Written By: Steven Winter – Corporate Finance
Blockchain technology, initially used for the bitcoin-exchange market, is now spreading into many other industries. Blockchain is a transparent and secure information storage-and-transmission technology that operates without a central control body. By extension, a blockchain is a database that contains the history of all the exchanges between its users since its creation. This database is secure and distributed: it is shared by its various users, without intermediaries, which allows each one to check the validity of the channel.
The big advantage of blockchain technology is that it can integrate real-time events or indicators to trigger automated claims or policy subscriptions. For insurers, it means a great potential to develop a new generation of products with policies or claims that can be quickly and in real time sold and executed. The blockchain can thus be used to establish smart contracts, between two or more parties, electronically programmable and executed automatically according to the appearance of particular events provided for in the contract. The data required to execute a contract is retrieved in real time by a new trusted third party, the “oracle”, which uses a series of sensors (connected objects) to trace events.
The smart-contracts development allows insurers to step in a range of small but profitable contracts that can cover daily-life risks in a few clicks upon the immediate request of the client. Indeed, with the blockchain, the issuance of a policy or claim for reimbursement can be activated automatically when the goods exchanged are equipped with sensors detecting the beginning or the ending of the action of the beneficiary, or any other event triggering a claim refund.
Personal protection, for instance, is one of the products most targeted by insurers at the moment.
A few examples of existing or under-development insurance products:
The insurtech Cuvva that in a few minutes allows a motorist to subscribe an insurance policy at the same time they borrow a car.
PwC (PricewaterhouseCoopers) developed a prototype recently that is designed for a person who wants to attend a gym-training session. The trainee indicates the chosen sport and the duration of the session, for which he is then insured—in the PwC example, it would be a price of 1.70 euros for two hours of running. Without an injury at the end of the session, the insured person is reimbursed up to 50 percent of the amount paid. Otherwise, he is compensated—in this example, 30 euros for a sprain—after sending a photo of the injury and a medical certificate thereafter.
In travel insurance, Berkshire Hathaway Travel Protection proposes a policy that will reimburse the client in case of a plane delay. Such a product requires that the insurer connects tools to those of airlines (for information delays or cancellations of flights, for example), then identifies in its client database those affected by the flight in question in order to trigger proactively the opening of claims to compensate the travellers.
Blockchain technology has reduced distribution costs, underwriting and claim management in such a way that the market could explode in coming years. On-demand insurance could become a star product in particular within the context of social networks and a sharing economy.
However, according to the PwC study on blockchain for insurers, more than half of the insurers do not yet know how to appropriate blockchain.
At least some of the big players are entering in partnerships/equity investments:
AXA Strategic Ventures participated in a fund of $55 million for the start-up Blockstream, a partner of PwC. This young company is a well-known specialist in sidechains (blockchains underlying a blockchain).
Allianz Risk Transfer collaborated with Nephila (an investment fund specializing in meteorological reinsurance risk). They have successfully led an experience-based system for smart contracts to accelerate and simplify the transactional and claim processes between investors and insurers within the context of natural catastrophes.
If the blockchain offers many promises for the insurance sector, the increased competition with insurtechs is obvious. The latter have seized the opportunities offered by the blockchain by exploiting data in a more competitive way; they could upset the economic model of traditional actors.
Other risks are linked to blockchain technology:
The first one comes from the volume to be processed. Small premium products are profitable if volumes are large. But today the original blockchain technology has a certain difficulty in large-scale environments. Bitcoin blockchain (the most secure blockchain) achieves seven transactions per second (far from the thousands of the Visa Network) due to a limitation in the initial protocol.
The second risk is the lack of appropriate legal framework. As Pauline Adam-Kalfon from PwC says, “The regulatory issue goes beyond the national framework with regard to the diversity of geographical locations and actors using the blockchain. It therefore calls for an international legal and technical framework, in particular regarding the use and protection of the participants’ personal data”.
To conclude, under the condition that insurers are kept on the alert, and seriously consider this challenge, the new business enabled by blockchain technology could outweigh the difficulties of implementation.