Insuring the individual

Insurance built around the individual will allow for a significant shift of priorities. Asset management will be less critical, and the insurers will be able to focus on risk calculation and matching supply and demand.

You could create a marketplace platform that insures customers. There are many ways that you could organize this new business. One possibility would be an on-demand marketplace where users post their requests, either standardized by custom smart contract or by chaincode contract. If you haven’t read about these types of new self-executing digital contracts, check out Chapter 5 on Ethereum and Chapter 9 on Hyperledger.

With this type of model, you, as the insurer, could calculate the premium for the specific demand, based on historical data and other risk calculation factors in your risk model. If the customer is satisfied with the offer, the customer can bid or subscribe, depending on the demand model being utilized.

This new type of insurance could be adopted by peer-to-peer (P2P) or crowd-funded insurance or a traditional insurance company that adopts the technology. Either way, both are created in a decentralized cryptocurrency ledger with the use of smart contracts/chaincode, which guarantee the payment from the customer to the investor and vice versa if an incident occurs. Blockchain is key here, because it enables a few things that weren’t feasible or secure a few years ago.

Blockchains create near frictionless transfer of value meaning micropayments are feasible because the transaction fees are so low. You can now open up new markets that did not have a working monetary system or legal system or instances where the cost of transactions and disputes outweighed the benefit of offering coverage.

You can use DAOs, with smart contracts, to govern large groups at a fraction of the cost and time. You could use this model to incorporate and administer your new company, and possibly crowd-fund insurance platforms.

The self-executing nature of smart contracts could also illuminate many of the costs of claims adjustment and third parties that help with the processing and collection of funds.

The legality of all this is still in question. Determining privacy concerns and consumer rights is difficult. Each country has its own regulations and disclosures for the insurance industry. That said, consumer rights and disclosure requirements may be better executed using blockchain technology. Decentralized insurance (also known as “Insurance 2.0”) is a type of insurance built on blockchain technology and operates decentralized, without the need for a central authority or intermediary. It aims to improve upon traditional insurance models by providing more transparent, flexible, and secure insurance products and services.

One of the main benefits of decentralized insurance is the use of smart contracts, which are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. Smart contracts can be used to automate the buying and selling of insurance and facilitate the payment of claims. This can make buying and using insurance more efficient and transparent, because all parties involved can see the terms of the contract and the conditions under which claims will be paid.

Decentralized insurance can also be more flexible than traditional insurance, because it allows users to customize their coverage and choose from a variety of insurance products. It can also offer more diverse coverage, because it isn’t limited by geographic boundaries or regulatory frameworks.

Overall, decentralized insurance has the potential to provide more accessible, transparent, and secure insurance products and services and is an emerging area of interest in the blockchain industry.

Here are some of the promising innovators within the space:

• InsurAce ( www.insurace.io): InsurAce is a decentralized multi-chain insurance protocol that provides insurance services to decentralized insurance users. It allows you to secure investment assets like smart contracts, custodian risk, and token offerings. InsurAce claims to lower its premium by creating portfolio-centric products that embrace risk diversification.
• Harpie ( https://harpie.io) is an interesting decentralized insurance company that offers crypto protection plans for cryptocurrencies, tokens, nonfungible tokens (NFTs), and other digital assets. Harpie connects directly to your Ethereum wallet, giving Harpie a clear insight into your asset holdings and enabling Harpie to monitor anything that may happen to your assets. Harpie provides coverage for theft, hacks, natural disasters, and more. It’s conveniently compatible with most crypto wallets, allowing you to secure more than one wallet at a time. Harpie is also launching an on-chain firewall it claims will prevent hacks, scams, and other types of theft.
• Tidal ( https://tidal.finance) is interesting within the smart contracts space because new technologies being built in decentralized insurance are vulnerable to manipulations and hacking. Tidal seeks to build trust in blockchain protocols by creating a decentralized insurance market for decentralized insurance that lets the new financial pioneers offload some of the inherent risks of building software on the Internet. It connects buyers and sellers to crowd-source coverage for smart contract hacks. Tidal also allows you to create specific insurance pools for one or more protocols. The platform’s primary purpose is to maximize capital efficiency while offering competitive insurance premiums.

The new world of micro insurance

Micro insurance is insurance to protect low-income people against risk, such as accident, illness, and natural disaster. It has become more feasible through blockchain technology.

When thinking about micro insurance, pay attention to two categories (which can go hand in hand):

• Insurance targeted to low-income households, farmers, and other entities where the insurance is designed around specific needs — typically, a low-premium and index-based insurance
• Insurance that deals with low-value products or services

The biggest issue with these types of contracts within traditional insurance models is that their handling costs are disproportionately high and make it unattractive to serve these markets.

The low-friction attribute of blockchains allows them to move value at extremely low cost, nearly instantly anywhere in the world, with no charge backs, opening up the opportunity of serving more people and at lower costs.

The key advantage of blockchain is that the creation of smart contracts allows for secure transactions without any middleman, so insurance has significantly lower costs.

The blockchain micro insurance principle is simple and consists of four steps:

1. Lending/insuring agreement proposal

   A person can offer to lend his property through his insurance provider, if the property is digitally registered. The offer can be sent to the potential user, either through the insurance company channels or via a public platform such as Facebook.

2. Agreement review

   The borrower can then review the proposal that he received and accept or decline it. The offer is kept in the public records, and if the borrower accepts the proposal, he can purchase the insurance through standard payment channels, and the process moves to the third step.

3. Agreement signature and notarization

   If both parties are on the same page, the insurance is paid for and the borrower receives the property in question, and the agreement is digitally signed and notarized onto a blockchain. This makes it virtually tamper-proof. All the transaction information is safely stored with a clear audit trail if it’s ever needed.

4. Confirmation tokens

   Both parties receive special digital tokens that serve as the proof of identity for the agreement in question. These tokens are used to cryptologically confirm that both parties have signed the agreement.

Besides this ease of use, smart contracts allow for index-based insurance, which is very useful for agricultural insurance and other fields where the values depend greatly on dynamic factors that can be accurately documented by trusted third parties. In this particular case, insured farmers can receive automated payouts when particular conditions, such as drought, are reported by verified meteorological databases, thus further reducing potential service cost.

This sector of decentralized insurance, micro insurance, has been slow to grow. Systems built on blockchain technology have more expense and additional risk than traditional software. A shortage of competent developers and privacy concerns have slowed commercialization of some pretty good ideas. However, the promise of decentralized and open-source financial applications, like self-executing insurance contracts, has kept investment dollars coming. These applications, often called smart contracts, can be used for a variety of purposes such as lending, borrowing, trading, and more.

A startup called Yas Microinsurance (https://yas.io) has started to make waves. It’s a Hong Kong–based insurance on-blockchain provider that raised $4.5 million in 2022 to provide insurance for things like special events or even just going for a walk. Yas Microinsurance claims its product is autonomous insurance and microinsurance on the blockchain. It’s still in the early days of commercialization.

IoT projects in insurance

IoT will likely have significant impact in three areas of your life: the connected car, the connected home, and the connected self.

The IoT is, at its core, a disruptive technology and, as such, it’ll change the shape of a broad range of industries, such as automotive original equipment manufacturers (OEMs), home security, and cable and mobile providers. In that mix are insurance companies — in particular, the ones that work with property and casualty (P&C) policies.

The data gathered by the sensors in the new appliances and devices, along with the automation and additional control options, will lead to new possibilities when it comes to new companies emerging in the insurance industry. Combined with the blockchain decentralized ledgers and smart contracts, the whole process could be automated to a level that would’ve been impossible before.

The new, always online, lifestyle that comes with such a radical shift in technology removes some of the existing risks, but it introduces new ones, the most important of which is information security. All this means that the risk factors will have to be recalculated. For example, self-driving cars will have reduced risk of accident due to the absence of human error, but the reliability of the technology will be in question until we have enough data from real-world application.

Implications of actionable big data

Big data has been a thing since 2000, and nowadays it’s a $200 billion industry and of particular importance to the financial sector. However, big data comes with a number of problems that only grow with its presence in the everyday world:

• Control: If you have a big multinational enterprise or a consortium, the issue of data sharing becomes fairly significant. Version control is imperfect, and it can sometimes be really difficult to tell which is the latest, most up-to-date copy.
• Data trustworthiness: How do you prove if you’re the creator of said data, or someone else is? What happens with corrupted data?
• Data monetization and transfer: How can you transfer, buy, or sell rights to any data, and be sure that it’s the only copy there is?
• Data changing: How do you ensure that data is not being changed when it’s not supposed to?

All these problems are solvable using cryptocurrency and blockchain. The large challenge that the industry is working through now is scaling blockchain technology to accommodate the cost and data storage demands of enterprises.

Decentralized security

At the core of current business models is something that could be called the centralized trust paradigm, in which middlemen such as bankers, brokers, and lawyers coordinate and ensure the veracity of financial transactions and exchanges of goods.

Centralization comes with certain inherent security risks, such as data corruption and theft. Blockchains combat this by creating a decentralized system that is based on mutual distrust of all the participants that keep each other in check.

In order to create such a system, you create a distributed ledger that uses cryptocurrency (like Bitcoin, Ethereum, or Cardano), where each participant is both the user of the system and responsible for its maintenance and upkeep.

Crowdfunded coverage

Similar to standard crowdfunding initiatives, the idea is to pool resources from numerous entities or persons in order to cover for an unexpected shortcoming in an insurance plan. For example, a retirement insurance plan could kick in only at the age of 65, but a person could be forced to retire early because of unforeseen circumstances, and additional funds would be needed by the unfortunate individual.

Economic disparity has grown over the years, and numerous underinsured or uninsured people could benefit from such a system. Crowdfunding can potentially provide benefits to all three parties in question:

• Insurers gain increased revenue because more people are interested in their plans. They gain access to a greater portion of the underinsured population. In addition, the insuring company could improve its brand recognition — it could be seen as a company that cares.
• Donors could benefit from possible tax exemptions, if the structure of the campaign allows it, or they could gain other benefits, such as discounts or free services.
• Seekers (those looking for insurance) obviously stand to gain the most, as they can get better protection and more affordable coverage.

Cognizant proposed interesting insights to crowdfunding insurance in its whitepaper. You can find it at https://goo.gl/u3Kd3U.

The implications of DAO insurance

DAOs are corporate entities that have no full-time employees, but are able to perform all the functions that a standard corporation can. The ability to create such an entity stems directly from the improvement in blockchain algorithms, which has happened over the last few years and has created what is commonly known as blockchain 2.0.

A DAO is, in essence, a form of an advanced smart contract. The DAO is able to treat DAO as a corporation where all its individual policy users are shareholders, while the corporation itself never is in direct control of any particular group or individual.

In the same manner, a DAO is never under control of the developers, and they don’t issue or deny policies. It’s strictly a peer-to-peer insurance model. Although vulnerabilities regarding identity verification still exist, this system will be improved, and in reality, the same issues exist even in the current, centralized insurance systems.