By Jenny Sutton
The centuries-old insurance distribution approach is overdue for an overhaul. Dismal customer experience, high levels of distrust and raised expectations make this the perfect environment for a blockchain-based platform which will rapidly redefine the industry landscape.
Disruption happens at an industry level
Disruption, by definition, affects an entire industry. Economic asymmetries between new entrants and incumbents enable entirely new business models. New entrants can cost-effectively tackle less profitable segments, engage new, lower margin distribution channels or produce at a lower cost than incumbents. Disruption is usually not localised to a country or region, and does not result in a zero-sum game for existing competitors. Rather, new disruptive entrants win market share from existing players.
Both Uber and Airbnb are examples of companies that have disrupted their respective industries. They both match buyers to sellers (replacing existing booking services), taking advantage of their marketing scale to reduce client acquisition costs, and providing the technology infrastructure for buyers and sellers, thus allowing small operators to compete equally with larger ones.
Platform-based versus product disruption
What Uber and Airbnb have in common is that they are platforms. Harvard Business Reviewdefines a platform as “a structure on which many variations of products are built”.
The total cost of ownership of the structure may be higher than that for a standalone solution, but as it is shared by many participants, the aggregate, rather than individual, scale is an advantage. Platform-based disruptions operate at the industry ecosystem level, making response difficult for incumbents who are only used to product-based competition.
In addition, these recent platform-based disruptions have impacted more than the industries they operate in – changing consumers’ behaviours, standardising products and services, creating new opportunities to make money and changing lifestyles as the concept of income is redefined.
Opportunity for a platform for insurance
In the insurance industry, we have yet to see platform-based disruption. Although innovative, Lemonade and Trov are product disruptor examples, not platforms. Peer-to-peer insurance models are examples of platforms, but they typically only represent the buyer side of the market place.
Yet the fundamental problems in the insurance industry today are ideal targets for a platform-based disruptor.
Cost and scalability of personal distribution channels
Platforms generally replace existing intermediary arrangements, streamlining the process of connecting buyers with sellers.
And the insurance industry is readier than any other industry for this: it is a sector where finding a good agent is a matter of luck, and relies on proprietary distribution channels, mostly face-to-face, which are expensive to operate and cannot profitably distribute lower ticket priced solutions to less affluent segments.
Information asymmetry exists in both directions. Insurers assume that clients are not sharing important health, lifestyle or other data with them. Clients do not understand what they have bought and why claims are denied.
This lack of mutual understanding leads to distrust. Distrust adds cost and friction to the relationship. The data collection and analytics opportunities enabled by a platform are endless and can, among other things, provide much more transparency for both the buyer and the seller.
The benefits of an insurance platform
A platform enables the introduction of many types of products from a variety of categories or adjacent industries. Uber started selling rides and is now selling food delivery services. In addition to accommodation, Airbnb is now selling experiences.
An insurance platform could offer life, health and property all in one place, and could also include other adjacent services – safeguarding the insured asset or life, a space that some insurers are making forays into, or being bundled with other products – like Tesla already does.
A platform enables cost effective entry into the insurance industry for new insurers, removing the barriers of IT investment and management.
While Didi’s ability to predict the location and timing of demand creates a virtuous cycle of being able to match drivers and riders, so too can an insurance platform provide for the collection of rich metadata to allow insurers to better understand the needs of its clients, and experience data for reinsurers to price products more accurately.
An insurance platform on a blockchain
The currency double spending issue that Satoshi Nakamoto originally devised the blockchain to solve is equivalent to the issue of clients being insured in multiple places for the same risk, or making the same claim more than once.
While it may not be the platform’s role to prevent a client claiming more than once for the same event, all relevant insurers could be aware of a particular claim, partly addressing the information asymmetry problem for insurers.
The immutability of a smart contract on a blockchain allows insurers to manufacture personalised products, without regard to the baggage of the legacy systems they are creating in the wake of each new product feature. The terms and conditions of each policy sold are enshrined in the blockchain itself – in the form of executable code – and future product development does not have to be backward compatible with the terms, or even structures, of the policies already issued.
The distributed ledger characteristic eliminates the need for reconciliations between parties, and seamlessly integrates interorganisational business processes.
How a blockchain insurance platform would work
A single operator, possibly on behalf of a consortium of insurance companies, would manage and enable the registration, KYC/AML and on-boarding, once.
An encrypted, tamper-proof store of information obviates the need for clients to complete these steps for each transaction. A secure underwriting profile is stored in the background as clients select the insurance benefits they need and assemble their portfolio of insurance benefits.
Pricing from relevant insurers is dynamically calculated for each benefit selected based on the client’s underwriting profile and the insurer’s pricing model. The client selects their preferred combination and one payment transaction takes place, with multiple insurance policies being written to a smart contract on the blockchain.
When a covered event occurs, the smart contract is invoked manually or by an oracle, and benefits are claimed against all relevant policies. A one-stop shop for life, health and property insurance for the term of the cover.
The trustless characteristic of the blockchain would enable a new approach to capitalisation of the industry. Based on the risks underwritten, regulatory capital (taking into account reinsurance contracts) can be dynamically calculated, and the capital payment itself completed and secured using blockchain-based escrow arrangements, allowing business to flow to the companies that offer the best solutions, not those that have the most capital.
Insurers who want to avoid being marginalised by the impending disruption of the industry must start thinking about themselves differently – making the industry, not their business, or even the market they operate in, the unit of their analysis.
They need to consider whether they can become the platform for some part of the industry, or take advantage of the opportunity to participate in platforms as they emerge. If innovation agendas do not include platforms, not only the innovation team, but also the company, is doomed.
Originally Published in Asia Insurance Review 1 April 2017