"In this new business model, insurance companies will focus on supply and demand issues, shifting from asset management to risk calculation and business operations. Insurance companies will provide a market, which is like a platform where customers can submit insurance needs, which can be a standardized product or even other specific needs."

Olivier Rikken went on to explain:

The insurance company will then use “risk intelligence” and risk models based on past data to calculate the return that customers will receive after deducting the company’s profits. Based on the calculated premium, interested investors can then apply for the required insurance. Whether it is done in a group through crowdfunding or in an individual peer-to-peer manner depends mainly on the type of insurance required, the investor’s available resources and their risk appetite. So far, it is more similar to the model established by Lloyd’s in the insurance market, or the model established by Funding Circle in the peer-to-peer credit market.

The final winner is always the Internet, it just took a little longer.

Market credit is expanding rapidly, and new asset classes are being developed. In the end, networks and markets always win, the question is how long it will take to achieve this. There are two reasons why the battle is considered long - consumer confidence and regulation. Consumer confidence in the insurance industry still faces many obstacles. We can do a few loan experiments in the credit market, and if the investment fails, then we can "learn from experience". Investing premiums for decades does not guarantee that you can really get cash back in the event of a disaster. This is definitely not the effect we are pursuing.

This is where consumer information and regulations come into play.

Blockchain Solvency 2

Solvency 2 regulations were established to ensure that insurance companies have sufficient funds to pay claims.

What would happen if the model became the blockchain market form envisioned by Olivier Rikken? He explained the logic of using smart contracts:

“[Smart contracts] guarantee that if the insured consumer event occurs, then the investor will be paid (if so, the smart contract is programmed as a traditional guarantee, so no bank involvement is needed!). Using this technology on the blockchain simplifies the management and execution process, making it completely automated, transparent, and cost-effective compared to traditional models. In addition, investors will be able to see the maximum risk gap (which will be confirmed by the smart contract).”

How big is the risk to investors' funds? Will there be companies like Lloyds that accept unlimited liability in the future? These questions will take a lot of time to solve, but I believe that we will eventually form a market model. Just like the realization of real-time clearing and settlement in the capital market, these changes will not come immediately, but they will eventually become a reality.

Secondary Impact

Below is our analysis from Cui Bono and Cui Amisit.

If this change occurs in the future, the insurance value chain will be completely reshaped.

• Insurance companies that incur losses at the third level will try to recover their losses through direct sales at the first level.

• Asset managers and markets will emerge from the influx of investment opportunities.

• Reinsurance companies thrive by tapping into the deepest pockets of capital.

• New insurance companies will be established on the blockchain, greatly reducing costs.

• Incumbent insurers will strive to transform their core operations to increase flexibility, reduce costs and become more consumer-centric. Some companies will fail in transformation and become another Blockbuster or Kodak. Others will be able to expand their market and increase flexibility through successful transformation and thrive.