Bitcoin has generated a lot of press due to its volatile value and the often dramatic nature of news stories regarding heists or illicit usage. But many people, Novarica included, have long considered the underlying technology, called blockchain, to be the real area of interest and potential future platform for the insurance industry. Allianz’s recent implementation of a blockchain-based CAT bond shows exactly how the technology can be used not to disrupt the industry, but to build trust and accountability in an existing marketplace.
One of the values of blockchain is that it creates a transparent and structured marketplace for executing contracts. In the case of Bitcoin, the contracts are about the transfer of cryptographic currency, but that’s only one application. Since the insurance industry is based on trusted contracts, blockchain seems like a natural fit. However, most insurance policies still require adjudication before payment (such as a claims adjuster working with a body shop to determine car repair costs), and that doesn’t fit in with a model that’s intended to take the subjective nature out of an agreement.
A CAT bond exists to dilute the risk held by the insurer by putting it on the bond investor. Unlike an adjudicated claim, the trigger for payment or default with the bond is typically driven by objective factors, such as a hurricane or other natural disaster striking a specific region. These post-event actions happen without regard to specific losses, so there is less need for subjective review. This means a blockchain implementation can manage a contract, maintain the financial stake, and properly transfer ownership in a secure and transparent way based on the original agreement.
Novarica expects other policy types with simpler payout structures to explore a blockchain model. Any time an objective third-party “oracle” can give definitive information that will trigger a fixed payout or default to an insurance contract, a blockchain model will work well. A critical illness policy would fit this model, as long as both the insurer and the insured trust a third-party medical examiner to serve as the arbiter of the illness. A flight insurance policy that pays out if a flight is cancelled would work in this approach since flight data is publicly available, such as the winning entry from a 2015 blockchain hackathon. And “personal cat bonds” might become an option, with homeowners purchasing simplified policies that insure against disasters, relying on the National Weather Service as the adjudicator. As one example, the insurance startup Jumpstart Recovery provides quick relief after earthquakes, and fits that potential blockchain model.
These use cases might expand in the future as more of the technology we work with gets smarter. Cars will be able to make immediate assessments of their repair costs after an accident and report them to the blockchain for automated payout. Similarly, a connected home might not only be able to monitor and help prevent water leakage, but also estimate damage when inevitable accidents do occur.
The key lesson is that blockchain can be a trusted, transparent, and objective way to manage insurance contracts and handle payouts, as long as both parties can agree on how to properly trigger claims. Consumers will benefit from a simpler purchasing model and a quicker payout. Insurers will benefit from automated processing and a lower transaction costs. And the entire industry will benefit from a process that’s readily available and clear to all.
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