We previously looked at some of the aspects of blockchain and how they might inform future products. But what might those products look like in more detail? An answer to this question exists, at least in part, in a number of the products that have been brought to market in recent years. These use its distinctive features in an innovative way, using automation and data sources that lie outside those normally used by the insurance industry.
For a start, we can create a self-executing policy which does not need to sit within the influence sphere of the insurance company. One of the first examples in the life insurance space is a product called Consuelo. The company which launched Consuelo, called Saldo.mx, facilitates conditional remittances for migrant Mexican workers in California, so that those migrant workers can send remittances home to their families in a way in which they can be sure that they are used for a specific purpose, say to pay for electricity or children’s schooling. This population segment would never buy life insurance normally because they would say that their family in Mexico has no idea where they are and whether they’re alive or dead, nor would have the means of starting a claim.
The Consuelo micro-insurance policy presented a solution to this market segment since it was coded using self-executing smart contracts that would trigger a payment to relatives automatically. But because this automation was hosted in a blockchain and hence was unstoppable, it wouldn’t depend on the insurer granting payment or not.
In the above case, the smart contract is connected to a centralised database that looks at death certificates that are issued in California, so the policy is automatically executed as soon as someone dies. That then becomes what is known as the ‘oracle’ of that particular policy. And in the same way, your health data, held in a wallet in your phone, can also become an oracle.
While not using blockchain or smart contracts, there are many examples of current life insurance products that are using or accessing health and lifestyle data to define pricing or grant discounts. The insurance company John Hancock Vitality has been active in this space, for example by linking life insurance policies to Fitbit data. In this model, your Fitbit communicates with the underwriter about your lifestyle and habits, but in the future, it may also communicate with the digital identity solution vaulted in your phone. As it would be coming from a device which had been protected, they would know that when you claimed to have done 20,000 steps, you had done. Your identity would be built, incrementally, around your behaviour, who you really were and who you were transacting with. And for the first time, the custodian of that data would not be Facebook, or Google, or Amazon. It would be your self-contained portable solution.
It also has implications for the underserved market, in which betting and staking can be used to generate data which doesn’t yet exist. There are prediction markets where people will bet on and vouch for me in the insurance space where people get to vote and effectively place bets on my behaviour in terms of my driving, for instance. If I misbehave, they will then pay for my deductible. There’s no reason why, just because people are in an underserved market, that we should not use new solutions to understand them better than we do now.
What future for underwriters?
Your data could be used to get better, more accurate insurance, but it could also mean that the underwriter was not needed anymore. The whole scoring and pricing of risk could, in fact, be automated. If you had a smart contract that said that Magda had a risk of 85 and that she was going to be pooled with someone else who had a risk of 90 and someone else who had a risk of 65, the risk could be placed wholly autonomously without reference to a human at all.
Tontines are not a new concept and have been around for around three hundred years, but there is the potential to put them on the blockchain. You won’t know who any of the other people are and you’re not tempted to try and find out and kill them so you can get the dividends and outlive them, because you will never know their identities. Instead, everything is automated. And you could potentially make big gains in capital efficiency and capital allocation with the transparency that blockchain promotes.
Data ownership is shifting and will impact insurers
Most of the innovation that we are seeing in the insurance products space revolves around data: from data enrichment strategies, to on-demand products or adaptive pricing that responds to data being streamed in real time. The actuarial value of many of these new data sources is still to be determined, but we can assume that many of these data will become increasingly relevant in the future. And they are not owned by insurance companies.
So, when we look at the data and, in particular, who will own that data in the future, we face a problem. You can think of this as the Netflix paradigm. Why? Because Netflix had the brilliant idea of streaming content that they didn’t own and didn’t produce. They generated a market that got used to streaming content when and how long they wanted. When that market became significant enough to negatively impact the existing business models of traditional contents providers like Disney or cable operators, content became increasingly expensive and more difficult to get. Yet, Netflix had been clever. They had prepared for that scenario. For ten years, they had been collecting data that told them how people were streaming and viewing content, what they liked and what they didn’t, and they used that information to feed into their artificial intelligence advanced analytics platforms and help them write their own scripts to produce content, in a better way than those that had been doing it for over a century.
A lot of what the insurance industry is building now is about data which they know that they will not own, such as the health or behavioural data streaming from wearables or even smart clothing, but which has actuarial value. Amazon is said to have already started hiring insurance people in the UK, so it is possible that it will not be the InsurTechs who triumph, but the players from outside the insurance industry who already have some of the data that we might need for the type of revolution that is being discussed.
Regulatory risks and future challenges
While we can be very optimistic about the future, there is a potential dark side to data analytics, no matter who owns the data, and that is caused by the fact that regulation has been slow to catch up. If your health data is in your phone and you are the custodian of it, you can’t be forced to surrender it, but you may be asked to ’volunteer’ it because the alternative is that you can’t access insurance. We currently have no regulation to protect people from their own data. There are some laws in place when it comes to DNA, like the Concordat and Moratorium on Genetics in the UK, but nothing concerning behavioural data. Moreover, if pricing and products get hyper-segmented, we may also end up with segments of the population that are uninsurable or just cannot afford insurance for their level of risk.
To use a sporting metaphor, we’re in the middle of a long play and nobody knows quite how the changes will affect the insurance industry or the wider world. There are many challenges to overcome to be able to use blockchain in a secure and scalable way. Self-sovereign data solutions are not mature nor secure enough to become the main way in which data gets stored. Consumers need to be educated about the value of the data and what it means to be fully liable for it. In the life insurance or retirement solutions space, where one must trust the product provider to be solvent and sustainable in the long term, these challenges become even more palpable. Would you rely on smart contracts and fully decentralized, peer-to-peer networks to deal with your savings, not even knowing what blockchain protocol or smart contract standards will prevail? If you’re buying an annuity now, you need to know that it will still be there in twenty years, which is a level of certainty that isn’t there at present.
Still, these high-stakes technologies are here to stay and the ecosystems developing them and building the foundations and infrastructure to enable this distributed markets vision are highly capitalized. The very high value of data and the fact that it is being centralized by a handful of players is one of the main reasons why the blockchain native ecosystem is working on self-sovereign data and identity solutions. That may do the insurance industry a favour, since it will be easier to interact with consumers and access data, by offering the right incentives, than to interact with large corporates that are well aware of the value of the data they have amassed. So we need to think about regulation, we need to think about hyper granular data and we need to think about how we will deal with distributed data architecture, because the evolutions that are taking place today will become revolutions tomorrow.