The insurance industry doesn't seem to be as vulnerable to technological disruption as traditional banking. Insurance is a highly specialized business where risk assessment and the ability to pool a large number of insurance contracts with similar risk profiles is a critical success factor that is difficult, but not impossible, to replicate automatically in a decentralized P2P marketplace. Hence, P2P and decentralized insurance underwriting are way more complex to implement than traditional banking.
On the other hand, the advent of blockchain technology represents a potentially great source of efficiency and innovation for insurers. And this time, the incumbents are not too late for the party!
Some insurance companies are already taking advantage of blockchain technology to position their businesses for success and increase profitability.
For example, Allianz demonstrated a beta version of a platform facilitating the settlement of catastrophe swaps and bonds. Such a platform makes it easier for the holders of such financial instruments to receive or send a payoff, in the case of a triggering event. This means a shorter waiting time for both parties, less uncertainty for people buying these instruments for insurance purposes, fewer verification errors, and an overall improved customer experience.
Lloyd's in the UK has not waited too long and started experimenting with blockchain-based products already. It partnered with the shared workspace provider Vrumi and blockchain digital specialist SafeShare to offer insurance products to Vrumi's hosts. Vrumi is an AirBnB-style company for office space accommodation and the idea is to allow Vrumi's hosts to underwrite insurance contracts protecting their rented property. The product uses blockchain technology to confirm and execute the obligations of each party.
And do you remember Everledger, the company that uses blockchain to track the origin of diamonds? It also helps insurers when pricing related insurance products by mitigating the risk of fraud and blood diamonds entering the supply chain. Purchased diamonds typically come with a certificate to prove their quality and origin but there is a history of fraud from missing paperwork. Blockchain could greatly help insurers when they need to verify the history of diamonds, works of art, jewelry, and luxury goods by preventing any fraud attempts.
There are a number of blockchain applications that will shape the development of the insurance industry in the future. For now, we know that blockchain can help by doing the following:
- Reducing uncertainty
- Lowering back-office costs and reducing bureaucracy
- Automating pay-off execution processes, saving time and man-power
- Improving customer relationships and satisfaction since blockchain-based smart contracts are objective and pre-programmed to execute automatically
Moreover, insurance contracts on the blockchain can help insurers improve their capital adequacy ratios due to better risk management, faster execution times, and improved visibility over pay-offs due to policy holders.
Overall, the main industry feeling is that permissioned blockchains can be a great solution for the future of the insurance sector. Such permissioned blockchains can fit into the current business model. If blockchain solutions are integrated with the existing framework, insurers, regulators, and customers can all benefit from the advantages discussed here.