As executives from various industries gain a better understanding of Blockchain’s capabilities and benefits, they begin to explore how they can leverage this exciting emerging technology. Within these exploration efforts, Insurance organizations are increasingly active, more than other industries, in gaining a better understanding of the tremendous impact the technology may have on their ecosystem. As a result of incumbents’ interest in the nascent technology, many startups have emerged within the insurance space to try to disrupt or optimize the industry’s existing business model and processes. As I have done before with the Banking and Financial Services space, in this post I would explore several interesting questions such as: Why are insurers interested in blockchain technology? How will this new technology impact the Insurance industry? What will be the new business models that emerge and what are Blockchain’s unique capabilities? Who are the current disruptors within the Insurance space?
Why Blockchain is so valuable for insurance?
Blockchain attracts a wide range of insurance stakeholders due to its multiple relevant capabilities. First, since insurance is a client-facing industry, stakeholders can program and design their Blockchain applications to be easier to use than existing insurance applications improving dramatically the customer experience norms within the industry. The importance of customer experience was highlighted by the impressive adoption of the insuretech startup, Lemonade, whose main focus is to 
In addition, by taking advantage of the Blockchain’s features—such as near-zero transaction costs, automation of processes, and elimination of middlemen and their associated intermediary fees, insurers can dramatically reduce the associated policy origination and sales costs. As a result, existing manual intensive processes will become much more efficient and this could transform the insurance industry into a customer-friendly, and efficient ecosystem turning it to a much more attractive for all participant. Furthermore, blockchain techno can increase the industry’s ability to reach underserved clients as existing challenges in providing microinsurances will be completely removed.
Further efficiencies are also possible through blockchain technology. Based on the technology’s capabilities, policies could be created on a secured, digital, stable, transparent, resilient and fast platform without any capacities constraints (all of these will be possible once the scalability and interoperability aspects which I described on earlier posts will be solved). These will enable stakeholders to minimize delays, human error and data duplication which continues to negatively impact the industry. Furthermore, pre-programmed, event-triggered smart contracts will drive costs further down through automatic claim processing and a reduction in fraud.
Blockchain can also improve risk assessment and pricing due to better accessibility and transparency of information among stakeholders. A distributed ledger means that participants will be exposed to all relevant information under the relevant protocol rules. This means that providers will be able to get real-time, individualized, trustworthy data feeds about their members. Hence, insurers’ actuarial models and risk evaluations will be improved substantially. Moving forward, as Internet of Things (IoT) devices and multiple sensors will be integrated into the platform this data will be even more accurate which will further improve these risk calculations.
Finally, as a distributed ledger platform in which identities can be anonymous, yet verified (once the developments around digital identities are achieved), the technology is ideal for auditors and compliance officers as all the transactions and relevant information is transparent to any permissioned stakeholder. These features, especially in a highly regulated environment such as insurance, promise important benefits to a wide range of entities within the insurance ecosystem.
Reimagining the current insurance business model
It is not a secret that the traditional insurance business model is undergoing a major shift nowadays, with more than 300 Insuretech startups which recognize the multitude of possibilities to improve existing cumbersome insurance processes. As a result, the latest CB Insights and KPMG Venture Capital Investment in Fintech report, highlighted Insurtech as one of the top industries in terms of VC investment in Q2 2016.
One key innovation in insurance that has enjoyed increasing popularity recently is Peer-to-Peer (P2P) insurance. Following Rick Huckstep’s from InsureTech weekly, this innovation could be split into three distinct business models. Around 2010, the Distribution Model reinvented the insurance value chain with the emergence of companies such as, Friendsurance and So-Sure, that position themselves as middlemen between members’ specialized insurance pools and existing carriers. Doing so, these intermediaries act as the carriers’ direct customers and negotiate for lower rates for their members due to their larger size. As intermediaries, these insurance pools divide their collected premiums to cover small claims, and the rest is used to cover larger claims based on their better rates. This enables the new insurance providers to redistribute collected premiums to members in the event that there are resources left at the end of the year. This new model, in addition to a better customer experience, makes these companies much more attractive to members.
Around 2014, another new insurance model was introduced according to Huckstep, the Carrier Model. Here, new insurance players, such as Guevara, act as carriers. They replace the traditional carriers by dividing members’ premiums into two pools, one for the members’ specialized insurance group, which covers smaller claims and the second to an overarching cross-company pool which covers larger claims. This means that the new carriers can redistribute their members’ premiums too in case their pool (members who acquired similar policies) did not claim the entire fund’s pool throughout the year. This original incentive generates a social pressure on pool members, which based on behavioral economics theory, reduces the total amount of claims from members throughout the year.
And then enters the Blockchain…
Blockchain technology is a key enabler for the third wave of innovation, the Self-Governing Model. In addition to facilitating the above-mentioned benefits, the emerging technology also allows for the creation of an insurance platform that can be governed by its members without any intermediaries. These decentralized platforms disintermediate the existing insurance business model by replacing the existing carriers with policy-based marketplaces that enable the creation of “trust pools” around specific policies. Blockchain technology enhances the existing insurance model because it enables operations on a much larger scale, while providing additional functionalities (e.g., members vote on group’s decisions, accessibility, security, privacy, fraud reduction, and more).
Another model that will be enabled through blockchain is a Distribution Model 2.0. Here, the model that Friendsurance and So-Sure use currently could be improved and expanded upon globally to a more robust, trustworthy, and cheaper platform than what is currently possible. This approach could be very attractive to global non-insurers (such as Facebook, Google and others) since it could enable them to enter the insurance market by increasing their revenue per customer without any substantial front-end investments. Furthermore, incumbents could use this model to offer specialized, focused policies that currently are not profitable or to improve dramatically their existing cost structure and by that remain relevant in the current competitive insurance marketplace.
Who is attempting to re-imagine the existing insurance space?
Understanding the benefits and advantages of this nascent technology, start-ups and incumbents alike are experimenting with it and developing new innovative business models, or at least trying to optimize existing models in order to capitalize on the new ecosystem. With that in mind, I will highlight some of the most exciting start-ups within the space nowadays:
B3i: Following the consortium trend created by R3 CEV and Hyperledger in other industries, B3i, stands for Blockchain Insurance Industry Initiative. It established an insurers consortium that attempts to explore the potential of distributed ledger technologies to better serve clients through faster, more convenient and secure services. To date, the members of the consortium are Aegon, Allianz, Munich Re, Swiss Re and Zurich.
Symbiont: Although I covered this start up already in my previous posts as a central player within the financial services space with its proprietary blockchain solution, Symbiont has decided to enter the insurance space as well with an impressive Catastrophe Swap PoC with Allianz Risk Transfer AG (ART) and Nephila Capital. The pilot exemplified how Symbiont’s platform facilitated the automatic distribution of funds to relevant recipients as a result of a natural disaster utilizing the capabilities of smart contracts that were triggered by an authenticated data feed (oracle).
Everledger: Employs blockchain to protect diamonds and other valuable goods throughout their product lifetime. The company’s solution enables various stakeholders within the diamonds ecosystem to access a digital, immutable, global ledger that authenticate the diamonds and proves their existence and ownership. Everledger’s innovation is in its ability to represent off-chain assets on-chain and hence reducing dramatically events of risk, fraud and theft. Since April 2015, the company has already certified over 980,000 diamonds.
Teambrella: Aims to revolutionize the insurance industry by providing a much more fair, transparent and affordable experience with a complete P2P solution. With teambrella, members can join different “trust pools” (teams) based on the terms they offer. Then once in a group, the member has the ability to vote on every decision that impacts him (e.g., new members, rules and claims). After a claim is approved by the team, the member receives his compensation from his teammates’ personal wallets. teambrella is an example of the Self-Governing Model I described above.
Dynamis: Leveraging the Ethereum blockchain to transform the supplementary unemployment insurance space by connecting with LinkedIn as a reputation system for its members. Applicants for a new policy utilize LinkedIn to verify their identity and employment status. Later, claimants can use the member’s social network connections to validate if they are indeed looking for a job. Dynamis is another example of the Self-Governing Model, which utilizes members and social networks to verify and trigger events.
Tierion: Leverages the Bitcoin blockchain to verifying any data, file, or process through Blockchain receipts. The solution, which can be integrated with IoT devices, enables users to anchor a permanent, time-stamped, irrefutable record of assets on the blockchain. Later these assets can be used for verification purposes without relying on any trusted 3rd party required currently for similar processes. Blockchain receipts reduce errors, fraud, and auditing costs since receipts are transparent to all relevant stakeholders.
Insurance is ripe for disruption by blockchain technology. As a result, many entrepreneurs and incumbents are trying to best position themselves to be in the right place at the right time to take advantage and benefit from it. The examples and business models shifts I described strengthen my belief that blockchain technology will change insurance as we know it and the question is just how this change will occur. Although there are multiple ways to reimagine the existing business model and indeed companies are trying to improve the existing frictions throughout the value chain, I believe that P2P insurance is the ideal space for blockchain entry as the technology enables multiple capabilities and fits best to the existing social insurance trend.