Insurance business models are beset with high operating costs, opaqueness and information asymmetry. With the advent of Web3, smart contracts, and decentralized autonomous organizations (DAOs), newer ways of transferring risk are coming to market. The use of blockchain technology within insurance is proving to reduce costs and improve end-user experience.
This final part, a continuation from the previous post, describes Web3 insurance products, including insurtechs and incumbents who are jumping in.
Roughly a third of insurance premiums are typically attributed to frictional costs. Around two-thirds are returned to customers as claims with the balance adding to distribution and operational expenses. Blockchain technology is expected to halve frictional costs, from administrative savings and reduced regulatory costs.
Allianz launched a solution to streamline international motor insurance claims. The enterprise blockchain platform is deployed across 23 European subsidiaries. Six weeks into the launch, staff processed over 10,000 international accident claims. A customer insured by Allianz Hungary, involved in a car accident in France, triggers claim communication within minutes instead of the weeks it took earlier.
Additionally, DeFi platforms are launching new products so users gain access to low-cost insurance. Popular products include a)Flight Delay Insurance b)Hurricane Protection c)Crop Insurance. Pay-outs are automatic when triggers are detected. In the past week, Lemonade launched a parametric climate risk transfer initiative utilizing blockchain and crypto-technology to deliver affordable climate insurance to vulnerable farmers. The Lemonade Crypto Climate Coalition has been constituted using a crypto feature as a DAO.
In the last two years, cases of smart contracts hacking, cyber attacks on exchanges have rapidly risen. Decentralized insurance protects crypto holders against such risks. Instead of being governed by an insurer, premiums and pay-outs are de-centrally determined. By providing capital to a risk pool, one can earn insurance fees by being exposed to risks. Products which are gaining mainstream acceptability include: a) Crypto Wallet Insurance b) Collateral Protection for Crypto backed loans. Lloyd’s has partnered with CoinCover to offer individuals hot wallet coverage.
Currently, one of the more popular covers is from Nexus Mutual, an Ethereum-based cover provider, with more than $100 million in active cover. It creates decentralized insurance on Ethereum by using a risk-sharing pool. The pool is governed by members with membership rights being represented by the NXM token.
Etherisc has developed common infrastructure, product templates and insurance license-as-a-service that allows self-service product creation. The Etherisc community can design products ranging from flight delay insurance and hurricane protection to crypto wallet and lending collateral protection. Others such as IMA Financial have set up Web3Labs in Decentraland, a leading metaverse in blockchain, to price NFTs.
Key issues hindering adoption are less resource-based, more because there aren’t great solutions yet. The Oracle problem is one such. An Oracle is an independent, outside data source that the Smart Contract can tap into, to determine if claims should be paid. For some business lines, this is easier using parametric triggers. But other lines are near impossible to fully decentralize. General Liability and Professional Lines claims need human intervention and an Oracle cannot objectively determine what claims are covered.
Regardless, there are several aspects of claims that can leverage Web3. Smart Contract reinsurance could be setup so when the primary contract has a payment triggered, the reinsurance is automatically paid out. The B3i insurance blockchain platform, owned by 21 global insurers, uses blockchain to manage nuclear reinsurance for six European nuclear pools.
Web3 has faced criticism. Former Twitter CEO questioned whether it will be as free and open as publicized. Insurance is a complicated business and Web3 presents an exciting opportunity to rationalize costs and increase trust in transactions. Web3 driven insurers can expect to resolve persistent problems by investing for the long run.
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