There is a paradox with blockchain: Everyone is excited about it, but nobody is really sure how it should be used, according to Dirk Schmidt-Gallas, Jan Weiser and Aude Saint-Paul of Simon-Kucher.
The paradox at the heart of blockchain is especially true for the insurance industry. Insurers are talking about blockchain as a technology that could revolutionise the sector, but no one has really identified its most useful applications. In fact, despite the ‘hype’ of the topic, blockchain as a technology is still in its experimentation stage, with many insurers still trying to figure out what they could do with it.
Blockchain regarded as a tool to ‘solve problems’
Blockchain has its advantages when it comes to data integrity and security, record-keeping and smart contract efficiency, making it a plausible candidate to reduce complexity in the insurance industry. Many insurers are capitalising on these properties, exploring blockchain’s ability to streamline time-consuming processes. For example, the Hong Kong Federation of Insurers (HKFI) has developed a blockchain-powered platform for motor insurance; while Tokio Marine has trialled blockchain-based marine cargo insurance certificates.
However, it seems that one factor about blockchain is flying under the radar. While there has been much talk about the benefit for insurers of leveraging blockchain (reducing complexity), very few insurers have fully explored the advantages that blockchain can bring to the end users of insurance contracts.
So, where is the customer benefit of blockchain? Are insurers missing the potential for blockchain to develop new products, innovate in marketing and improve the customer experience?
Blockchain and the customer
Insurers have a fundamental challenge: Insurance is perceived as boring. People are simply not interested in the details. Most of the time, they don’t even understand it - and no wonder, with long contracts detailing complex covers and exclusions the norm.
As a result, customers lack trust in insurers, questioning the entire concept of insurance. After all, an insurance policy is essentially a contract, bound by promissory statements. Policyholders must be able to trust that their claims will be paid, and insurers that their clients will not seek payment for claims that are fraudulent.
So between customers’ low interest, the lack of understanding and the absence of trust, the challenge for insurers is straightforward: To find a way to offer simpler, more engaging contracts that people can understand and trust. What people need are offers that solve a real-world problem and are understandable by a typical insurance buyer.
Blockchain can help with these challenges
Firstly, because of its ability to create trust between parties that do not know each other. And secondly, because of its potential to help accelerate the development of new, simpler products that customers may understand better than traditional contracts – especially if they are designed to cover specific situations that truly matter to them.
The example of parametric insurance and flight delays
A good illustration of the opportunities blockchain opens up is in parametric insurance. Parametric insurance is a type of contract where the insurer agrees ex-ante to make a payment upon the occurrence of a triggering event (a parameter).
In a traditional insurance contract, everything is complex, from understanding what you are covered for to settling a claim. First, the customer has to go through the process of asking for compensation, usually through a detailed claim. Then multiple parties get involved: Usually an expert (to assess the damage), claims teams (to process and settle the claim).
This can take weeks. Or months. Or years. The whole process is opaque to the customer, who usually has a limited view of the insurers’ processes and, most importantly, only knows ex-post how much he is compensated. In parametric insurance, things are simpler: As soon as the triggering event occurs, payments are also triggered.
Blockchain is taking this simplification further
It is now possible to design offers that cover very specific situations, with a smart contract automatically triggering payments when something happens – without the customer ever having to submit a claim.
Take the example of flight delays. AXA (under the name Fizzy) has developed a cover for delayed flights, leveraging the Ethereum public blockchain – a concept also developed by Swiss InsurTech Etherisc.
How does it work? In the case of Fizzy, customers simply enters their flight and personal information to purchase the policy, which is registered on the Ethereum blockchain. The policy then works as a smart contract: It is connected to global air traffic databases so that if the flight is delayed by two hours or more, compensation is automatically triggered without the need for a claim from the customer.
This is an example of parametric insurance, where flight statistics are the parameter to trigger the performance of the contract. It uses blockchain in two ways: For record keeping (to maintain an accessible record of the insurance contract itself within a smart contract) and as a mechanism for triggering the payment to the client once the two-hour delay mark is passed.
Customer benefits are clearly visible
There is no paperwork (and indeed no action at all) needed from the customer to claim. The process is near instantaneous: Customers are notified of compensation at the ‘plane’s arrival. There is also total transparency on the payment decision and the compensation amount: Compensation is displayed at the point of buying and is recorded on the blockchain, meaning AXA cannot subsequently change it. Last but not least, there is enhanced intelligibility: The product is simple, and there is no exclusion (customers are covered whatever the cause of the delay).
Extending the concept to other examples
Fizzy and Etherisc are still in the testing phase. However their philosophy is interesting for two reasons. First, the concept opens up a new word of possible offers. The same reasoning could be applied to anything where there is a reliable external source of data as long as the data source is trustworthy. Smart contracts could be implemented to trigger automatic pay outs.
Weather data could be leveraged to design insurance against extreme weather events, such as crop insurance, flood insurance or hurricane insurance.
In fact, AXA Lab Asia is already in talks with Shanghai-based Global Risk Exchange to develop a blockchain-based solution for agricultural producers. The idea is that smart contracts will govern whether policies need to be paid, with data fed into the system from public sources such as rainfall volumes triggering a farmer’s claim automatically. The same logic could also be valid for less extreme weather events – imaging ‘no-snow insurance for a ski trip, which the Singaporean start-up Inmediate regards as a potential use case for the smart contract insurance concept it is developing.
Health insurers could also develop innovative offers by leveraging data from connected devices and electronic medical records. As an example, LumenLab (MetLife Asia’s Singapore-based innovation centre) is trialling a blockchain-powered insurance product that offers financial protection to pregnant women with a risk of gestational diabetes.
Its experimental product, Vitana, connects to the customers’ electronic medical records via their mobile device. It triggers a $500 automatic payout upon the diagnosis of gestational diabetes, without the customer having to make a claim.
In the case of Fizzy, customers can be reassured that even a large financial institution cannot decide to change the terms of the contracts or fail to compensate them. In fact, as soon as the contract is registered, AXA no longer controls whether or not to indemnify the customer: It has delegated the payment decision to a third party network.
In the eyes of clients, this type of offer is more understandable, more transparent, and therefore more trustworthy. This could be the premise on which customer relationships of the future are built for insurers: More inclusive, transparent and instantaneous.
In fact, what the likes of Fizzy, Etherisc, Vitana and Inmediate show us is that for blockchain to be useful, insurers must start from the customer use case, not from the technology itself. Most insurers keep looking for problems which blockchain can solve. However, like many technologies, it will truly be useful only when it is used to design offers that solve customer’s real-life problems and are understandable to typical insurance buyers. A
Mr Dirk Schmidt-Gallas is a senior partner and global head of insurance at Simon-Kucher. Mr Jan Weiser is a partner of the Simon-Kucher Singapore office and specialises in insurance practice. Ms Aude Saint-Paul is a senior consultant at Simon-Kucher in London, and has worked on a wide variety of commercial programmes within the insurance industry as well as other B2B and B2C sectors.