What could blockchain enabled smart contracts mean for the insurance industry?

Background

This thought was triggered by the sad yet uplifting article about a form of crowd-sourced giving to cover catastrophic loss. The concept of communities helping each other in such circumstances is not new - miners used to pay subscriptions towards injured colleagues. Further, the insurance market itself and the concept of spreading risk is not new, dating back thousands of years. It is something people have always wanted to do. What is different is the enabling technology we now have. Searching for articles there is an interesting comparison with banking. A number of consultancies are looking to sell blockchain technology to incumbents with the aim of helping them become more efficient. But then there is this article that is far more radical and showcases the opportunities that innovators are already involved in.

A ramble through some ideas

An insurance company is a mechanism to pool resources from potential claimants, manage the premium-to-claim ratio, and provide customer service to pay out on claims. So is it really just a middleman with some clever algorithms - ripe for disruption. What internet technology now provides is the concept that communities are not necessarily co-located and therefore not always subject to the same risk: compare a winter storm to an earthquake in totally different locations. This allows virtual communities to spread risk for themselves. And now blockchain technology and smart contracts are removing the need for trusted central parties. That leaves us with the actuarial algorithms of managing premiums to claims. This is non-trivial, but can be accomplished. As with Bitcoin, the payment system can become Peer-to-Peer, and the insurance market can do the same.

Now, in terms of reputation, that’s a whole different issue. If you are insuring your life, you want to know the payer is sound. Insurance companies are heavily regulated. The higher the sum (the more you have to lose) the sounder the reputation you want. And so, in economies with good quality regulated insurance companies, is there really a need? Similar to Bitcoin, if you have a good payments system, why the need? Over to ‘emerging’, read high growth, economies. The Economist has noted technology ‘leap-frog’: the emergence of mobile telephony over land line, the M-Pesa payments system over banking, and an interest in Bitcoin. If you are looking at community based insurance at a micro-level, there could be an amazing interest. Let’s take the concept of a failed crop. For a subsistence farmer, this could mean despair and poverty. But if we now take social funding and social insurance, we could be looking at online communities providing insurance on a social level, potentially for minimal or no reward. Similar to people running Bitcoin full nodes for the greater good of the community, could we be looking at the same concept for micro insurance?

Summary

Empowering individuals is central to the technology of the internet, Bitcoin and Blockchain. In particular, matching consumers and producers directly. The insurance market matches consumers of risk with producers of risk - the opportunity now is to turn the insurance company into a Peer-to-Peer social-funding network.