Blockchain to disrupt multi-trillion dollar Insurance industry: plagued by opacity, misaligned incentives, and fraud.*

Insurance is a multi-trillion dollar industry plagued by opacity, misaligned incentives, and fraud. Insurance is supposed to help with the cost and stress of damaging unforeseen events. Yet, when an unforeseen event occurs, policyholders often end up having to fight to prove the legitimacy of their insurance claims to companies whose profits are impacted by the number, and the dollar amount, of payouts.
By bringing transparency to an opaque industry and democratizing data for policyholders, blockchain-enabled insurance platforms aim to fix the deficiencies that shroud traditional insurance companies.
Where are the points of entry for decentralized insurance platforms?

✳ Opacity: Insurance is an opaque industry. There are multiple studies that examine inadequate transparency of the insurance industry. From limited disclosure to an overall lack of consumer protection laws, the insurance industry often finds itself in the midst of a grey legal area. As an example, in 2016, the Illinois State Treasurer sued three insurance companies in order to audit their records and identify death benefits that should have been paid to families of the deceased policyholders. The State Treasurer found that between 2011 and 2015, there was an estimated $550 million in unclaimed life insurance benefits. The opaque and complex process of an insurance claims process, underpinned by the lack of incentives for insurance companies to help clients make claims, are detrimental to policyholders and favorable for insurers.

✳ Data Collection: In the traditional insurance industry, a policyholder’s data is collected for an insurance application and permanently kept by an insurance company/broker — even after an insurance policy has expired. Brokers are the dominant distributors of insurance products on behalf of insurance companies. According to The Block’s research, virtually all of an insurance company’s commercial lines come through brokers. These brokers dominate the industry and greatly benefit from its opacity. In 2017, the top three brokers generated about 40% of the revenue among the top 50 brokers in the U.S. The billions of dollars in revenue generated by these brokers enable them to collect data and information in huge private silos — leveraging this information to outcompete their smaller competitors.

✳ Fraud: Over $40 billion annually is lost due to insurance fraud — and this does not even include the health insurance industry. One of the most common types of fraud are double billings. Double billing is when a practitioner submits a bill to an insurance company multiple times for a procedure that only happens once.

With the problems facing centralized insurance companies, how do decentralized insurance platforms solve them?

✅ Opacity → Transparency: A transparent, distributed ledger can, in theory, enable anyone to audit multiple levels of the insurance value chain. Any premiums paid into the policy by policyholders are also recorded on a blockchain registry for the policyholder to monitor. Digital immutable certificates can establish ownership of an insurance policy — enabling policyholders to make claims quickly.

Data Collection→ Data Ownership: Decentralized insurance platforms enable users to control how their data is shared with insurance companies and revoke data access when a policy has expired. Data ownership helps create a marketplace for a user’s data. Users can sell their data to insurance companies/brokers on a decentralized platform. The transparency and accessibility of data enable smaller insurance companies/brokers to better compete with their larger counterparts, and these larger counterparts no longer have an advantage over user data.

✅ Fraud → Fraud Prevention: Nodes on blockchain-enabled platforms help prevent double-spending by verifying transactions. In the case of insurance, this could prevent policyholders from processing multiple claims for a single accident, as nodes can verify whether a claim has already been processed by the network. Furthermore, digital immutable certificates that provide proof of ownership can also prevent the falsification of ownership for an insurance claim.

What are the barriers to entry?

👉🏾 Capital efficiency: Unlike traditional insurance companies, blockchain-based insurance products are designed to prevent insolvency in the case of a catastrophic black swan event, by taking on extra collateral in the form of increased premiums. Traditional insurance companies typically invest premiums to generate investment income. In theory, the investment income generated by these insurance companies contribute to keeping the cost of premiums low. Decentralized insurance platforms lock up premiums in smart contract effectively preventing capital from becoming value-generating assets. A decentralized insurance platform would, therefore, need to charge a higher premium relative to their centralized counterparts in order to maintain the appropriate payout for claims.

Volatility: Because decentralized insurance products are typically paid with a volatile asset, the dollar value of a policyholder’s premium payment could fall below the nominal value of the insurance policy. In this case, a decentralized insurance company would be forced to increase the premiums paid by their policyholders. Volatile premiums could deter the adoption of a decentralized insurance product.

Insurance Fraud Limitations: A transparent distributed network could prevent fraud in the digital realm, but would be unable to prevent fraud in the physical realm. Traditional insurance companies will often hire auditors to validate an insurance claim physically. For example, an insurance company can send auditors to a burnt down restaurant to ensure that it was not burnt down on purpose for an insurance claim. A decentralized insurance platform would not be able to cover claims that require physical auditing. This limits the insurance products a decentralized platform can offer.

https://www.theblockcrypto.com/2018/11/09/block-by-block-insurance/