Nowadays, each part of insurance is under competition by entrepreneurs touting new ways to underprice risk, creating new types of premiums and servicing consumers in a tightly regulated on-demand economy. While most startups are doing their best to gain traction in the insurance market fall under incremental innovation, Blockchain for insurance could be characterized as disruptive.
The underlying technology of the world’s most adopted digital currency, bitcoin, is quickly becoming one of the hottest topics across several industries. More than just a distributed database for bitcoin, Blockchain’s ability to send, receive and store information has the underlying power to disrupt the way businesses process digital transactions.
The implications of decentralized ledger technology (DLT) are astounding: Digital trust is now an ever reasonable possibility; meaning online and offline assets can now be assigned ownership and the transference between those parties can be proven both linearly and cryptographically. Specific to insurance, Blockchain technology can simplify the claims process, alleviate high premiums, help insurers create niche coverage and, most importantly, benefit those who live in catastrophe regions.
The adoption of blockchain can transition new and existing models of insurance, including P2P insurance, parametric insurance, and microinsurance, into a new digital age. Blockchain technology is powerful because of its secure platform connecting capabilities.
New distribution routines like peer-to-peer insurance (P2P) could end up restructuring the entire market. P2P insurance gives policyholders to a greater portion of the premiums rather than the individual private wealth managers working to produce returns for insurance companies. several well-funded startups are already beginning to stake their place in the P2P insurance market.
Another use case for Blockchain is parametric insurance. Instead of indemnifying the pure loss, insurers would sympathize to pay a certain amount upon the occurrence of triggers within preset smart contracts. For example, if an earthquake were to occur in a given region above a magnitude of 5, the smart contract would automatically pay 20 percent of the insurance claim to policyholders. Contracts require mutually trusted third-party administrators (TPAs) to adjust. As parametric insurance becomes known, its process will likely improve to play a key role in the widespread adoption of smart contracts.
The fast growth of IoT-based technologies and sensors have fueled startups and corporations, giving access to real-time data that may ultimately give way to new methods of settling insurance disputes. Automobiles could have allocated tokens by their manufacturers; rather than having the incident go through an insurance company, vehicles could adopt tech for cars to assess driving accidents automatically. A fender-bender would cause instant compensation within the smart contract based on sensor and party data.
Blockchain has various perceived benefits in microinsurance, as well. It can allow trust between peers to increase transparency for populations living in remote regions of the world. Its beauty lies in its simplicity. The virtual nature of the deal could side-step governmental bureaucracy to make geographic limitations irrelevant within its context. These features make the future of microinsurance very interesting.
The future of insurance could prosper through an intelligent adoption of Blockchain, with applications in digital currencies, fraud solutions, and smart contracts. Large insurers have the potential to benefit immensely. However, its application will mean that insurance companies will have to change their underwriting process, the structure of the policy, as well as risk underwriting.
Blockchain permits for cheaper, more consumer-oriented products to be developed that could chip away at the premiums collected by large insurance companies. A classic scenario would be the cooperation between Blockchain startups, carriers, brokers, reinsurers, etc. However, most likely many segments of the insurance industry will be subject to disruption and may follow the way of milkmen or lamplighters… a precautionary tale for incumbents in the insurance industry.