Blockchain technology is actually a new way to pursue an insurance distribution system that existed 300 years ago, an expert at Willis Towers Watson said.
“This works like the way we used to do insurance 300 years ago,” said Magdalena Ramada Sarasola, a senior economist with Willis Towers Watson.
Ramada Sarasola made the argument during her talk: “Blockchain: Finding Real Opportunities Behind the Hype,” at the Casualty Actuarial Society’s 2018 Ratemaking and Product Management seminar, March 19-21 in Chicago.
She said that developing a better understanding on how blockchain (distributed ledger technology) will transform insurance in the future calls for thinking about how insurance was developed 300 years ago.
In short, blockchain allows parties to share distributed ledgers for secure transactions and contracts executed between users and protected by the highest levels of encryption. Among other things, blockchain lets users who do not know each other transfer money and other things of value directly and without the need for an intermediary, such as a bank, to validate and execute the transfer.
“I can transfer value, I can transfer information, and I can transfer ownership,” Ramada Sarasola said. “It can be delivered in a safe and secure way. It won’t be corrupted, and it will get to the right person.”
Blockchain is also used to enable “smart contracts” that are executed automatically once certain events or conditions have been reported. An early example of blockchain-enabled smart contracts in insurance are flight-delay policies that automatically transfer money to a policyholder’s account upon notification by an airline of a delay in the insured’s flight.
As the capabilities of blockchain expand, Ramada Sarasola predicts it will allow for risk sharing and risk transfer among ever smaller groups of individuals, much as the original fire insurance clubs organized themselves in the 17th and 18th centuries, but with a twist.
“At the end of the day, this is not a new way of mutualizing risk. It’s an old way enabled by a new technology.”
“However, I don’t need to be among 12 friends anymore,” she added. “I can use solutions [provided through blockchain] to derive trust from a system created with people I don’t know.”
‘Coding a Mutual’
Combined with data collected from social media, smartphones and sensors installed in autos and homes, blockchain may offer the prospect of “insurance without underwriters,” Ramada Sarasola said, adding that innovators are already working on ways to develop general risk scores for individuals.
“We can code the way we assess the riskiness of someone, and then pull that data [together] to mutualize the risk,” she said.
With this capability, “we could have packages of risk we could allocate directly to the capital markets,” she continued. “We could find an investor that has the right appetite for [a risk package], and a smart contract could define the rules for maintaining capital solvency.”
“What [these innovators] are doing is essentially coding a mutual into the blockchain.”
Among the advantages of blockchain in insurance, Ramada Sarasola said, is that it can collect and preserve risk-related information to serve people who might otherwise be closed off from the insurance system.
“We’re becoming able to map underserved markets and nonstandard markets,” she said. “We are able to generate more information because all people will be able to build an identity through these solutions.”
To illustrate, Ramada Sarasola cited the example of a Mexican life insurance company that issues policies on migrant workers in the U.S. Upon authoritative notice of the death of an insured individual, the policies will automatically make a payment to his or her family in Mexico.
As the Mexican life insurance example suggests, blockchain essentially allows data to be reposited with individuals and accessed with permission by insurers, financial institutions and other parties. This can reduce the amount of internal data insurers have to maintain and change the dynamics of customer relationships.
“We can actually have consumers own their data in a ‘wallet’ that reflects who they are,” Ramada Sarasola said. “Now that I can own my data, I can decide how to use it and whether to monetize it.”
“This will change the way we deal with data in the future,” she continued. “If people can have their own portable data, they won’t be willing for you to keep that data. They just will allow you to access it, get the insights you need, and provide them with a service. But they won’t give you the data.”
“That’s a big game changer for our industry, because one of our main advantages is data.”
A shift in data ownership could also demonstrate blockchain’s ability to empower small risk groupings and marginalize other individuals seeking insurance coverage.
“We could create a world where everyone is self-serving with their data, seeking to use their data to get better insurance prices and services” Ramada Sarasola said. “That is not sustainable, as we may end up with a lot of people who are just not insurable.”
“A pool of five is not a pool,” she said. “If [risk classification] gets too personal because we have the data to do that, how do we deal with the dark side of analytics?”
Scope and Scale
“Is all of this going to happen tomorrow?” Ramada Sarasola asked. “No. Most of the things we’re seeing today are operational improvements.
“In the next five years, better data measurements of risk, data ownership solutions and policyholder identity solutions are going to [emerge],” she continued. “Peer-to-peer business models and automated matching of risk may come in the next 10 years.
“So, what’s the road ahead?,” she asked rhetorically. “We need more scale. We need more scope. We need standards we don’t have yet. There are a lot of things we need to be able to reach the full potential [of blockchain].”
“The good news is that a lot of people are working on it.”