At the Blockchain for Insurance summit in London, a gathering of major insurance players, technologists and thought leaders promoting digital transformation using blockchain, a clear pattern is emerging. While the $5.5 trillion global insurance industry is an otherwise fiercely competitive market, when it comes to the adoption of blockchain or distributed ledger technologies, industry titans, such as Swiss Re, Zurich, Aegon and others, are opting for coopetition and a shared services approach, rather than embracing opportunities for internally-driven disruptive innovation. This consortia approach, under the banner of initiatives like Swiss-based B3i, R3 and the RiskBlock Alliance, a non-profit initiative of the insurance education and certification body The Institutes, are the de facto blockchain “skunk works” for many major players in the insurance market.
This consortium model is a compelling approach in harmonizing both management understanding, favored technologies and rapid prototyping of use cases, with hundreds of insurance-based proofs of concept between them. As many of the major insurers continue to labor under the twin threat of anemic interest rate conditions along with a turbulent risk environment, with record losses posted in 2017, much of the blockchain-based efforts are largely focused on back-office functionality or operational efficiency, where up to 30% cost savings gains are possible. Indeed, given the size of the industry and its systemic too big too hide and too big to fail nature, a broader embrace of digital transformation is key to addressing the global protection gap, wherein potentially insurable losses are unfunded in the private sector and passed on to tax payers, households and businesses. According to B3i the industry could add $700 billion in new premium growth through embracing digital transformation and driving a wedge between the rate of uninsured or underinsured risks in different classifications.
The consortium approach, however, may preclude more fundamental shifts in the insurance industry’s business model and the essential societal role insurance plays in shoring up resilience to man-mage, natural and emerging risks. Part of the core challenge insurers face, particularly those that wish to preserve status quo or merely focus on answering short term quarterly investor calls, is that their capital base, solvency standards and current cost structures – averaging 30% expense ratios – makes many lines of business and modes of delivery economically unfeasible if the current modus operandi remains unchanged. For this reason, as with many mature industries, true breakthroughs tend to come from non-aligned outsiders, startups and upstarts who understand the elemental properties of an industry (for which insurance has four key forces in regulation, compliance, ethics and imagination) and know precisely how to reorder them with technology at the center of the change rather than at the periphery.
A dilemma exists between creators and accelerators where for example Henry Ford was the creator of the modern automotive industry with his eponymous Ford Motor Company and Elon Musk is an accelerator, having achieved Ford’s market capitalization with Tesla despite Ford’s 100-year head start. This same property of exposure to disruption is true in all facets of the insurance value chain and for many of the new entrants the the market blockchain and decentralized autonomous structures are core to their strategies, rather than marginal efficiency gains. Firms such as IXLedger, Etherisc and ChainThat, are digitally native and beyond the piloting stage of a number of blockchain-based applications, insurance classes and other structures than can profoundly challenge incumbents in the insurance market.
The changes that are afoot are not singularly driven by emerging technologies, there is also a clear erosion of confidence and insurance utility evidenced by the large share of claims in 2017 that were unpaid or are still in the queue awaiting settlement and third-party validation. Other forces accelerating the timeline of change is the advent of major players such as the coalition between Amazon, Berkshire Hathaway and JP Morgan, who have clubbed together to pull their more than 1 million employees out of the private health insurance markets – a market that is arguably broken and in desperate need of efficiency, transparency and improved customer outcomes. Here too, the consortium model applied by a very powerful triumvirate is being echoed by the startup and venture capital scene. Firms like Briovation in healthcare’s first city, Nashville, are launching a healthcare tokenization initiative, alongside the Health:Further event, which draws over 2,500 healthcare leaders, investors and innovators, all with an eye on the prize of driving digital transformation in healthcare.
Across the spectrum, insurers whether in healthcare, life, non-life and other parts of the value chain are assailed by the emerging reality that their industry may be difficult if not impossible to defend. Assailed with a high regulatory burden, managed at the state level in the U.S., low barriers to customer exit and transition (indeed wet ink on a broker of record letter is often all that is needed to switch relationships), and a zero-sum capital strategy with the lowest cost of capital and lowest cost of risk often winning the day. Add to these trends a convergence effect in terms of limited policy and coverage differentiation, alongside the growing financial indifference among the largest traditional insurance buyers, many of whom have fortress balance sheets of their own and the case for change could not be more urgent. Add in the effect of a growing group of millennial buyers, born with an iPhone in their hands, accustomed to instant gratification and the fractionalization of all the assets that traditionally signaled an insurable risk, from cars and bikes to travel, lodging and healthcare, and insurers may very well be confronting a shrinking pie.
There is a silver lining to the lingering storm clouds that hang over the insurance industry from 2017 – an annus horribilis for insurers. One example is the wakeup call among policy makers and public entities, such as FEMA, at the essential nature of the insurance industry, particularly in driving down the insurance gap. This much is being called out in FEMA’s 2018 – 2022 strategic plan, which specifically calls for “crowding in” more private sector risk capital in response to an accelerating rate of disaster declarations in the U.S. Similarly, under the auspices of the World Bank Group, which has been essential in identifying the finance and insurance-related funding gaps in achieving the UN’s Sustainable Development Goals (SDGs), the role of insurance has been directly linked. Indeed, if the world has any hopes in mitigating the root causes of global instability, for which global insurers are particularly vulnerable – being hit on both the risk and reward sides of their asset-liability management activities – the world needs to move from billions to trillions in blended capital. There are few sectors with the financial wherewithal, management discipline and investment horizon long enough to make an impact on these priorities other than the global insurance sector. The key, as with their embrace of digital transformation and blockchain, is that they need to begin taking risks of their own.
Ironically, for an industry that has been fractionalizing, mutualizing and sharing risks for more than 330 years, the cold underwriting reception cryptocurrencies and blockchain businesses have received in the insurance markets does not bode well for product innovation, market relevance and sourcing competitive risk-adjusted returns. That a trillion-dollar asset class emerged in 2017 without a centralized authority or insurance floor does not bode well for insurance adoption in emerging market segments. This score is repeated in the emerging medical cannabis space, which remains largely unbanked and underinsured, despite its growing legitimization among regulators and healthcare providers. Getting insurance back to its roots as a catalyst for business and innovation requires more insurers to lead the way in emerging risks and business models. For this some may need to contemplate going it alone.