Image from actuaries.digital
Early stage investors and entrepreneurs make their money when something moves from bleeding edge (lots of technical risk) to leading edge (market and team risk). Blockchain in Insurance is currently at this intersection, which is why we see so much interest in the subject. The technical risk is lessening every day (there is always some technical risk) but there is still a lot of market risk. We are seeing a lot of Proof Of Concept (POC) projects and lots of Minimum Viable Products (MVP), but as yet very little Product Market Fit (PMF). There is lots of good theory on why these MVPs should get to PMF, but there is as yet very little actual proof from the market.
Auto Payout Based on a Trustless Smart Contract
This holds out a win/win promise. Customers know that payout is automatic and immediate (no more hassling for payout during the most stressful times when the bad event has actually happened). Insurance companies get two benefits:
- Elimination of fraud. The Insurance company does not rely on the customer’s version of truth. There is independently verified data.
- Elimination of claims processing cost. This is a consequence of elimination of fraud.
For this to work, it has to be binary simplicity. An algo has to make a yes/no decision instantly. Something with complexity (such as who is at fault in an accident or whether a medical procedure is covered) needs human intervention.
One example of where we see that binary result is flight insurance. The flight was either cancelled or it was not. Blockchain systems use external data sources (e.g via the Oraclize service ) to get this proof of what happened. A Proof Of Concept for this flight insurance use case was coded during a weekend at a hackathon using Ethereum – proving that technical risk is not the prime concern.
We expect to see lots of use cases where this binary rule applies where really low cost insurance can be offered (thanks to elimination of fraud and claims processing). This is classic disruption at the edge – where disruption usually gets traction. For example, there are lots of use cases within the sharing economy. These are on demand or just-in-time insurance use cases.
One mainstream use case is Life Insurance. Life or death is pretty binary. Smart Contracts can look at online death registers and make payout to the designated account. Given the stress that grieving relatives are under, this would score high on Net Promoter Scores.
Enforced rules for where to spend the money
In more complex claims processes it is more about enforcing rules on where a customer spends the money. For example, in an auto accident, only go to these garages or in a ski accident, only go to these doctors. This is a win/win as the customer has confidence of getting reimbursement and the insurer gets lower and more predictable claims. Using geo location and smart phones it is pretty simple for the customer to make a decision where to go even in stressful situations and will take this action if there is 100% confidence in auto payout via a Blockchain resident smart contract. Ideally the vendor (garage, doctor etc) gets notification on their phone of incoming customer and notification from the smart contract of what they can charge, so the customer does not have to pay and reclaim later.
The Provenance use case for Blockchain
The use case for Insurance that has been understood for some time is Provenance. This affects assets such as jewelry, art and antiques where it is critical to know that the “asset is what the customer claims it is”. If I am insuring a 1964 Chateau Petrus (currently valued in US$ millions), the Insurance carrier needs 100% confidence that it really is a 1964 Chateau Petrus and not cheap wine with a 1964 Chateau Petrus forged label.
An immutable blockchain database is the obvious solution. You can see all transactions on that 1964 Chateau Petrous dating back to when the farmer sold the grapes in 1964. Ok, that only works for transactions starting now unless there is a conversion of historical data – nobody said this was easy!
An early pioneer in this use case is Everledger (our note on Everledger from July 2015 is here). They focus on jewellery, which is a big niche market.
This is a niche within Property Insurance and one can envisage lower cost insurance offered at the point of sale because a smart contract tied to proven provenance means that many more products can be covered. So this can grow the market.
Blockchain + P2P Insurance = Disruption
P2P Insurance has been suggested by many as the disruptive model for Insurance and we have covered this many times on Daily Fintech. It maybe that P2P is only viable with Blockchain resident smart contracts that can guarantee the payout. For the fundamental theory behind this, read a white paper from Joshua Davis entitled “Peer to Peer Insurance on the Ethereum Blockchain”. The Distributed Autonomous Corporation (DAO) that takes in premiums and makes payouts would be owned and controlled by policyholders who have an affinity (ie part of a cohort with a shared risk profile).
Joshua Davis, who wrote that seminal white paper went on to turn theory into practice by creating Dynamis. They are not trying to boil the ocean; their niche is supplemental unemployment insurance.
Unbreakable Escrow and Solvency 2 on the Blockchain
As the WEF report states, Blockhain based smart contract Insurance works through an “unbreakable escrow”. The insurer will pay out before they even know about it. This has dramatic and complex implications on solvency regulation that will take time to play out.
Solvency 2 regulation is designed to ensure that insurance companies have enough capital to pay claims.
The issue is how much capital the investor has to put at risk to enable “unbreakable escrow”. Will it be back to the future where the equivalent of Lloyds Names agree to unlimited liability? Or will Insurance companies have to deposit a far higher % of reserves to guarantee the payout. A P2P DAO owned by the policy holders can afford to do this. A traditional insurance company cannot afford to do this. This is classic disruption.
A Digital Lloyds of London
MicroInsurance for the Underbanked using Blockchain
Consuelo (Spanish word for consolation) from a Mexican company called Saldo.mx offers microinsurance for health and life insurance. This is like microfinance – doing something in really small bites at very low cost. Saldo prefer the term non-adjustable insurance, which means replacing the claims process and the claims adjuster.
This fits the Daily Fintech thesis of “first the rest then the west” (that innovation will come from billions emerging into a global middle class because they have greater need and a technological clean slate). What Saldo is referring to is the same Blockchain based smart contracts based on verifiable data from oracles that we described earlier. What is interesting is that this innovation may first get traction among the Underbanked.
Daily Fintech recently described why China and India may define the future of Insurance and InsurTech. At the time we speculated that this innovation could also come from Latin America. It is interesting to see this happening now.
What makes Consuelo particularly interesting is their focus on one of the most critical global networks – diaspora networks. They are focussed on the huge market of Mexican Americans. They call this “community without borders” in this interview in CoinTelegraph.