Imagine that you have life insurance, and you pay the monthly premium in order to protect yourself and your family from life’s unforeseen circumstances. You pay exactly the same as your friend John, who has your same age, same medical preconditions, and you kind of share the same lifestyle, which – to be honest- is not extremely healthy. But one day, you decide to change your diet, buy a FitBit and start exercising, while John gets angry at the fact that you are not going to eat pizza together on Sundays anymore. The healthier my lifestyle gets, though, the more I become frustrated by the fact that I pay exactly the same as someone that has much more risk than me. Well, in the past it was impossible that your life insurance provider knew about your health data, but now you have a lot of new data points via FitBit that you are willing to share with your life insurance. Sharing these data on the blockchain to your life insurer, gives them the ability to lower your price based on your fitness life. Amazing, right?
Imagine another situation where you are a car insurer that has a considerable problem which is deciding whether to reimburse customers that have accidents: it’s hard to understand exactly what goes on in accidents, and therefore to attribute responsibilities – leaving large room for error, and with an enormous problem of trust. Now, imagine that your team is able to recreate the accidents, via sensors that are in the cars and that give life to Digital Twins of the car itself, and that is able to recreate the exact conditions of the accident: you are now able to pay out claims and reduce inefficiencies and mistakes.
“Andrea, how is all of this possible? How can you solve in minutes problems that the industry today takes weeks if not months to solve?”. This sounds more like a fictional script from the Netflix “Black Mirror” series, right?
But it is not: it is much more real than Black Mirror, and it represents some of the real-world applications of Web3 technologies to the Insurance sector.
Let’s go step by step.
First of all, what is Web3? Well, Web3 is considered by many the 3rd iteration of the internet, towards which we are approaching thanks to its underlying new technologies: blockchain, Metaverse, DAOs, digital twins, crypto, dApps (decentralized Apps), NFTs, all powered by A.I. and ML (Machine Learning), and so on: basically, a a new generation of Internet services that are built on top of decentralized technologies.
How did we get here, though? Let’s look at the evolution of the Web: Web 1.0 came with the birth of the Internet and fundamentally digitized information, submitting knowledge to the power of algorithms (this phase came to be dominated by Google) and making it read-only for the most part. Web 2.0 came with social media, running mostly on Smartphones, and digitized people and subjected human behavior and relationships to the power of algorithms (this phase was dominated by Facebook), and made the internet not only a place to consume content, but also to create it.
What about Web3? This third phase will fundamentally digitize the rest of the world and render it in 3D. In Web3, all objects and places will be replicable and readable by machines and subject to the power of algorithms. And who will the metaverse be dominated by? Most likely by anyone and no one at the same time – exactly because it is a decentralized web, as well as it will be a place for people to consume content, produce it, but most importantly: own it. It has certain characteristics, that it is decentralized (as we mentioned), immersive ( it is 3D and not only 2D as the internet is today), and persistent ( things happen even while we are not online).
Recent statistics show the opportunity for companies to dive deep into the Web3, as the expectation for the market is to grow steadily: The global Web 3.0 market size reached USD 3.2 Billion in 2021 and is expected to register a CAGR of 43.7% up until reaching USD 81.5 Billion in 2030, according to a latest analysis by Emergen Research.
As per some of its underlying technologies, such as the metaverse, the opportunity is just as big: for instance, a new report by research firm Gartner predicts that by 2026, 25% of people will spend at least one hour per day in the metaverse for work, shopping, education, social and/or entertainment. It’s also expected that 30% of the organizations in the world will have products and services ready for the metaverse by 2026.
When it comes to blockchain, although the financial sector accounts for more than 30% of the complete market value of the technology (a market value that is poised to reach $ 67.4 billions by 2026, according to Markets and Markets), the value of the ecosystem has also begun to spread to other technologies, such as manufacturing (17.6%), distribution and services, (14.6%) and the public sector (4.2%).
When it comes to the Insurance sector as a whole, the opportunity is huge especially on 2 sides: on the one side, to insure Web3 assets, and on the other, to transform traditional insurers. First off, the Web3 economy is currently under-insured and has huge potential for future growth. Today, out of $1 trillion in crypto assets, less than 1% are insured, so that there’s a huge opportunity out there on the first front. Second, companies can leverage Web3 technology to reinvent the insurance value chain, creating propositions and business models that are better, faster, and cheaper. In the near-term, Web3-based propositions can help insurers reach new customers and address unmet customer needs. In the longer-term, Web3 offers the potential to reimagine business models that radically challenge what an insurer can look like.
But all this is still mostly in the talks, and besides some shy experiments with Web3, we might not be there yet when it comes to Web3 maturity in the Insurance market. But we definitely see a strong acceleration of Digital Transformation in the sector. As a keynote speaker and researcher that works with most insurance companies globally (including Liberty Mutual Group, AIG, Prudential, Bradesco Seguros, Capemisa and many others), I am fully aware of the impact that Digitalization is having on the insurance industry, especially after Covid-19: A global report by KPMG points to an evident digital acceleration of insurers in the post-Covid period: 85% of insurance CEOs surveyed say that COVID-19 has accelerated the digitalization of their operations and the creation of next-generation operating models. 78% say they have made accelerated progress in creating a better digital customer experience. A similar number (79%) also said that Covid has brought new urgency to creating new business models and revenue streams.
But if we can agree that Digital transformation is underway at the moment (and accelerated by Covid-19), we still have to admit that the Insurance industry is not very clear yet about the potential impacts and opportunities of Web3 on its business, from the Metaverse granting better experiences to insurance customers, to Digital Twins helping to better personalize claims and premiums, from Blockchain for claims settlement to Tokenization of insurance, eventually helping to do what the industry aims for since its inception: better protect the customer from the unforeseen circumstances of life.
This is why I have spent the last several weeks talking to experts from the biggest insurance companies across the globe, and have put together this article that describes what are the main impacts of Web3 technologies on the Insurance industry.
1. Metaverse for customer education and training
“Meta-what?”: I am sure this was your reaction to Mark Zuckerberg’s recent announcement of Facebook’s rebranding to Meta. At least, that was mine. But interestingly enough, now we all talk about the Metaverse thanks to that announcement and although it is not a new idea, we only recently became able to better understand its implications for insurance companies, especially for the way they interact with the customer.
But let’s first understand what is the Metaverse: the term was born from the junction of the Greek prefix “meta” (meaning beyond) and “universe”, and fundamentally is a virtual and collective shared space, created by the convergence of virtually enhanced physical reality (represented by the “Digital Twins”), and the virtual space that already permeates the physical world (in particular Augmented Reality, also called AR). Confused?
Think of it this way: today we are basically online when we access the Internet, but with new devices, greater connectivity such as 5G and cutting-edge technologies, we will be online all the time in decentralized, immersive and persistent worlds.
One of the great opportunities that the Metaverse is providing to the insurance industry is for instance through ‘immersive experiences’ in the metaverse, that may provide an opportunity for customers to gain a deeper understanding of the value of insurance products. Until now, insurance salespeople have simply explained to potential customers the significance of insurance as a contingency plan, by using statistical data and their own professional experience. In a virtual space, however, insurance companies could make it possible for people to experience situations where insurance would be used, allowing them to better understand the value of insurance. By allowing people to experience the simulated impacts of certain events that could occur to them, such as car accidents and fires (non-life insurance) or illnesses (life insurance), insurance companies can provide their potential customers with the opportunity to realize and recognise risks that they were previously unaware of. In order to put this into practice, however, insurance companies will also need to resolve practical issues from the perspective of customer protection—for example, taking measures to ensure that these simulations do not cause the customer emotional harm.
Another topic we need to think about is the following: once we’re in the Metaverse, what will we need to insure?
In their January 2022 report, “The Metaverse & Insurance – Pixel Perfect?,” Michael Mainelli and Simon Mills explained, “risk management in the Metaverse is no different than risk management in the real world. Traditional insurance approaches still apply. There will be a need for developing specific insurance products for Metaverse applications, such as the protection of personal data and digital assets or insuring against long-term physical or mental harm.”
In his Celent article, “Insuring the Metaverse: A thought experiment,” Donald Light proposes several categories of insurance we will possibly need if we are going to explore or reside in the Metaverse. These include protection for virtual property, businesses, health, and even lives.
Let’s focus for a moment on data and digital assets: Every person in the Metaverse exists as data and this presents an enormous opportunity for this data to be stolen. Metaverse residents will need to protect their data with insurance products that resemble today’s cybersecurity policies. The difference will be the type of data the insurance is protecting. Likely, virtual policies will have to protect the data that makes a digital person, not just the data that surrounds them. Metaverse residents will own property: personal, business, and commercial. Their virtual property’s exposure to risk is no different from the risk that comes from owning property in the real world. The potential for loss exists on both sides of the computer. According to MetaMetriks, a metaverse land analytics provider, virtual real estate will grow to over $1.9 billion in sales in 2022. These dollars do not account for the digital property people are already purchasing and selling in the digital world. These assets may not be analog, but they still have value and will need to have strong insurance protection.
2. Blockchain for more efficient reinsurance
To start off, let’s first understand what the Blockchain technology is about: it is basically a distributed database that is shared among the nodes of a computer network, which stores information electronically in digital format. A blockchain collects information together in groups, known as blocks, that hold sets of information and that have certain storage capacities and, when filled, are closed and linked to the previously filled block, forming a chain of data known as the blockchain. All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once filled, and when it is filled, it is set in stone and becomes a part of this timeline. Each block in the chain is given an exact time stamp when it is added to the chain. See? The blockchain is a distributed ledger technology (DLT), where that database is spread out among several network nodes at various locations, which makes it decentralized.
While blockchain technology has been subject to waves of extreme hype often centered around cryptocurrencies like Bitcoin, its true killer applications are likely to be in some of the most antiquated fields out there. It could be a transformative force for industries like insurance, which require the coordination and cooperation of many different intermediaries with different incentives.
And this is where Blockchain can transform reinsurance: Reinsurers provide insurance for insurers in an arcane and inefficient system determined by one-off contracts and manual processes. Depending on the type of reinsurance purchased, it can cover a proportion of an insurer’s risk during a set time period, or cover specific risks such as earthquakes or hurricanes.
The current reinsurance process is extremely complex and notoriously inefficient. With facultative reinsurance, each risk in a contract needs to be individually underwritten, and contracts typically take up to 3 months of wrangling between parties before they’re signed. Insurers will typically engage multiple reinsurers, which means that data has to be exchanged between various parties to process claims. Different data standards between institutions often lead to different interpretations of how a contract should be implemented.
Blockchain technology has the potential to upend current reinsurance processes by streamlining the flow of information between insurers and reinsurers on a shared ledger.
Using blockchain technology, detailed transactions around premiums and losses can be updated on an insurer and reinsurer’s computer systems at the same time, eliminating the need to reconcile books between institutions for each individual claim.
With data shared on an immutable ledger, reinsurers can be better equipped to allocate capital for claims nearly in real-time, allowing them to both process and settle claims more quickly without relying on primary insurers for data around each claim.
PWC estimates that the blockchain can deliver reinsurance industry-wide savings of up to $10B by increasing operational efficiencies.
This could trickle down and lead to lower insurance premiums for consumers — it’s estimated that reinsurance accounts for 5% to 10% of existing insurance premiums.
A great example? B3i is a company formed by some of the biggest names in the insurance and reinsurance sectors to explore blockchain technology. Members include AIG, Allianz, Aegon, and Swiss Re.
In 2017, B3i launched a prototype of a smart contract management system for Property Cat XOL contracts, which is a type of reinsurance for catastrophe insurance. Each reinsurance contract on the platform is written as a smart contract with executable code on the same shared infrastructure. When an event — such as a hurricane or earthquake — occurs, the smart contract evaluates data sources from the participants and automatically calculates payouts to affected parties.
B3i’s pilot program concluded in September of 2018, after testing and receiving feedback from 40 companies. The consortium closed a Series B funding round for an undisclosed amount in December 2020. It had previously raised more than $26M across multiple investments.
B3i is also exploring collaborations with other companies in the blockchain insurance space. In 2022, it announced a partnership with Institutes RiskStream Collaborative to explore new homeowner parametric insurance and reinsurance solutions.
Executing reinsurance policies using blockchain technology can help reinsurance companies allocate capital and underwrite insurance policies more efficiently, bringing greater stability to the insurance industry. Rather than relying on primary insurers for data around losses, reinsurers can query the blockchain directly to provide coverage.
3. Digital Twins for more personalized underwriting and claims
In 2019, Kevin Kelly, the founder of Wired magazine, wrote an amazing cover story for the magazine called “Welcome to the Mirrorworld”, where he describes how Augmented Reality will unleash the next big tech platforms. He wrote: “We are building a 1-to-1 world map of almost unimaginable reach. When completed, our physical reality will merge with the digital universe.” In other words, get ready to meet your digital twin and the digital twin of your home, your country, your office, and even of the world.
“Digital twin?”, you might be asking yourself, especially after having read about this concept previously in the article.
Well, let me then introduce you to one the first building blocks behind the metaverse, that is, the concept of “digital twins”. A digital twin is, according to IBM’s definition, a virtual representation of an object or system, or even person as we saw, that spans its lifecycle, is updated from real-time data, and uses simulation, Machine Learning and reasoning to help decision-making. Imagine a large manufacturing company having digital twins of its equipment: through them, an engineer from his home will be able to solve problems in a factory on another continent through the Metaverse. The same technologies will enable office meetings that are much more productive than using today’s two-dimensional video conferencing tools. Customer-facing applications can include creating Digital Twins in retail, offering customer service experiences that would not be possible in the physical world, and even engineering companies such as Ericsson are using digital twins to simulate the impact of trees falling on their 5G antennas. Amazing, right?
And when we get to insurance and look at the potential implications for the industry, we can use Digital twins in countless applications, and more specifically for more personalized underwriting and claims.
In underwriting, real-time streaming data could provide a more nuanced understanding of risk and improvements in pricing. Leading insurers are also looking to offer customers real-time risk prevention and risk-DNA-based insurance—in an effort to be a more holistic provider of protection for their customers, not just a business that pays you when something bad happens.
For commercial lines insurers, while getting a more homogenous data set across customers may be a challenge, I believe the benefits will be worth it. We’ve seen it already for workers’ compensation, with payroll and ERP integration helping carriers to understand the changing workforce, associated premium changes and reducing the need for premium audits.
More efficient and faster claims processing is another area where you can see tremendous opportunities for taking advantage of digital twins. We’re already noticing leading insurers seeking real-time coverage optimization, integrated restoration infrastructure and the use of human + AI to improve the employee and customer experience.
For example, imagine that you offer personalized auto insurance and one of your customers is involved in an accident. Think about the insights you could gain if had access to:
- Telemetry data indicates what was happening with the car at the time of the accident—the way the wheels were turning, the speed of the car and how hard the driver was braking.
- Weather patterns that explain the driving conditions when the accident occurred.
- Information on the driver such as how well they slept last night and whether they were distracted by something they saw or by talking with a passenger.
- Service data such as how long it will take to get the car repaired, how long the wait time is for the parts you need and whether you are connected with your own service fulfillment supply chain through your network partners.
The more you delve into the details, the more possibilities you can see to take advantage of digital twin data across the insurance business.
Digital twins combined with the Internet of Things (IoT) are forcing insurance companies to adopt a new business model in which they mitigate or prevent rather than compensate for damages. This new business model is called Assurance.
Digital twins and the networking of smart devices have the potential to prevent damage before it occurs. Under these circumstances, no one is asking for old-fashioned insurance policies anymore. To understand this better, let’s take an example:
Consider a ship transporting goods from one port to another. Telematics of nearby objects warns that the ship will soon be exposed to a tropical storm. The ship’s digital twin takes real data from all of the ship’s systems. Thus, a simulation is performed that reflects the effects of the storm on the ship. Based on the simulation results, the captain decides to return to port. Similar logic could be applied to smart cars, smart houses, and so on.
Customers expect insurance companies to quickly adopt technological improvements and assure their assets.
Now, stats show the potencial impact of Digital Twins on the insurance market: Data Bridge Market Research estimates that by 2027, the global digital twin financial services and insurance market will account for USD 77,530.82.
- 87% of insurance executives agree that digital twins will strengthen their ability to collaborate in strategic partnership ecosystems, crucial for long-term success.
- 93% of insurance executives realize the necessity of a centralized and intelligent data hub that helps them understand the defects of their current processes and remodel their operations.
4. Crypto insurance policies
Insurance is key for financially securing important assets. The cryptocurrency sector — which is predicted to reach a global market size of $4.94 billion by 2030 — may be lagging behind when it comes to insuring digital assets, but in particular following the crypto winter that is taking place due to the plummeting of cryptocurrency valuations, demand for crypto insurance policies has skyrocketed in 2022. Less than 2% of crypto-related risks are currently insured, said Edin Imsirovic, associate director at insurance credit rating agency AM Best—so those willing to sell policies can command rates several times those of traditional coverage.
Premiums are usually twice as high as traditional policies for non-crypto risks. Superscript’s cyber errors and omissions policy charges from $20,000 to millions of dollars in premiums depending on the business and its specific risk profile.
Businesses entering the cryptocurrency industry have faced market volatility, high-profile hacks, theft of digital assets, and security concerns. And lack of government regulation is a major wildcard.
Most traditional insurers including Lloyds, Chubb Ltd., Tokio Marine Holdings Inc., Mitsui Sumitomo, and AXA XL, cover financial services and tech companies’ crypto risks under business liability policies, according to insurance brokers.
“A lot of insurance companies are looking for new revenue streams,” said Luke Speight, digital assets director of insurance broker Willis Towers Watson. Insurer giants like Munich Re, Zurich, Arch, and Canopious are now underwriting crypto risks, he said.
You might be like: why is it so important to insure crypto companies? As explained in a publication made by the website Embroker “The sole nature of cryptocurrency indicates that most risks these companies face are related to the online world. Cryptocurrency is, after all, a digital currency that doesn’t have its physical form, and all trading, investments, and payments are conducted online. That’s why the most prominent risk for crypto companies is the risk of a cyberattack. Cybercriminals target crypto companies because cryptocurrency can be extremely hard to trace once they start moving funds around. Even if a company has robust cybersecurity measures in place, hackers are constantly looking for new ways to attack, and their activities are becoming increasingly sophisticated.
This is why a cyber insurance policy is probably the policy you should pay the most attention to. As you collect and store passwords and confidential information, you have an obligation to keep that information safe. You should also be careful with handling transactions and sending/receiving payments online.
If a data breach occurred and hackers gained access to your confidential data or stole cryptocurrency from your online “hot” wallets, a cyber liability insurance policy would kick in and help you recover your data and cover your loss of revenue caused by the data breach.
Suppose that the breach compromised your client’s systems as well. They could then decide to sue you for damages, and a third-party cyber insurance policy would respond to those claims. An extensive policy would cover most of your costs, including credit monitoring, notification and investigation costs, computer forensics, and civil and reputational damages.
How much is the investment? Well, Business insurance for cryptocurrency and blockchain companies is still a new field, and, as we already mentioned, insurers are still reluctant to insure these businesses. That’s why it is also challenging to estimate the average insurance price for cryptocurrency companies. As with any other company, there are a few factors that influence how much you’d have to pay for cryptocurrency insurance:
- Company size
- Number of employees
- Annual revenue
- Claims history
- Policy limits
The average cost of a general liability insurance policy for crypto businesses in the U.S. is between $400 and $700 a year. “
Do you know how a cooperative works? I do a lot of speaking to cooperatives in Brazil, especially in the finance and agro sectors, and I have always been amazed by the way they are able to be more customer-centric and collaborative, because of their “ownership” structure – that, to explain as briefly as possible, is basically a model in which the organization is “owned” by its customers.
This definitely makes accountability much more important, makes the division of profits more egalitarian, and as I mentioned before it makes the organization more customer-focused (as the cooperates, namely the customers-owners, make decisions about the cooperative strategy during regular meetings).
And while traditional cooperativism was born in 1844 in England, we now see a new form of cooperativism on the rise through Web3: namely the one brought about by DAOs, or Decentralized Autonomous Organizations.
What are DAOs, to start off? A DAO is a new kind of organizational structure, built with blockchain technology, that is often described as a sort of crypto co-op. In their purest form, DAOs are groups that form for a common purpose, like investing in start-ups, managing a stablecoin or buying a bunch of NFTs. ConsenSys, a blockchain organization, defines DAOs as “governing bodies that oversee the allocation of resources tied to the projects they are associated with and are also tasked with ensuring the long term success of the project they support”. Once it’s formed, a DAO is run by its members, often through the use of crypto tokens. These tokens often come with certain rights attached, such as the ability to manage a common treasury or vote on certain decisions.
And how can DAOs make an impact in the insurance sector? What do Decentralized Autonomous Organizations (DAOs) have in common with the insurance industry?
To better understand this, I brought an article piece written by Chris Ossowski. Check it out:
“It turns out a lot. Both bring groups of people together to collectively address certain problems. The way DAOs operate today is reminiscent of the early insurance market. And DAOs bring a lot of promise for how the overall finance, investing and risk management might become more efficient and egalitarian over time. Let’s review some history, currents trends and discuss future ideas.
Lloyd’s of London, where I worked back in 2013 while running the Ariel Re process, is an insurance and reinsurance market place, started in London in 1686. Back then the businessmen would meet up in coffee shops to discuss which ship expeditions were worthy of insuring. They would vote on projects or sign up for the projects they wanted to participate in.
Once agreed they would create syndicates to insure cargo ships. As compensation, the syndicates members would receive premiums and often a share of profits from successful expeditions. However, the initial syndicate members were personally liable for the losses. So in case a ship was destroyed during a storm the investors might have been forced to sell their homes to cover the losses. Thus, it mades sense to diversify the risk amongst a large number of syndicate investors.
Most of the early insurance companies like the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire set up by Benjamin Franklin in 1752 were structured as mutual insurance organizations. In a mutual the policyholders were also owners of the company and had some governance rights.
Today, most insurance companies are not mutuals. But overall the same concepts apply today as before. Every insurance company wants to have lots of policyholders paying premiums and it wants a diversified risk exposure so no one event can put it out of business. But today’s policyholders are not mutual owners and do not have any governance rights. The shareholders have the governance rights. Many argue that policyholders do not want to deal with the intricacies of running an insurance company so best it is left to the specialists.
Just like in 1600s in London, today people with similar interests get together on Discord or Telegram and organize themselves through DAOS. DAOs and the way they work sound like sounds a lot like the old school mutual companies, doesn’t it? However, DAOs are built on the blockchain and they issue tokens that serve sort of as shares in the normal stock market company.
An example?Nexus Mutual has been set up by Hugh Karp, of course, in London in 2018 and it has raised ~$3m of venture capital funding, and it helps insure smart contracts on decentralized finance (DeFi) platforms like Curve, Anchor, etc. Here is how Nexus Mutual describes itself:
- No insurance company. Nexus Mutual is run entirely by its members. Only members can decide which claims are valid. All member decisions are recorded and enforced by smart contracts on the Ethereum public blockchain.
- When joining the mutual you become a legal member of a UK company. Your membership rights will be backed by legal agreements. All members will have legal rights to the pool of funds.
Just like with social DAOs, you can become a member of Nexus by buying a membership for around $8 (0.0020 ETH) plus gas. You have to pass a regular KYC/AML. This legal structure assures that as a member you will not be personally liable for the mutual as a whole. You will also be able to buy a cover, earn NXM tokens for helping run the mutual by voting on claims, helping evaluate smart contracts and by voting on proposals. Sounds very much like the Lloyd’s of London from 1600s, doesn’t it?
In 2021, Armor launched by Robert Forster and team has partnered with Nexus Mutual. Armor “is a smart cover aggregator for DeFi which provides Pay as You Go coverage for user funds across various protocols.”
Armor’s smart contracts are available across popular protocols such as Uniswap, Sushiswap, AAVE, Maker, Compound, Curve, Synthetix, Yearn, RenVM, Balancer and others.
Armor insurance is underwritten by Nexus Mutual, with added features:
- Permissionless (No sign-up required)
- Pay as you go coverage across various protocols
- Flexible amount/ duration coverage, only pay what you owe”
Armor also created its DAO to engage a wider community and create incentive systems. Last year it partnered with ImmuneFi to form the Armor Alliance bug bounty program. They paid out $1.5MM USD worth of Armor to fix a critical bug. Pretty cool and entrepreneurial!“
6. Insurance Tokenization
Who hasn’t heard of the NFT buzzword lately? Impossible not to have been impacted by the hype, which for the most part is related to “digital art”.
Well, to start off we have to understand what are NFTs, or Non-fungible Tokens, in order to understand that their applications go much beyond only art and gaming, and are not only the speculative bubble that we are seeing now.
We see a strong impact in Insurance as well, especially based on the fact that the insurance industry is required to constantly evolve to tackle, among other things, 1. the emergence of new risks, especially due to new technology development, such as cyber security breaches; 2. the transformation of existing risks, such as increasingly recurring natural catastrophes due to climate change; 3. shifts in consumer needs, such as rapid access to customized, on-demand insurance, quick claim management, as well as transparency in the insurance processes; 4. continuous advancement in techniques applied in insurance fraud.
Against this backdrop, there is a dire need for solutions that allow insurance policies to be flexibly designable, insurance holder and claim data to be easily manageable, and insurance processes to be openly auditable. Bearing the nature of programmability, traceability and transparency, token-based insurance solutions built with blockchains are on the rise. In particular, the plethora of token models underpinned by smart contracts enables easy configuration of various products and services, as well as cost-efficient record-keeping of miscellaneous transactions and activities within the insurance business.
An example? full tokenization to transact insurance products, as hedge funds like Fermat Capital does with catastrophe bonds (which are high-yield debt that are used to hedge against natural disasters). In this scenario, we know that the benefits of near immediate settlement, automatic yield distributions, and digital collateral that stem from tokenization could also bring liquidity into long-term plays and provide greater flexibility to the fund manager getting in and out of positions. This would enable an internal billboard or secondary marketplace for insurance-driven investment firms to trade with each other like any other freely liquid marketplace.
The token-based insurance model requires many actors, each of which has a vital role to play in the ecosystem. The main roles in this interplay include the insureds, the insurers, the underwriters, the reinsurers, the claim assessors and, finally, a decentralized autonomous organization (DAO) responsible for governance.
Different from workflows of traditional insurance, token-based insurance solutions are underpinned by a multitude of digital assets and tokens. A permissionless and public blockchain allows anyone to transact and verify transactions with these tokens, and the token-economics (or “tokenomics”) define the utility of each token and the ways the token can be used to incentivize positive behavior in the network.
Another great example comes from a collaboration between Wharton and the Decentralized Insurance Foundation, a Swiss non-profit organization to develop a feasible incentivization mechanism for their DIP on the Ethereum blockchain. The result of this collaboration is a new token design with strong foundations in microeconomic theory that also exhibits a high degree of practical feasibility. At the center are cryptographic tokens, i.e., digital assets issued to the anonymous blockchain network participants who do not trust each other. Due to the common asset and a shared interest in its value, their interests align along the goals of the project. A main feature of our token design is staking, a digital form of collateralization, which requires network participants to deposit tokens into a smart contract or bound wallet. In case of an insufficient effort and, in turn, a faulty result, the tokens are redistributed to the customers to compensate them for their losses. Our results show that this concept can effectively incentivize workers in the decentralized insurance organization and therefore prevent malfeasance that could endanger the product quality and ultimately the whole market.
Furthermore, we determine the optimal stake to be put up by workers who deliver a component or service of the digital insurance product in the DIP network. We are able to show that the welfare-maximizing stake is much lower than the maximum loss that could occur for the customer. Hence, partial collateralization is sufficient to reach an optimal outcome for all token holders. Our results exhibit a high practical relevance for the projects run by the Decentralized Insurance Foundation such as parametric hurricane coverage or crop insurance. The latter has already been piloted by Etherisc, Oxfam, and the global insurance broker AON with rice farmers in Sri Lanka and was highly acclaimed by the media.
Meet Scott, an insured driver in 2030. His digital personal assistant orders him a a vehicle with self-driving capabilities for a meeting across town. Upon hopping into the arriving car, Scott decides he wants to drive today and moves the car into “active” mode. Scott’s personal assistant maps out a potential route and shares it with his mobility insurer, which immediately responds with an alternate route that has a much lower likelihood of accidents and auto damage as well as the calculated adjustment to his monthly premium. Scott’s assistant notifies him that his mobility insurance premium will increase by 4 to 8 percent based on the route he selects and the volume and distribution of other cars on the road. It also alerts him that his life insurance policy, which is now priced on a “pay-as-you-live” basis, will increase by 2 percent for this quarter. The additional amounts are automatically debited from his bank account.
See the power of Big Data being processed by Artificial Intelligence, that by its definition is computer systems able to perform tasks and solve problems that normally require human intelligence, such as visual perception, speech recognition, decision-making, and translation between languages, among others? It helps us to predict more and react blindly less. And consider that we already live in a world with lots and lots of data, where more than 90% of the data generated since the beginning of humanity was generated in the last decade, and where today we got to the point of 97 Zettabytes of data by the end of 2022 according to Statista (which just to give you an idea, a Zettabyte is a number with 12 zeros…that’s a lot of data!).
So how can Big Data and A.I. impact the insurance sector? The truth is that there are a plethora of applications, and In this evolution, insurance will shift from its current state of “detect and repair” to “predict and prevent,” transforming every aspect of the industry in the process. The pace of change will also accelerate as brokers, consumers, financial intermediaries, insurers, and suppliers become more adept at using advanced technologies to enhance decision making and productivity, lower costs, and optimize the customer experience.
AI and its related technologies will have a seismic impact on all aspects of the insurance industry, from distribution to underwriting and pricing to claims. Advanced technologies and data are already affecting distribution and underwriting, with policies being priced, purchased, and bound in near real time.
On the distribution side, The experience of purchasing insurance is faster, with less active involvement on the part of the insurer and the customer. Enough information is known about individual behavior, with AI algorithms creating risk profiles, so that cycle times for completing the purchase of an auto, commercial, or life policy will be reduced to minutes or even seconds. Coupled with blockchain, Smart contracts enabled by blockchain instantaneously authorize payments from a customer’s financial account. Meanwhile, contract processing and payment verification are eliminated or streamlined, reducing customer acquisition costs for insurers.
New business models also arise: Highly dynamic, usage-based insurance (UBI) products proliferate and are tailored to the behavior of individual consumers. Insurance transitions from a “purchase and annual renewal” model to a continuous cycle, as product offerings constantly adapt to an individual’s behavioral patterns. Furthermore, products are disaggregated substantially into microcoverage elements (for example, phone battery insurance, flight delay insurance, different coverage for a washer and dryer within the home) that consumers can customize to their particular needs, with the ability to instantaneously compare prices from various carriers for their individualized baskets of insurance products. New products emerge to cover the shifting nature of living arrangements and travel. UBI becomes the norm as physical assets are shared across multiple parties, with a pay-by-mile or pay-by-ride model for car sharing and pay-by-stay insurance for home-sharing services, such as Airbnb.
The power of Web 3.0 and AI applied to the insurance market is indeed amazing!