Part 1: Insurance and the Blockchain: Peer to Peer or People to People?
The Blockchain is providing opportunities that can be used to create competitive P2P life insurance products at scale. Click to Tweet
There are a number of disruptive developments–driven by changing consumer experiences and a need for personalized products and services–that are undermining the effectiveness of time-tested insurance models and are leaving insurers vulnerable to entrepreneurs who are leveraging information, creating alternative models of revenue, and changing the spread of risk. These include – the IoT, Mobile Applications, and the general change in the mindset of regulators and consumers.
However, the Blockchain’s infrastructure-development capabilities make it a tool that allows for the unification of these different technological evolutions.
In this post–the first in a series of posts written under the theme of ‘Decentralized Insurance’–we will first conceptualize P2P insurance and explore how the Blockchain, with its ability to implement smart contracts to verify, govern, and complete transactions without an intermediary, is providing opportunities that could be used to create competitive P2P life insurance products at scale.
What’s P2P Insurance?
P2P normally stands for Peer to Peer. But in the case of insurance P2P is more like People to People.
The reason for the difference is because P2P insurance is not the same as other P2P platforms. Driving someone to the airport or letting someone sleep overnight on your couch doesn’t break any laws and is not governed by strict regulation. Insurance, on the other hand, is a very different animal. There are laws that prevent people from going door-to-door suggesting that everyone contribute monthly to a single pool of money which would then be used to pay for expenses in the unfortunate event any of the members were involved in an accident.
P2P insurance has always existed to a certain extent in the form of mutuals, fraternal benefit societies, reciprocal inter insurance exchanges (the original Lloyd’s of London syndicates), etc. With P2P insurance, the concept is to form customer teams of large numbers who are not just family and friends (as in Peer to Peer). These teams manage all insurance functions, such as setting of policy rules, accepting new members, making and approving claims, and reimbursements.
What Does the Blockchain add to P2P?
The Blockchain adds to P2P insurance the ability to record transactions reliably and transparently. Click to Tweet
What the Blockchain adds is the ability to 1) efficiently bring a wider range of parties together online to tailor an insurance product to meet individual needs, 2) reliably and transparently record the transaction, and 3) efficiently use smart contracts to enforce and automatically fulfill the obligations of the parties when the conditions of the contract are met.
With the Blockchain, P2P Insurance could be developed once a minimal number of persons join a team (two at least) and fund their distributed wallets. In these kinds of “mutual pools”, policy holders pool capital together and support each other financially in case of a claim.
The main point of difference is with regards to how the deals are made: Each member has to put a certain amount of capital in their account to become part of a team. Thus, there is no premium. The initial payment is kept in the member’s wallet where it stays. Payments only occur when a claim is made and approved by the rest of the team.
The default, therefore, is that everyone in the same team starts with the same risk rating. But, if one team member is a bad driver and everyone knows it, then that person gets a higher risk rating and they either have to put more capital into the wallet or they get less if they make a claim. This may be one of the main advantages of P2P models – research shows that owing to bad faith relations with their insurers, most people have less hesitation in declaring false claims as they look at the insurance company as “out to get them.”
However, in a P2P model, a member’s reputation is on the line when a false claim is made. Considering that false claims cost the industry $80 billion annually (including fraudulent P&C claims), there is a cost saving initiative here to be explored (Deloitte, Insurers on the brink, 2016).
P2P insurance is a model that has been gradually gaining some stead in recent years, and this trend has picked up steam as the adoption of the Blockchain has accelerated.
The Blockchain’s features of disintermediated trust, decentralization, automation, and customizability are being leveraged by a host of new entrepreneurs in different sub-sections of the insurance market. Click to Tweet
The objective of this post is to offer a brief introduction to the concept of P2P insurance. In following posts, we will see some of the opportunities that this is creating, the players who are taking on the gargantuan incumbents, and what challenges and limitations need to be addressed in order to envision a new landscape of the insurance sector.
Insurance and the Blockchain: A Mini Series on Decentralized Insurance by Kary Bheemaiah. Click to Tweet