Incumbents, consortia and start-ups consider distributed ledger technology to improve business processes, reduce costs and increase revenue by introducing new insurance products. But how intense is the impact of blockchain technology - does it eventually disrupt the insurance industry?
Incumbents and InsureTech startups develop primarily parametric insurance products based on blockchain technology. Parametric insurance products define a pre-determined trigger event as a parameter. If the trigger event takes place, then payments are automatically executed via smart contracts, i.e. if-then statements on the blockchain. This is automatically checked relying on large databases. The most prominent example for parametric insurance products are flight delay insurances. If an insured flight is delayed, then payment e.g. in ETH, is automatically processed. This reduces operating costs, improves processing time and creates trust on the side of the consumer as the pre-defined smart contract is stored immutably on the blockchain. Moreover, new insurance products based on parametric data such as crop insurance in development countries are emerging. On the other side, non-parametric insurance products still need manual assessment and are thus more challenging for implementation on a distributed solution.
Flight delay insurances illustrate the opportunities of blockchain technology in dedicated applications. Furthermore, distributed ledger technology improves transaction processes within insurers, reinsurers and brokers. Data on policies are secured on the blockchain in a standardized format with authorization of the parties being determined in smart contracts. This reduces processing costs and additionally improves auditing as the entries are immutable and time-stamped on the blockchain. A consortium of more than 30 insurance and reinsurance companies already developed a prototype for CAT XOL contracts and further elaborate on additional use cases.
Besides dedicated applications, new entrants develop entire insurance crypto economies. These crypto economies serve as a market environment for all participants such as the insured person, insurers and reinsurers whereas brokers are replaced by the protocol as transparency is provided by the market itself. The success of crypto economies is strongly related with the adoption of blockchain in the overall market.
Answering the question whether blockchain technology disrupts the insurance sector, different parties and aspects must be considered. It is expected that business processes within the insurance and reinsurance are altered and improved by distributed ledger technology which finally disrupts brokers. Whether incumbents face disruption by crypto economies within the next 10 years depends on various factors such as the adoption rate of blockchain technology in the overall market, the willingness to innovate by incumbents, the handling of non-parametric insurances and the availability of historic data or alternatives such as prediction markets. So far, only the area of parametric insurances is expected to be disrupted by blockchain technology primarily by start-ups which means that incumbents should prepare and develop similar solutions.