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How blockchain will make insurance cheaper and safer
Get ready for a big overhaul in the way humans manage risk.
Blockchain technology promises to disrupt the insurance industry, and some companies are already developing blockchain-based insurance solutions. But some experts predict that blockchain technology will end up making insurance obsolete.
What is a blockchain and what is cryptocurrency?
A blockchain is a digital ledger that lets people confidently transact with others, without a centralized third-party needing to verify that the transaction was legitimate.
A cryptocurrency is both a digital asset you can trade on a blockchain and a fundamental blockchain component that keeps many blockchains running.
The two concepts are intricately connected, and a short history of Bitcoin will explain how.
The creator or creators of Bitcoin, known by the pseudonym Satoshi Nakamoto, thought that digital financial transactions should be more akin to face-to-face cash transactions. You and any other individual should be able to make a trade without a third-party financial institution looking over your shoulder to resolve disputes and verify that everything’s legit.
So the challenge of creating a digital coin was essentially the challenge of creating a powerful verification system the likes of which the world had never seen. The elegant solution they developed was blockchain technology.
At a very high level, verifying a Bitcoin transaction requires someone (anyone) with a computer to solve complex mathematical problems. Every time a new batch of transactions needs to be verified, people all over the world rev up their computers and try to solve the problem. These people are called miners.
Having so many miners involved in the verification process reduces the need for a centralized third party while also achieving a network effect that helps to keep the system secure.
What’s the incentive for miners to complete this task? Well, the solution to the mathematical problem is represented as a line of code and the lucky person, or conglomerate, who solves the problem gets to keep that line of code, also known as a Bitcoin.
What are the benefits to the industry?
It wasn’t long before people realized that there’s room on a blockchain for more than just a cryptocurrency. Developers and entrepreneurs have taken the source code from the Bitcoin blockchain, which Nakamoto open-sourced, and they’ve been hard at work creating new blockchains powering almost any kind of transaction you can think of.
One of the more notable blockchain developments was the invention of smart contracts. This tech was largely spearheaded by the next big crypto project out of the gate: Ethereum.
That’s because Ethereum’s founders realized that not only could blockchains automatically verify whether or not a contract’s terms and conditions have been met, but that they could also be the place where you’d actually define and store those terms and conditions.
All of this points to a future where middlemen and lawyers will have more limited roles. It might not get rid of them altogether, but it should reduce their influence and reposition them as a sort of third party, providing limited human input when needed.
Here’s who else should be worried:
- Bye-bye third-party certifiers. Blockchains will allow manufacturers and retailers to monitor their supply chains to ensure their suppliers are following proper standards.
- So long energy suppliers. Blockchains will allow individuals with solar panels to sell their excess energy directly to their neighbors instead of selling it back to the grid for redistribution.
- Farewell media distributors. Blockchains will allow content creators and publishers to license their own work and get paid for it directly.
How does the insurance industry look to be disrupted?
The insurance industry is full of middlemen, lawyers and contracts, making it ripe for blockchain disruption. The whole industry will become much more streamlined without the need for sales agents, brokers, claims processors and lawyers.
All of this will allow premiums to come down and claims to be processed much quicker. Here’s how it will happen:
- Quicker and more reliable quote processes. Customers will be able to securely store their pre-verified personal data on a blockchain, reducing the need for someone at each insurance company to verify the information every time the customer wants a quote.
- Quicker and more reliable claims processes. If a customer is covered against an event, that event can be automatically verified and the person’s claim authorized in real time.
- Personalized premiums. Real-time tracking and monitoring, with the customer’s permission, will help insurers build profiles for each customer. This will allow them to offer premiums that better reflect each person’s unique risk profile.
- Real-time risk assessment. Insurers can provide incentives for customers to lead risk-averse lifestyles, and every time a customer does something that reduces their risk, that activity can be automatically logged and verified.
What’s happening around the world?
Here are some of the many exciting insurance-focused blockchain projects happening around the world:
- New travel insurance products. French insurance giant AXA has launched Fizzy, a smart insurance product that pays you if your flight’s delayed by two hours or more. Airline data is paired to the blockchain, and a delayed flight will automatically trigger the terms of your smart contract and deposit your cash immediately. No need for you to file a claim.
- Insurance for the Internet of Things (IoT). Singapore-based blockchain startup Aigang (AIX) is working on an insurance product for the Internet of Things connected devices like smartphones, drones and even self-driving cars. Since these things are already connected, it’s easier for them to transmit data directly to the blockchain for verification.
- Rotating savings and credit associations. Blockchain startup BITPARK (BPC) is developing an insurance alternative that is a sort of an insurance/finance hybrid. It’s a solution that allows people to create their own communities where they can pool their funds and ration them out when one of the members needs assistance. Members can set out the terms ahead of time using a smart contract. Rotating savings and credit associations have been around for centuries and are common in developing countries, minus the smart contracts.
- Marketplace for tradable insurance policies. Blockchain startup Fidentiax (fdX) wants to make it easier for you to sell your life insurance policy. If you have term life insurance, you can sell it to someone who will take over your premiums and receive the payout when you die. They are essentially betting that you’ll die before their premiums exceed the final payout. Fidentiax thinks the blockchain will remove the many existing third-party frictions that make it difficult to sell a policy and to receive a fair price.
Are there any drawbacks?
With all of the recent excitement around crypto, it’s understandable that no one’s mentioning many of the drawbacks to the insurance industry.
Challenges the industry might face on the road ahead include:
Blockchain could make insurance obsolete
Insurance is largely based on the idea that everyone pools their money together, and that money is used to pay for the claims of those who need it. Naturally, the people who don’t claim are the ones subsidizing those who do. It can largely be summed up as safe people subsidizing risky people. For example, it is largely accepted that in health insurance, the younger population subsidizes the claims made by the older population.
Sure, insurers will conduct risk assessments that offer safer people lower premiums, but these assessments are very general in nature.
A market powered by blockchain would make individualized risk assessments easier to perform, and premiums could start drifting toward the actual cost of the claim that person is likely to make. That means safe people would be paying less and less into the pool and risky people would be paying more and more. That defeats the purpose of insurance altogether.
Unfortunately for blockchain purists, who often argue that tech will reduce the need for government, this may require stricter regulations around how much insurers will be allowed to reward good behavior.
Insurance policies come with tons of small print explaining the exact circumstances that validate or void a claim. Blockchain technology will make it easier and easier to track and verify events leading up to a claim.
With blockchain, customers will have their own data secured on a blockchain containing all of their important information, and they can choose whether or not to open this up to their insurer. But what happens if insurers won’t sell you a policy unless you agree to implement ongoing tracking and to give them full access to your data?
One possible solution would be for the consumer to agree to log all relevant tracking information onto a blockchain ledger, but retain full control over that data. The insurer wouldn’t be permitted to gain access unless a claim is made, and even then they’d only see the data related to that claim. These specific conditions could be programmed into a smart contract to trigger automatically, meaning the insurer would get automatic access to the data but only under specific, 100% digitally verifiable conditions that everyone agreed to ahead of time.
In fact, Sydney-based blockchain startup bron.tech is working on technology that could solve this issue. It’s using the Ethereum blockchain to create a data storage system where individuals control their data and get to decide who gets to see it and when. It’s a perfect fit for insurance.
Is there a way to insure crypto investments?
Most insurers are reluctant to insure cryptocurrency investments. For one, digital assets are difficult to insure in general because the law can’t keep up with the speed of tech. Add to that the volatility of cryptocurrency prices, and you have a recipe for a headache of a product and an expensive one at that.
A Google search indicates that a few companies are starting to offer it, although these companies don’t appear to be advertising it publicly. These insurers specialize in insuring large commercial enterprises and high-net worth individuals, so they’re probably just doing some trial runs on some extremely large accounts.
Insurers will have to figure out how to insure this booming industry sooner or later unless they want to leave money on the table. So in the meantime, don’t invest more than you’re willing to lose and keep your eyes peeled as the industry matures.
Insurance has needed a makeover for a while, and it’s about to get one. The short-term improvements in efficiency that could happen with blockchain technology aren’t exceedingly difficult to anticipate, but it’s not as easy to visualize the complete transformation that is bound to occur.
But until blockchain-based insurance moves out of theory and into reality, you’ll need to stick with comparing insurance options that are available on the market now.
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