Insurance is a multi-trillion dollar global industry, providing an avenue to manage risk, ranging from the world’s largest corporations to individuals, covering everything from billion-dollar supply chain activities to the loss of individual electronic devices.
In everyday life, insurance gives peace of mind to car owners, travellers, homeowners, farmers and more. It is both a necessity and an afterthought, as most who pay for insurance won’t ever have to claim on it. However, those filing claims often find the process is not as simple as it should be.
Blockchain & Smart Contracts can prove to be practical tools that’ll only increase transparency and efficiency of the otherwise traditional insurance industry by eliminating or minimizing an overreliance on trust, information asymmetry, cumbersome processes, and opaque practices.
Transparency is the root cause of many problems in the insurance industry. Though simple, insurance has built-in complexities because it is a financial agreement between two parties. This misaligns the incentives for both the parties, for they assume to operate in a setup where one wins, and the other loses.
Misaligned Incentives Between Policyholders and Providers
On the consumer side, policyholders better understand their situation than the insurance company. The insurance company must rely on information provided by the policyholder to determine their risk profile, premiums, and deductibles. This leads to a situation where the insurance company would benefit immensely from the transparent information the policyholder provides. In contrast, the policyholder is incentivized to withhold negative information and exaggerate positive information for lower premiums rates.
As a result of this lack of transparency from policyholders, insurance companies are constantly bombarded with fraudulent claims. In the U.S., it’s estimated that non-healthcare-related insurance fraud costs insurers $40 billion annually and represents up to 10% of total claims. The insurance industry expends a considerable amount of resources to fight fraud, which leads to higher policy premiums, more manual processes, and longer arbitration times that correspond to increases in admin and labour costs, underwriting procedures, claims processing, and dispute resolution.
Black Box Environments of Traditional Insurance Providers
Conversely, policyholders cannot see policy parameters, premium pricing, and claims processing in the black box. While they can make generalized assumptions, the truth is that many policyholders are unaware of why they have received specific pricing, the factors that played into that decision, and even why their claim was denied. They are subject to the insurance company’s decisions, which have the final say in insurance-related matters—barring lengthy and stressful legal challenges.
All this back and forth makes underwriting policies, and processing claims more time-consuming and manual and raises the baseline costs on all premiums to reliably turn a profit.
Introducing Smart Contracts To The Insurance Industry
By combining blockchains, the smart contracts built on top of them, and decentralized oracles, it’s possible to upgrade the foundational infrastructure of insurance not only to solve the problem of transparency but also to streamline the entire insurance process and make insurance globally accessible to disenfranchised consumers. Decentralized insurance protocols offer better, faster, cheaper, and more trust-minimized operational abilities, leading to speedier insurance claims, arbitration, and payouts.
On top of transparency, there are multifaceted benefits that the integration of smart contracts will be:
Data-Driven: Whereas current insurance agreements rely on the interpretation of a claims processor, a smart contract is executed directly from data. For example, crop insurance payouts can be triggered by weather data, creating an automatic process based on a relevant trigger rather than waiting for manual input from an employee.
This moves the needle from information asymmetry to information parity. The insurance provider can receive verifiable proof that a claim occurred as it’s triggered by trusted data-generating entities, such as a multitude of IoT devices. This can substantially reduce costly manual claim verification, enabling insurance policies to receive definitive answers regarding claims and their legitimacy—ultimately removing the need for unverifiable information from either party by having a shared source of truth. Which, in this case, is location-specific weather data provided by satellites.
Streamlined: Because smart contracts are automated and redundantly stored across distributed networks, they are faster, cheaper, and less prone to error. Automation allows claims processing to be streamlined and digitally verified using real-time data. Numerous insurance agreements can increasingly use the Boolean logic of smart contracts to replace the backend work.
Digitized: Most insurance contracts are written legal agreements signed between both parties. This creates a pressing need for dynamic contracts that are human and machine-readable, often referred to as Ricardian contracts. Not only do Ricardian contracts bring physical contracts into the digital world, but they can also enable quicker and composable amendments that further streamline processes and allow codable and non-codable clauses to co-exist.
Projects such as OpenLaw and Clause (which created a foundation for developing legal templates called Accord Project) are pioneering solutions that merge existing legal contracts with blockchain infrastructure.
Globally Accessible: Because traditional insurance models are based on trust and commonly enforced by legal systems, workers worldwide may be unable to access a reliable source of insurance in developing nations with unreliable financial and legal infrastructure. Blockchain insurance represents an exceptional opportunity for disenfranchised workers, from fishermen to farmers, to access reliable insurance.
Onchain Insurance Providers
The space has seen a few innovative projects streamlining the insurance industry and bringing never seen before use-cases to life. Some of these projects are:
Nexus Mutual - The firm describes itself as a people-powered alternative to insurance that protects cover against the risks associated with the failures of smart contracts, DAO hacks, and/or issues arising from parity multi-sig wallet issues. Nexus Mutual distinguishes itself from the other firms on this list by giving members the power to vote whether or not claims are valid.
Founded in 2017 by Hugh Karp, Nexus Mutual has seen its membership rise and has several high-profile clients like 1confirmation, Blockchain Capital, Version One, Semantic Ventures, Kinetic, and Collider Ventures, amongst others.
Tokens represent members’ rights, which can be used to buy insurance cover and participate in the voting procedures in claim assessments and governance. It is necessary to note that income generated from the sales of tokens all belongs to the members.
Nayms - Founded in 2019, Nayms is designed to provide cover for Crypto brokers, asset managers and verified investors. Nayms provides insurance cover for smart contracts and general risks associated with cryptocurrencies.
Recently, the company entered a partnership with traditional insurance firm AON to provide merge insurance with the ever-growing blockchain technology.
As a result of its intuitive offerings, Nayms has entered into high-profile partnerships with Velona, BREACH, SafetyWing, and CoinCover, amongst others, as it seeks to merge the insurance blockchain and financial industry.
Unslashed - The firm seeks to provide ease for cryptocurrency users and investors of crypto-based projects by providing insurance coverage that is reliable and efficient. Unslashed provides users with the functionalities of ensuring that their insurance cover is constantly collateralized, and the decentralized model of settling claims makes it a transparent process.
Unslashed provides cover for smart contract hacks and breaches on exchanges and stablecoin pegs and even extends onto oracle failure.
In addition to its impressive features, Unslashed allows users to earn on the platform by letting them underwrite risks to earn rewards. Unslashed has entered partnerships with Paraswap and Enzyme to provide impressive insurance services.
Opyn Insurance: The decentralized insurance platform that provides insurance services to users seeking to protect their investments in decentralized finance from unforeseen risks. Using the revolutionary Convexity Protocol, Opyn does not utilize claim assessors to determine the validity of claims.
The provision of incentives on the platform urges more users to adopt the medium in which users can earn yields by depositing Ethereum, minting options, and trading them on the market. The non-custodial nature of Opyn, lower margin requirements, and protection for volatility are reasons for investors’ preference in choosing Opyn as their insurance cover.
Insurance Models Meets Web3
Oracle-enabled smart contracts offer a way for the insurance industry to move from a manual, trust-based system to a more automated, trust-minimized system. Information asymmetry is reduced as the industry shifts toward a 1:1 information equilibrium between insurance providers and policyholders. Information is delivered from third-party sources that provide a source of truth, rather than the unverifiable hearsay that’s the case in the current model.
The claims process changes focus from personal interpretation to the execution of an “incident,” deterministically verified through IoT data and sourced with user privacy in mind. Trust is re-established because neither party can tamper with the outcome once it’s sent to the blockchain. Efficiency increases as everything are automated. Both policyholders’ premiums and insurance companies’ costs decrease because fraud is drastically reduced.
Blockchains, smart contracts, and decentralized oracles are set to ignite a paradigm shift towards trust-minimized insurance models refocused around information parity—and many insurance companies are monitoring the trend.