What distributed insurance and smart contracts will change in assurantielles practices
The world of finance is very interested in the blockchain. But far from confining its potential to the banking community, this new technology is also of interest to the insurance industry. Companies such as Lloyds and Allianz France have already expressed their interest and willingness to launch experiments on blockchain. More recently, Axa has invested 55 million in the start-up Blockstream, whose developers are the biggest contributors to the Bitcoin protocol and which will allow inter alia interoperability between different blockchains.
If the large insurance companies are looking at the blockchain today, it is because this technology allows to emancipate themselves from the reporting phases, and to build new insurance systems via the Internet without intermediaries. While peer-to-peer insurance models have already begun to appear (e.g. Friendsurance or inspeer.me), Blockchain gives it a new impetus thanks to smart contracts ‘ automated insurance systems.
Smart contracts and oracles to automate processes
Smart Contracts (in French, “smart deals”) are autonomous programs that automatically execute the terms and conditions of a contract, without requiring human intervention when started. If this concept appeared as early as 1994, it began to be fully exploited with the blockchain which provides security and replaces the previously needed third party of confidence. New specialized entities operating with the Blockchains, the “oracles”, allow to manage the data of the smart contracts and to determine, for example, whether the conditions are well fulfilled to trigger the payment.
These mechanisms promise major changes for current insurance systems. By automating the execution of contracts, they allow both insureds and insurers to emancipate themselves from the declarative phases: forms, claim, verification, trigger of compensation… Blockchain, acting as an automated trusted third party, paves the way for reduced structure costs while fiabilisant and accelerating decision-making processes. In the long run, this would mainly generate greater satisfaction for policyholders through the introduction of new, more intuitive and faster services.
Blockchain, acting as an automated trusted third party, paves the way for reduced structure costs while fiabilisant and accelerating decision-making processes.
The example often quoted to illustrate the insurance models based on smart contracts is that of insurance called index or parametric, i.e. insurance linked to an index such as for example the temperature or the level of rain. The smart contract between the farmer and the insurer may, for example, stipulate that payment is made after 30 days without precipitation. The contract is powered by reliable external data (e.g. rainfall data from the National Meteorological Service), which allow the oracles to automatically trigger the payment after 30 days of drought, without the intervention of a Expert nor need to declare or claim the insured.
But other applications are possible: Last September, a team from the hackathon Blockchain of the Fintech Week in London built a travel insurance program on the Ethereum platform in a weekend. Finding that 60% of passengers insured against the delay of their flight never claimed their money, they created an automated insurance system based on blockchain, via the Oraclize service. With this service, passengers are automatically compensated when their flight is late, without the need to fill out any form, and therefore without the company having to process the requests.
It would certainly have been technically possible to create these processes without blockchain. The true contribution of blockchain technology is to generate the confidence and security necessary to automate the declarative phases without resorting to a third party. If in the past the insurers have not set up this type of product, the blockchain is now providing a solution that could allow new players to enter this market.
Setting up peer-to-peer insurance
Beyond the autonomisations of the processes described above, a new trend, that of peer-to-peer insurance (P2P), has emerged in recent years. In France with Inspeer.me, in Germany with Friendsurance, or in the United Kingdom with Heyguevara, platforms offer user-to-user assurances without intermediaries.
Pairing the blockchain technology with this P2P insurance model paves the way for quasi-autonomous and self-regulating insurance systems, where policyholders ‘ insurance policies and claims are automatically managed. An additional development for insurance, but not so futuristic.
Blockchain and smart contracts enable the establishment of autonomous decentralised organisations (DAO): They are autonomous entities in the Blockchain, without formal legal status. Their operating rules are listed in computer code. In the case of insurance, these DAO can be used to create groupings of policyholders, on the P2P format, without central control organization, each group being governed by the policyholders themselves. In this type of system, the premiums paid by each insured form a capital used to pay compensation.
One of the great advantages of these CAD insurances is the drastic reduction of structure fees, which allows the insured to automatically redistribute to the end of the year the capital which has not been used to compensate them (the “contract gains”). This collaborative model also shifts the decision-making power of the third party insurer to the insured: voting systems can be put in place to enable the group to collectively decide whether or not to validate compensation or to redistribute the Surplus.
Start-ups have already been created to offer this kind of service. This is for example the case of Dynamisapp, which offers additional unemployment insurance based on smart contracts via the blockchain Ethereum. In France, the Wekeep.io project builds a system to self-secure without intermediary on blockchain, through a currently developing management tool.
The big question raised by these models is that of regulation: with contracts without territoriality and a form of decision-making power given to lines of code, the legal stakes are considerable. Determining who is legally responsible for the code contained in the DAO is a problem that has not, at the moment, been really decided by the legislative systems.
Pending the resolution of these legal issues, blockchain remains a robust and effective tool for establishing safer, more intuitive and more collaborative systems that will create refocused insurance for its users.
Companies that benefit from the creation of distributed value are those that will follow the new uses of “consumers” and that are able to renew themselves. Let’s think of the fall of Kodak, which is a striking example. For this reason, insurers have every interest today to experiment around the blockchain in order to define the applications that will correspond to the uses of the years to come. Like banks, insurance companies have to test this new technology within their organizations, or they may be punished by the market in a few years. Forging partnerships with accelerators and blockchain startups, creating communities of developers and daring to open source, which is a formidable catalyst for innovation, can also be an opportunity for insurers to Condition to quickly seize the subject.