Describe a plausible scenario of the state of the cryptocurrency ecosystem that would allow traditional insurance products to be built/delivered in a decentralized manner.
For the first time in history, distributed, decentralized, and autonomous entities are capable of existing and functioning in cyberspace. Blockchain is the underlying technology that makes it possible. In this brief paper we will outline how an insurance operation can utilize blockchains to its advantage. We will also touch on some societal benefits of blockchains in the insurance industry. Furthermore, we will outline a case where an insurance company as a DAC could exist with technology that is currently available (but perhaps is not fully deployed).
Blockchains are essentially databases. Insurance companies can utilize them in various ways to help with their business. Identity verification, document registration, data mining, recurring payment administration, are a few examples of blockchain usage that can aid with day to day operations. Such services would reduce costs, automate services, and in some instances provide transparency. If all the investments held by an insurance company were registered on a blockchain, an audit would be automatic and accessible at any time to executives, regulators, and clients alike. Perhaps in such a scenario, voting owned shares could also be distributed to clients who have paid premiums with which the shares were purchased. This would definitely be an improvement over the current arrangement, whereby the insurance company votes all the shares as it sees fit. A DAC insurance company can also be owned by its policyholders.
Let’s now explore a case for an insurance company on the blockchain. We will outline a DAC that insures autonomous vehicles. Automotive insurance is a very widespread insurance product as it is required by law in most, if not all jurisdictions. The tools to form DACs already exist (plethora of 2.0 projects) with perhaps the most prominent (Ethereum) coming online soon (Spring 2015). A DAC can raise capital by selling shares in itself. our insurance DAC would sell policies for autonomous vehicles via smart contracts registered on a blockchain. All information required (including the car’s capabilities of interfacing with a blockchain) would be embedded in the smart contract representing the policy. Payment can also be handled on the blockchain (either monthly or by installments). Because the vehicles are autonomous, the driver’s risk is not an issue. Perhaps the geographical area in which the vehicle is driven most of the time can be of essence, but such information can be supplied either by the client or queried and obtained from the vehicle itself. Pricing of the policies can be competitive as querying of competitors’ quotes is possible.
Settling of claims is a little bit trickier and requires information that may not be available in digital form, but should be soon. Claims can be initiated on the blockchain via invocation of a clause in the smart contract. This could even be done automatically by the vehicle. Fault of a collision accident can be determined from data supplied by the vehicle(s). Theft can be verified via GPS. Personal injury claims would require medical opinions in a machine readable format. Other information may also be required and obtained from oracles. The DAC can also hire independent insurance adjusters who may review claims whenever there is a dispute. Such adjusters can offer their services on a per case basis and be paid accordingly. Their digital reputation may be used to determine compensation, so this should eliminate fraudulent or dishonest rulings. The DAC can also subcontract automotive repair shops for estimates and repair, auction houses for disposal, and towing companies for transportation. Investment of float can also be subcontracted to professionals based on some criteria, but it is foreseeable in the near future that a DAC could control a trading account.
As discussed above insurance on a blockchain is possible. The required technology exists, but it is not connected and widely used at this time. It is conceivable that within a decade or two our described scenario may become reality. The required services will be built, and oracles will provide more and more information. A decentralized insurance company offers cost savings, transparency, use of game theory to achieve better results and savings, and offers opportunities that perhaps are not apparent yet.
Mainelli, Michael and von Gunten, Chiara. “Chain Of A Lifetime: How Blockchain Technology Might Transform Personal Insurance”
Stolyarov, Gennady II. “Blockchain Insurance Company”, SOA 11th Speculative Fiction Contest.