Hey Stemmers,

the current wave of digitization brings movement into the insurance landscape. Everywhere you read and hear about new projects, concepts and InsurTech startups, which disruptively influence the insurance world. While there has been a trend towards digitization in the industry for years, initiatives for fully digital insurance are now recognizable. Examples include Lemonade, nexible, Oscar and ottonova.

Lemonade is a non-life insurance start-up, which automates the distribution and the damage handling largely as a mobile app by means of self-learning AI algorithms (artificial intelligence). In addition, Lemonade pursues behavioral approaches by benefiting from surpluses of charitable organisations to reduce insurance fraud.

The Ergo has founded the pure digital brand nexible, which is to start this year with a motor liability insurance. Nexible is built according to the model of a start-up without technological legacy.

Oscar is a private health insurance, which is networked via salaried doctors, telematics, telephone conversations and other assistance services patients and doctors. With ottonova, the first German digital PKV (Private Health Insurance) is waiting for its BaFin approval. 

Potential to break the value chain of the insurance industry

Real potential to break up the value chain of the insurance industry, reconnect its members and rethink business processes from scratch, seems to have the blockchain technology. This technology is a decentralized database, which in its design is similar to the general ledger of the bookkeeping system and is therefore called the distributed ledger. A block-based application thus fully integrates the information technology (i.e., the distributed tamper-resistant database) with the system of bookkeeping (i.e., the general ledger and booking history).

The blockchain technology is the basis of the digital currency Bitcoin, which gave the impulse for innovations in the financial sector. It can be used not only to manage payment transactions, but also to administer insurance protection, to authenticate documents and identities, and to implement smart contracts. For this purpose, computer protocols are used which technically represent contractual regulations in such a way that contract clauses are partially or completely independently executable. Insurance companies expect a lot from such reliably distributed distributed databases and smartcontracts.

In October 2016, Aegon, Allianz, Munich Re, Swiss Re and Zurich founded the Blockchain Insurance Industry Initiative (B3i) to explore this technology. Thus, the use of a blockchain in retrocession is expected to result in billions of savings [i] due to reduced documentation and administration costs. Ten other companies have now joined B3i.

Example 1: Authentication of documents and origin

The British start-up Everledger [ii] documents the origin of luxury goods with a combination of private and public blockchains. For example, the serial number as well as other parameters of a diamond [iii], such as weight and cut, are fixed unalterably in a public block. Data on its owners are stored in a private blockchain. This technical hybrid approach combines the high security of a public block with the access control required by a private company for business applications. This approach is also conceivable for watches, artifacts or electronic components as well as everything that has a serial number.

This is particularly interesting for insurers. In the event of theft or loss, the property stolen or lost will become the property of the insurance company after payment of the insurance sum. Therefore, you can not insure the goods a second time and report them again as lost or stolen.

However, the exchange of information is not only made easier between insurers. Likewise, auction houses, online marketplaces, police or Interpol can access the data. Trade in conflict diamonds and goods of doubtful origin will be curbed and the insurance classes could be offered lower premiums.

Why is a blockchain used here? This application would also be possible without a blockchain. However, additional trust is generated here because the serial numbers, properties and photos of the goods are stored invariably in a public decentralized blockchain. While authenticity certificates can be lost, the stored data are protected against failure. Nobody can change them afterwards. In addition, the history of the goods can be tracked. A variant of this approach is to keep track of all possible goods or components through a supply chain. Automatic transport insurance can be used at this point. Also, different documents, Eg contracts, are certified by electronic signatures in a blockchain. This increases transparency for the customer.

Example 2: Retrocession

In retrocession, the problem is that the retrocessionaire hardly knows what risks he actually buys. The advantage of the blockchain is that all risks can be decentralized and can be viewed with repeated reinsurance of the retrocessionaire. Furthermore, multiple inputs are avoided and thus a possible human error source is eliminated. Smartcontracts enable payments to be made almost real-time in the event of damage events, so that the duration of claims is reduced from several months to minutes or hours. Here, cost savings of five to ten billion dollars are expected.

Why is a blockchain used here? The blockchain simplifies and accelerates billing. This application could also be implemented with traditional databases, since the number of participants is manageable and they trust. However, many different participants regularly exchange data. The blockchain creates a "uniformity by system design" in IT. This relates in particular to the data of retrocessionaires, reinsurers, primary insurers, insured persons, brokers and third parties. Therefore, from the outset, a system design is available, which can represent the origin of all documents at any time. Furthermore, the process of the business processes can be automated by means of Smart Contracts in order ultimately to reduce costs. However, this application requires the classification of risks.

Example 3: Smart Contracts and Disaster Bonds

Insurance securitizations such as catastrophe bonds and swaps are financial instruments whose value depends on loss events. In this way insurance companies can transfer parts of their insurance risks to the capital market and refinance themselves. For example, purchasers of an earthquake loan receive coupon payments on a regular basis, and their investment sum will be refunded at maturity. However, if the insured disaster event occurs, that is, An earthquake in a particular region, the investors lose part or all of their investment sum. The data on the location, time and strength of the quake are provided by a third party supplier.

Why is a blockchain used here? Since several parties exchange payments and information for long periods according to fixed rules, smartcontracts based on a blockchain can automate these. This simplifies and accelerates transactions between insurers and risk carriers. Their traceability is also increased. Overall, the tradability of such products improves.

If you like to see more examples i would be happy to share more with you. There are tons of application that could be build on top of blockchain very well interesting from the insurance points of view.

Those are some example guys how this industry could be disrupted! Sorry if i wrote too much but i think is worth sharing all this insights!

When you think this industry will be digitalised? Matter of a couple or 50 years?

I would like to gather the opinion of my followers.

Best

Francesco

Footnotes:

[i] http://www.pwc.com/gx/en/financial-services/publications/assets/blockchain-for-reinsurers.pdf

[ii] https://www.everledger.io/

[iii] http://media.everledger.io/2016/09/20/kimberley-process-ibm-edge/

Sources

[1]: Autoren: Raoul Ghosh, Mathias Ott, Philipp Sandner. 
[2] Download des Artikels als PDF-Datei. Weitere Informationen zum Frankfurt School Blockchain Center im Internet, auf Twitter oder auf Facebook.