AGEFI Luxembourg in April 2018
Introduction: Current state of the insurance market
Insurance whether mandatory, offering peace of mind, or necessary to protect ourselves and our assets is an essential part of most financial decisions. However, conventionally the insurance industry ranks at the top as one of the most paper heavy professions. Digitalization and automation can revolutionize the insurance industry. Blockchain technology and IoT give access to an unprecedented technological landscape to insurers in the way that it can reshape the insurance market structure. Now more than ever, provided these new age tools the insurance industry can keep up with the modernization of their environments.
BLOCKCHAIN: THE ADDED VALUE
The blockchain technology is mostly associated with cryptocurrencies which is just the tip of the iceberg in terms of potential. Blockchain is a decentralized, openly shared and distributed digital ledger technology. This ground-breaking technology eliminates huge amounts of record-keeping through efficient digitization, reduces administrative costs through optimization and ultimately kicks operations into a much higher gear.
Smart insurance contracts instead of traditional insurance contracts
The insurance policy is a contract between the insurer and the insured. It outlines the terms and conditions which the insurer is legally responsible for upon the agreed terms. The insurance policy contracts are operated in a centralized database, which has been the model of insurance. In this dynamic, there are more administrative costs associated with the business process. Additionally, in some case the involvement of third-party intermediaries (insurance brokers or insurance agents). This aspect works in the favor of consumers in alleviating conflicts of interests arising by third party’s participation (preferred insurance providers or administrators of benefits).
Powered in blockchain technology, a smart contract is a digitally signed customizable agreement between two or more parties containing specific instructions given to them, and all transactions are traceable and irreversible. It has the ability to initiate responsive actions when predefined conditions are met without any human intervention. Every single transaction between two parties automatically generates a record on the digitally enabled distributed ledger. In turns because of this mechanism the authenticity can be verified by the entire community. This added value falls right into mitigating risks of fraud associated with insurance. Moreover, the automated variable would allow virtually instantaneous payments resulting a claim as well as remove delays associated with insurance subscriptions or desired changed by the customer.
Fizzy by AXA one of the first practical business case
In terms of blockchain implementation, last year AXA managed to be the first insurance company to market a parametric insurance offer based on the blockchain technology. Last September they launched a new product that relies on the Ethereum blockchain. The insurance covers flight delays with an automated and effortless claim payment based on flight statistics. Hence the product, called Fizzy, is being pitched as “smart insurance”. Fizzy benefits from a 100% digitalized and secured subscription process. It offers complete transparency about the payment that would be received in case of a delay longer than 2 hours and most importantly does not require any paper trail nor justification or even action from the subscriber. The payment is automatically made based on the flight statistics, which are already public and fed in real-time. The benefits of digitalization, in terms of instantaneity, reliability and user friendliness speak for themselves. The product is still in this early stage being tested on the transatlantic flights from / to Paris CDG to / from the US, but they are planning on a worldwide coverage for 2018. Also, we can hope for an incoming reduction of the subscription delay, which is currently 15 days ahead of the flight. Blockchain both insures the integrity of the self-executing parameter-based smart contracts and allows low-cost deployment. All these new developments were unavailable until the arrival of IoT and blockchain.
THE INTERNET OF THINGS (IOT)
The internet of things can virtually and instantly connect nearly every type of consumer device. This technological progress enables the collection of more detailed and more specific data in a way that wasn’t possible in the past. Historically, insurance companies have relied on an outdated underwriting model to assess their pricing premiums. The IoT platform allows basing rates directly on individual characteristics instead of a more general population sample. Insurance companies can more accurately calculate insurance rates based on case by case basis rather than generic tendencies. This introduces usage-based insurance (UBI), which provides new tools that completely change the work methodology, the relationship with the customers and how products are structured and delivered.
Usage-based insurance (UBI)
With the progressive digitalization of all services and the introduction of UBI insurance companies can attain a never before reached level of customer-centricity. For example, auto insurers can track the precise number of kilometers driven and calculate your policy rate accordingly. Therefore, as a collateral effect it also creates an incentive for the customer to be more attentive to their driving habits and consider even balancing with car sharing options. Insurers can use the IoT tool to build a closer relationship with their customers by adapting existing products and influence customers’ behavior. Another example is wearable activity tracker to record physical activity or health habits. The health giant Aetna started back in 2016 health initiatives and offers the Apple Watch to their customers for a small charge.
Blockchain and IoT, the demand for web developers, data miners, and data engineers continues to grow. Due to the volume of data now available, there is need for the information to be analyzed and assimilated into useful metrics. The demand for web-specific technical skills has increased over the years thanks to the popularity of new technology and the milestone we have achieved. With these new players we can expect a more dynamic insurance industry over the coming years.
In this new ecosystem, we can forecast new customer expectations, increasingly fierce competition, new laws that resonate with customer data protection (IDD, GDPR). However, it will not change the core business of insurance which relies on forecasting and calculating the premiums but the rapidly changing market and technological conditions are presenting insurers with an unparalleled range of strategic and operational challenges. Down the line it might prompt rigorous expectations from regulators and standards but ultimately ameliorate the consumer experience.
By Frederic Lorain & Anta Sylla consultants at Initio