Blockchain-Backed Mutual and Peer-to-Peer Insurance
A PwC survey found that 57 percent of surveyed financial services industry personnel are unsure about, or unlikely to respond to blockchain technology. Using the smart contracts described in my previous blog post, insurers could use blockchain to succeed in the peer-to-peer (P2P) and mutual markets.
The insurance industry, like most industries, is shifting towards greater transparency and trust. Mutual and P2P insurance are gaining in popularity because they can offer these qualities.
“Blockchain technology could empower people to manage (some of) their risk more directly, with peer-to-peer and mutual insurance platforms based on blockchains,” according to Long Finance, as quoted by PwC.
An interesting article by Olivier Rikken in CoinDesk, manager at AXVECO, a consultancy firm in Amsterdam, examines the possibilities.
Insurers can provide a marketplace-like platform where customers post insurance demands. These could be for traditional products, or specific demands. By using historical data and applying risk models and analytics, a premium calculation would be performed to post the expected return (after subtracting the insurer’s margin), according to Rikken.
Once the premium calculation is available, interested consumers can subscribe via a peer-to-peer system, or via crowdfunding. Blockchain would guarantee the payment from the investor to the customer base (when necessary).
“By doing this in a blockchain, the administration and execution processes are simpler, almost fully automated, transparent and cheaper than in a traditional set up. Besides that, the investors know their maximum exposure as the amount defined in the smart contract,” writes Rikken.
Some insurers would balk at giving up control of the insurance process and their customers, for fear of turning into a mere “pipe” or conduit. This is certainly a legitimate concern and challenge, but as P2P, mutuals and blockchain technology gain wider acceptance, it is wise to begin exploring their potential now.
My NEW white paper, Blockchain’s Benefits for Insurers: Begin Planning for The Next Blockbuster Technology, provides an overview of this emerging technology, and helps insurers understand how they can utilize blockchain to improve their business.