That a change is taking place in the financial sector is clear. The strong rise of the Fintech industry, where investments have increased eight times in the last five years to almost $20 billion, is causing changes within traditional companies and their financial management systems.
In addition to the impact of new technologies such as Internet of Things and Big Data, as well as crowdfunding and the possibilities of new services within the insurance sector, there is one that is sometimes less talked about: the Blockchain.
This technology is one of the most interesting developments in the Fintech industry, and although there are already many examples of how Blockchain could revolutionize the banking sector, especially payment services, security and commodity trading (as well as projects like Ethereum have white papers describing examples of new products as a result of the Blockchain technology), they are less focused on possible new business models.
A March 2016 report by the Dutch National Bank on the state of the Dutch financial markets focused on future sustainable business models, but it also identified such models within the insurance sector as dangerous. For this reason the urgency of new business models for the sector is high, although it seems that the immediate sense of urgency is not always present in traditional insurance companies, as the focus is more on incremental change of the current model rather than disruptive change or the establishment of a new model.
Insurance company model in Blockchain
So, how could this be a new model and how could this model be implemented? The Blockchain and especially the smart contracts could be facilitators when it comes to restructuring within the insurance sector, making it closer to the people and facilitating the relationship between the insurers and their customers.
Within the new business model, the focus of the insurers would be on the comparison between supply and demand, on research and risk calculation operations, as well as on the abandonment of asset management.
In this way the insurer could provide a marketplace as a platform where customers can post their insurance demand, which could be a standardized product or even a specific demand. It should be noted that to achieve this, the use of Big Data technology and the analysis of social networks are two other basic pillars to achieve this.
Another case is that insurers could use their intelligence system and risk models based on classic models to perform a premium calculation and then publish the expected return, after subtracting the course margin from their historical data.
By counting this premium calculation interested investors can bid and/or subscribe to the requested insurance, and this can be done in conjunction with crowdfunding or individualized models depending on the type of insurance request, the investor's available resources and his or her appetite for risk. Such business models are already used at Lloyd's within the insurance sector or companies such as Funding Circle have established themselves in the P2P loan market.
This is where the Blockchain will play a vital role, since in addition to the administration that is done in a decentralized "ledger", the use of intelligent contracts will guarantee the payment of the investor to the client in case the event for which the client published his insurance demand occurs (intelligent contracts are programmed as a traditional guarantee, but without the need for human interaction).
By using Blockchain technology the administration and execution processes are simpler, almost completely automated, transparent and cheaper than in a traditional configuration. In the same way the investors also know their maximum exposure, as the amount is defined in the intelligent contract.
On the other hand, insurers can also play the role of damage evaluator to verify the validity of the insurance claim and this in turn could be subcontracted to a third party. Thus, by connecting the Blockchain with other distributed "ledgers" this validation can be verified automatically.
It can be seen that in this model, the use of intelligent contracts in the insurance market would not have to be limited to the example of P2P insurance, but could be used for virtually any type of insurance, especially in life, death or health insurance, since the verification of the event that enforces the coverage is almost immediate.
Benefits and advantages
This new business model has benefits for insurers, investors and, of course, their customers.
Benefits for insurers:
- The capital required to insure customers remains with the investors, so the insurer can be maintained with a light capital.
- Similar models in the P2P loan business do not need comprehensive legislation, or in many cases, no legislation at all.
- As far as employment within traditional industries is concerned, technological change does not change the regulations to be complied with.
- The development of the platform is subcontracted to third parties on a pay-per-use basis, making the company more agile.
Advantages for investors:
- New opportunities with greater potential for return.
- Opportunities for private investors with less capital through crowdfunding.
- Clear vision of maximum exposure to financial risk.
Advantages for the customers:
- The new contract/subscription model and the low operational cost model make insurance cheaper than traditional insurance.
- It gives the user the possibility to publish the demand for specific insurance in an easy way.
- If the event or contract takes place, the payment of the insurance is guaranteed due to the intelligent contracts.
Challenges of the Blockchain, smart contracts and Ad-Hoc coverage
Finally, within these models there are still many challenges and one could ask questions such as Will the regulatory agencies accept this model for the insurance sector? Can a client push for a new "bouquet" or "fashion" for personalized purposes? Is there a platform that can support this, especially the flexibility for the demand side to request very specific insurance?
Let's hope that these questions and challenges can be answered in the future, as it is very clear that the Blockchain is an easy, simple and headache-free solution that satisfies all parties involved. An ideal world? We will have to discover it.
