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The use of Blockchain technology has a wide range of possible applications in the insurance industry. This is a look at the possible impacts that blockchain could have on the insurance value chain.
1. Smart contracts
This is a contract that can be entered into by two or more parties. It can be programmed electronically and is executed completely automatically with its underlying blockchain when triggered by the events that are coded into the contract. When the information / data needed to trigger and execute the contract is located outside the blockchain, a third party known as an ‘oracle’ pushes the information into position in the blockchain. The hardware oracles use a series of sensors (connected devices, the IoT) to track events. There is great potential for growth here: in 2015, there were already over 5 billion connected devices; this number is expected to rise to 20 billion by the end of 2020, for an estimated world population of under 8 billion.
The potential of smart contracts is immense – given the way that the world is moving toward a sharing economy. These contracts will help to speed up the development of new models such as on-demand or just-in-time insurance. On-demand insurance can be activated and deactivated at the customer’s request and is an increasingly popular product. New players are making the most of this niche, including the InsurTech company – Cuvva, which allows drivers to arrange insurance in just a few minutes when borrowing a car on hire.
2. Peer-to-peer insurance
Although peer-to-peer insurance has been around for a while, blockchain technology has brought in a slew of new opportunities thanks to the principle of the decentralised autonomous organisation (DAO). These DAOs allow P2P insurance to be rolled out on a large scale. This is due to their ability to manage complex rules among a large number of stakeholders. This makes it easier for both incumbent insurers as well as new players to manoeuvre themselves into a good position on the P2P insurance market. The French start-up Wekeep offers to pool together the insurance premiums for non-mandatory insurance within a smart contract that is signed by several different parties. If and when there are claims, they would be settled on the basis of two conditions:
In a P2P arrangement, no single member is in control of the funds collected at any time and no central organisation has overriding decision-making powers. Claims are settled if the majority or a predefined percentage of the members agrees to settle the claim.
3. Possible use in industry agreements
The IRSA Agreement (in France) for direct compensation to the insured at the time of a claim and recourse between car insurance firms – looks to facilitate the settlement of damages in the event of a traffic accident. This first came into being as far back as 1968 and was signed by most insurance firms in France. The IRSA Agreement is the basis around which liabilities and insurance claims are settled. This agreement covers traffic accidents in France that take place between a minimum of two landborne vehicles insured by member companies. The principle that is followed is very clear and straightforward: “Irrespective of the type of traffic accident and the nature or amount of the damage, member companies undertake, prior to seeking recourse, to compensate their own customers to the extent of their compensation rights, as per the provisions of general legislation.” An expert needs to have the damage assessed after which the insurer determines the liability of its customer and directly compensates the customer for damages and injuries caused if any. Compensation paid is based on France’s traffic regulations, and liability determined is in line with the provisions of general legislation. The insurer then seeks recourse against the insurer(s) of the opposing party as per the agreement between them. The main purpose of the IRSA Agreement is to speed up the settlement process for insured parties based on a common scale, and to ensure that insurance firms settle claims from their customers.
4. Index-based insurance
Index-based insurance is insurance linked to an underlying index such as rainfall, temperature, humidity or crop yield. The index based approach seeks to overcome the limitations of traditional crop insurance in the rural areas of developing countries. This is usually done by ensuring that management and settlement costs are reduced to a minimum. In areas where insurance penetration is very low like in Africa which has just about 2% insurance penetration, there is a lot of scope for this type of insurance. Even though there are many benefits of this type of insurance, setting up an index-based insurance product remains complex and costly. Significant resources and technical expertise are required to design and develop such products. This is particularly essential for the infrastructure needed to gather data. By basing insurance such as this on smart contracts, index based products would be automated, simpler and cheaper. A smart contract between a farmer and an insurer could lay down the condition that payment should be made to the farmer by the insurer after 30 days of no rainfall. The contract gets data from reliable external data (e.g., rainfall statistics compiled by national weather services) supplied by oracles, and payment is triggered automatically after 30 days of no rainfall. There is no necessity for an insurance claim to be made by the insured or for an expert on-site assessment. This type of insurance could represent an alternative to traditional agricultural insurance.
In the recent past, almost all of the major insurance companies have set up internal reinsurance mechanisms, usually in conjunction with the introduction of Solvency II. The use of internal reinsurance enables capital requirements to be reduced for individual entities. This is because the risk is transferred to a captive reinsurer which could be a separate entity or even a department within the holding company. The insurance company will then be able to gain in capital efficiency as diversification is focused at the level of the captive. All of the internal reinsurance mechanisms usually require rapid and complex exchanges of information in line with regulatory or fiscal mandates. These information exchanges could also have the involvement of third parties like brokers or professional reinsurers who supply internal transfer pricing for insurance at arm’s length.
6. Transforming asset management
Asset management is a highly regulated industry and it requires a high degree of communication and interaction between all of its various intermediaries. The distributed ledger technology could see vast improvements in process efficiency and efficacy in this industry besides close cooperation between all of the industry’s different stakeholders. We can already see this taking place in Luxembourg, where ten of the major financial institutions joined the Fundchain initiative to look at the impact of blockchain technology on the asset management market. Many applications based on the specific characteristics of blockchain technology are currently being analysed. While traders may react in nanoseconds, settlements can take several days. The Spanish bank Santander firmly believes that blockchain technology will allow banks to save up to US$ 20 billion each year by smartly reinventing the back office. An Illinois start-up – Blockchainiz is at present developing a few projects in this area and they are working with leading banks to reduce the reconciliation costs in asset management.
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