How does blockchain shape the future of insurance industry?

Author: Ziggy Bak (CSO at Zikto)


  • What does the insurance industry need now?
  • How can blockchain technology improve the insurance industry?
  • Other elements to consider

The growth of the insurance industry had slowed down from 2017(1). Traditionally the insurance industry, which provided preparedness and avoidance of risk, has steadily grown in history. However, the insurance industry is agonizing how to grow out external factors such as declining population, slowing economic growth, and lifestyle changes, as well as internal factors such as high operation costs, low digitalization, and lack of customer interface. While the insurance industry is considered the most conservative industry, it has started to search new ways with an aim to digitalize and automate operations, thereby improving sales and operational efficiency.

<Figure 1. Six major issues of insurance industry(2)>

But how exactly can the insurance industry expand the market and increase operational efficiency? The below diagram shows a combination of claims from various research reports and experts’ opinions from the insurance industry.

<Figure 2. Issues and underlying factors of insurance industry>

The solutions to these issues are to strengthen the capacity for product development and increase operational efficiency. That is, by developing better insurance policies and minimizing operating costs, more subscribers can be secured, maintained and profitable. The six issues shown in Figure 1 are largely solvable. While there are various aspects to enhancing product development capabilities and improving operational efficiency, we will focus on ‘data- driven decisions and ‘automation of insurance payments’.

The practical benefits of ‘data driven decisions’ and ‘automation’ can be described as follows:

– Data driven decisions

  • A variety of insurance products can be developed: coverage can be expanded to for example pet insurance, exchange hacking insurance, etc.
  • More accurate measures of loss rates: insurance premium measurement is easier and clearer, and more cost effective (e.g. usage-based insurance, real-time variable insurance (dynamic pricing))

– Automation

  • More attractive insurance products can be developed: insurance policies are easier and clearer, reducing inconvenience in claims/payments
  • Acquired cost and time efficiency: claims/payments are fast and less expensive

To develop and sell insurance policies, insurance companies measure the ‘loss ratio’ of the insurance policies. The loss ratio can be determined by multiplying the possibility of an event requiring payment (probability) and the actual amount paid when the event occurs (impact). Naturally, the smaller the ratio, the more attractive it will be to the insurance companies (Figure 3 green section), and the larger the ratio, the more attractive it will be to the users (Figure 3 red section). That is, from an insurer’s perspective, an insurer can only release insurance policies by carefully reviewing and understanding how often an insured event will occur and how much insurance should be paid when it occurs.

<Figure 3. Risk of insurance products by profit/loss section>

The amount paid can be calculated relatively clearly (e.g. the amount of damage * guaranteed). The problem is the possibility of occurrence. We often think, “If there’s such insurance policy, it would be great, but why isn’t it there?”; for most of these cases the possibility of occurrence difficult or impossible to identify. Pet insurance is a good example. When the probability of a pet being sick is unknown, the insurance company will only be able to set the premium as conservative as possible by predicting a high probability of occurrence. This will lead to (and of course) higher premiums, while higher premiums lead to lower rates of insurance coverage. As a result, it becomes an unappealing insurance product to subscribers.

In these circumstances, data can serve as clearer means of identifying possible occurrences. If insurance policies can be developed based on actual data, more accurate probabilities of occurrence can be identified, and if the probability of occurrence varies according to a variety of variables, it would be possible to develop more specific and realistic insurance products by disaggregating the probability of occurrence with each variable. Let’s set a hypothesis with pet insurance. The data required to release pet cancer insurance will be pet’s breed, age, lifestyle and incidence of cancer by resident. These data can be collected through vets, pet breeders and/or by pet owners (and pet-related apps). This would enable the development and sale of disaggregated insurance policies that would identify whether each independent variable is correlated with a subsidiary and provide appropriate coverage of insurance premium and deductible. In addition, to collect data, enough compensation (incentives) should be given to the data provider — Insureum tokens can be used as a method compensation.

<Figure 4. Example of development flow of data-based insurance and usage of Insureum token>

As described in the example above, the Insureum Protocol can collect and secure a diverse set of data to create an environment in which more efficient insurance products can be developed.

<Figure 5. Example of data collected and utilized through Insureum>

Automation of insurance payment can be done in simpler and clearer ways. A good example would be a flight delay insurance product called Fizzy from AXA headquarters, which is already on the market. One can automatically receive insurance payment if the flight is delayed by 2 hours or more. This is achieved by utilizing smart contract used in Ethereum and 3rd generation cryptocurrency. Smart Contract is a function that automatically executes transactions based on logical values. For example, if a code is made to pay a certain amount to a specific person on December 31st and the amount is placed in an electronic wallet, the amount entered on that day will be transferred automatically. Or a more complex code can be written and have 100 USD sent to each and all members of a ski club in case it doesn’t snow on December 25th. Data that makes these transactions possible are public weather data and electronic wallet addresses of subscribers. It is predicted that smart contract will be welcomed by insurance industry, which requires high reliability, as it will be stored in blockchain which cannot be forged once created.

<Figure 6. Overview of Smart Contract>

Then when does blockchain apply to the insurance industry? Currently we have partnered with several insurance companies to develop insurance products. Consider the following three major factors regarding the use of blockchain and cryptocurrency:

  1. In fact, for the automation of the whole insurance transaction process, cryptocurrency should be available as an alternative to fiat: it is still more difficult to use cryptocurrency (especially in insurance payments) due to regulations thus the actual usage would require further discussion and development.
  2. There will be a steep learning curve for the development and operation of new insurance products: The development and operation of blockchain and data-based insurance products will require testing periods that will increase both insurers and subscribers’ understanding of insurance policies, which may lead to high losses but will gradually stabilize.
  3. To increase users, it is necessary to continue to think of and develop usability measures: Many block chains, including Ethereum, are neither easy nor convenient for most users. Continuous development of UI/UX and service layers will help more people to make use of blockchain and cryptocurrency in real life and accept them as means more than just an investment.

All in all, a collaboration between ‘the most conservative’ insurance industry and ‘not-yet entirely regulated’ blockchain industry is facing a variety of issues to resolve until fully functioning. Still there are many (including us) who are trying to overcome prevalent issues since they believe that collaboration will result in real value. I truly believe that foundation is being laid right now to generate future value. Because in my perspective, the integration of blockchain with insurance will not only create excess value from productivity increase and process optimization but also expand the scope of values created from insurance industry, provoking a new type of perspective on insurance. Traditionally the insurance industry has grown based on ‘fear’ about the future; however, if insurance can now start offering positive and instant value, more and more will appreciate the value of insurance through good faith. I would like to wrap up this posting with my hope that we can gather more value together.

1) Deloitte, 2018 Insurance Outlook: Shifting strategies to compete in a cutting-edge future

2) Swiss Re Institute, Sigma 6 report (2017); Zikto analysis

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