The machines have spoken
Many a word has been written about the oncoming wave of technological changes that will affect the financial services industry. While many companies are acutely aware of how their business model will be affected, there are some companies in the industry that are adopting a wait and see approach before they make an informed decision on their future livelihood.
Blockchain is an example of how technology will affect the insurance industry in particular. A recent report by techcrunch.com journalists Kevin Wang and Ali Safavi shows how this new technology is impacting international insurers.
Peer-to-peer insurance
Blockchain adoption has the power to transition new and existing models of insurance, including peer-to-peer (P2P) insurance, parametric insurance and micro-insurance, into a new digital age. Blockchain is powerful because of its secure platform connecting capabilities.
The report points out that new distribution methods like P2P could end up restructuring the entire market. P2P insurance empowers policyholders to a greater portion of the premiums rather than the individual private wealth managers working to produce returns for insurers.
A number of well-funded startups are already beginning to stake their place in the P2P insurance market. One example, Dynamis, is a P2P supplemental unemployment insurance protocol that uses the policyholders’ social capital to replace underwriters.
Enigma enables different parties to jointly store and run computations on data while keeping the data completely private. In the foreseeable future, specific P2P insurance platforms may begin to use smart contracts to settle claims and match demand between consumers in an online market, solving many of the current issues when transferring digital assets or accessing private data.
Parametric insurance
Another use for Blockchain is parametric insurance. Instead of indemnifying the pure loss, insurers would agree to pay a certain amount upon the occurrence of triggers within preset smart contracts.
For example, if an earthquake were to occur in a given region above a magnitude of 5, the smart contract would automatically pay 20% of the insurance claim to policyholders.
The article shows that product-creating startups like Rainvow can be used to create cross-border risk pools, allowing individuals from all over the world to access its exchange protocol via digital currencies. Rainvow’s Ethereum platform facilitates niche coverages to automatically compensate for unforeseen transportation costs on rainy days.
Platform-creating startups like Factom facilitate highly specific insurance policies. These systems allow third-party administrators to create triggers or oracles for smart contracts, promising to make parametric insurance easier and more adoptable by insurance carriers.
The fast growth of internet of things based technologies and sensors have fuelled startups and corporations, giving access to real-time data that may ultimately give way to new methods of settling insurance disputes. Automobiles could be assigned tokens by their manufacturers; rather than having the incident go through an insurance company, vehicles could adopt tech for cars to assess driving accidents automatically. A fender-bender would trigger instant compensation within the smart contract based on sensor and party data.
Outlook
Because of the dynamic nature of technology, it is hard to pinpoint an exact reaction that will occur in the market. The best that can be done is to provide future scenarios and plan accordingly.
An example of this, unrelated to Blockchain, is driverless vehicles. While a long way from being adopted in the South African market, there are questions as to where liability will lie should an accident occur. Would it be with the manufacturer as opposed to the owner of the vehicle…or are there other liability issues that we are not aware of?
The techcrunch.com article shows that Blockchain allows for cheaper, more consumer-oriented products to be developed that could chip away at the premiums collected by large insurers. An ideal scenario would be the cooperation between Blockchain startups, carriers, brokers and reinsurers. However, most likely many segments of the insurance industry will be subject to disruption and may follow the way of milk men or lamplighters.
Editor’s Thoughts:
Probably the most pertinent question everybody has is whether technology will completely take over the industry; the answer to that – in my mind – is no. But will technology sink companies that wave at it as it passes by them? The answer in my mind is probably. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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