There is a shift going on in the financial sector.
The steep rise of the FinTech industry, where investments went up eightfold in the past 5 years to almost $20bn is causing unrest within traditional companies. One of the most interesting developments in the FinTech industry is without a doubt blockchain.
There are already many examples of how blockchain could impact the banking industry, especially payments services and security and commodity trading. In the insurance industry it is Internet of Things, big data and crowdfunding that are widely described.
Perhaps because of this, the impact of blockchain on the insurance industry hasn't been a strong point of focus for new innovators. Some papers, like the Ethereum white paper and “Chain of a lifetime” do describe examples of new products that could result from blockchain technology, but these focus less on new possible business models.
But that's not to say there's no conversation on this topic. A report from the Dutch National Bank of March 2016 put sustainable future business models within the insurance branch on deep red. The urgency for new business models is high, although it looks like the sense of urgency is not always present within the traditional insurance companies.
There, the focus is more on incremental change of the current model instead of disruptive change or even green field set up of a new model.
Benefits to gain
So, what could be a new model and how could this model be executed? Blockchain, especially smart contracts, could be the enabler for a true P2P or crowdfunded insurance model.
In the new business model, the focus of the insurers would shift away from asset management and instead would focus on matching supply and demand and to risk calculation research. The insurer would provide a marketplace-like platform where customers can post their insurance demand, which could be either a standardized product or even a specific demand.
The insurer then would use its "risk intelligence" and risk models, based on their historical data, to perform a premium calculation to post the expected return, after subtracting their margin off course.
Posting this premium calculation, interested investors can bid or subscribe to the demanded insurance. This can either be done as a group through crowdfunding, or by individuals in a P2P way. This could depend on the kind of insurance request, the available resources of the investor and his or her risk appetite.
So far, this model looks much like the one Lloyd's already has in the insurance market or the ones companies like Funding Circle have set up in the P2P lending market.
And here is where blockchain will play a vital role.
Besides the administration being done in a decentralized ledger, with the use of smart contracts, one could guarantee the payment from the investor to the customer in case the event for which the customer posted their insurance demand happens. The smart contract is thus programmed as a traditional guarantee, but without the need of a bank.
By doing this in a blockchain, the administration and execution processes are simpler, almost fully automated, transparent and cheaper than in a traditional set up. Besides that, the invest
via www.coindesk.com
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