Blockchain Technologies and Distributed Ledgers are being tried around the world and the insurance market is not exempt. Using Blockchain to reduce friction and increase efficiency makes a lot of sense, and many industries will benefit from it. Blockchain Technologies and Distributed Ledgers are being tried around the world and the insurance market is not exempt. Recently, the B3i group, composed of fifteen global insurers and reinsurers, has announced the launch of a functional prototype that uses blockchain to build an efficient industrial platform on a global scale for market participants to more easily cede, control and negotiate risks. Scheduled to go into production as early as 2018, they expect to reach 30% in cost reduction with the platform.
Using Blockchain to reduce friction and increase efficiency makes a lot of sense, and many industries will benefit from it. But, I believe Blockchain's revolutionary potential will only really be fulfilled when we understand that this technology allows for new arrangements that were not even imaginable a few years ago. Of course, one thing does not exclude the other, but we must overcome the dilemma of innovation and think how future insurance could be, instead of just trying to translate the processes of the current insurance and reinsurance model into a more efficient version in Blockchain.
What if we combined Blockchain technology and Artificial Intelligence and rethought the current model of insurance, which is archaic and inflexible? The two main questions that guide this reflection are: (a) How to reduce information asymmetry to provide a fairer experience for all participants on a global scale? (b) How to algorithmically regulate the platform to ensure a very high degree of solvency reliability?
Of course, there is no simple answer to these questions, but one way is to rescue the essence of mutualism, with small trust groups as a basis, however, running on a neutral protocol, totally decentralized in blockchain, allowing a high degree of risk dilution. The kind of protocol we have in mind would have three pillars: disintermediated mutualism, automated risk management, and peer-to-peer reinsurance.
First of all, it is important to point out that Mutual.Life is not an insurer, let alone an association or mutual insurance cooperative. We are just a technology platform whose business model is to offer software as a service, aiming to provide different levels of risk sharing among its users, based on a shared type of self- insurance. This is important because Mutual.Life, as a company, will not have any kind of benefit or savings when claims are denied, making it a neutral protocol.
For the first pillar we look for statistical and economic basis in current studies like and about informal insurance in regions with a low HDI, and from these and other studies, we have proposed the formation of small mutual aid groups as the basis of the platform. Although small groups of 30 to 50 people will not be able to dilute their risks in a minimally acceptable way, if they are formed by trusted people such as co-workers and family members, in view of the moral hazard linked to trust relationships among participants, information asymmetry, which we have actually observed in a pilot experiment we are conducting with a smartphone protection. So, while insufficient alone, small trust groups are one of the most important pieces of our puzzle.
Then, in order to give the small mutual aid groups a good risk dilution, we need to use the second pillar by introducing an automated risk management layer to the decentralized self-insurance protocol. For this, we can use Artificial Intelligence to produce scores of individual and group risk, processing historical data on the platform, as well as eventually aggregating external data through consensually authorized reliable oracles. The risk scores will serve as the basis for automated risk management, orchestrated by smart contracts and robots. In this way, groups can be organized into pools, and robots, with no conflict of interest can, with maximum efficiency, act by promoting symmetry in peer-to-peer relationships and systemic network stability. In this way, this second pillar will allow smaller and frequent events to be diluted in time between the different groups of the same pool, providing much more solvency reliability. We believe that this arrangement of mutual aid groups in addition to smart pools will, for example, overcome the solvency confidence of mutual associations and cooperatives in a disintermediated, transparent (auditable online) way, and with rules of governance and compliance guaranteed via blockchain and smart contracts .And if we imagine this protocol operating on a global scale, even co-variant risks such as hurricanes and earthquakes, for example, which are much rarer, but with great economic impact, could be diluted efficiently between the regional pools.
So far, we are visualizing a shared self-insurance protocol that aims to promote symmetry and solvency. But, if we are to rethink the future of insurance in general, we will need to go further and consider the importance of reinsurance and external investors carrying residual risks from the network. So, we believe that the best solution to achieve optimal levels of solvency is to unite the best of both worlds (mutualism and insurance) and allow the pools' risks to be negotiated through what we might call peer-to-peer reinsurance. Using digital assets to tokenize risks, outside investors will be able to purchase residual network risks that eventually will not be covered by smart pools. This mechanism would also be implemented via smart contracts that will manage the collateral deposited by the investors, the premiums paid by the users/pools, the indemnities and, finally, the result of the operation for the investors. By issuing tokens (crypto-coins) that represent investment in pools, investors can not only monitor their performance online but also market them without any friction in the crypto-currency markets, giving investments much greater mobility and liquidity.
Of course, such an ambitious project is extremely challenging. One way to think of a viable roadmap is to take the experimentation and validation mindset of a startup and work from the mutual aid groups, which is not and does not compete directly with insurance products, but can add value to underserved markets, and from the organic growth of groups to provide ever-increasing levels of security, with peer-to-peer reinsurance as an alternative to giving the necessary confidence. Today, especially in developing countries like Brazil, a large portion of the population does not have access to insurance products, not only because of the lack of an insurance culture, but also because current products are designed for specific socioeconomic profiles, excluding a large part of the population and limiting business lines to those whose historical data give the system the necessary security for a large-scale operation. Therefore, starting from the poorly served market, creating products that can serve different profiles, from microinsurance to the consortium of companies, a global solution can emerge in a gradual way, leaving neither the market nor the consumer public vulnerable.
The truth is that nobody knows exactly what kind of model will consolidate from this technological revolution. However, we believe that just as the Internet has provided the decentralization of content and communications production, so too must risk sharing, which will be decentralized, taking on a more organic and flexible form. Be that as it may, the new model tends to be more efficient, safer and more inclusive than the current model of private insurance.
Article published in: Next Business Media