How and why blockchain technology could transform the insurance industry Part 1

The problem.

 

The history of modern insurance industry goes back to Edward Lloyd and his coffee house in London, United Kingdom.

Lloyd’s is actually not an insurance company. It is a marketplace for various parties in the insurance industry, including brokers, underwriters, corporations and individuals. Edward Lloyd opened the marketplace in 1686. Originally, the coffee shop was a gathering place for sailors, boat owners and merchants. Eventually, it also became a place to purchase marine insurance, then it transformed into an insurance marketplace and the company that it is today.

Insurance business is about diversification of risks. This concept has existed long before Edward Lloyd and Lloyd’s. Centuries before Lloyd’s, Chinese merchants would usually divide their cargo over several ships so that if something were to happen to one vessel they would still have a part of their merchandise. This division also prevented merchants from operating in secrecy because to divide the cargo and deliver it on multiple vessels to the destination, the merchants needed to involve multiple parties and explain to their partners what and why they were doing. Similarly to that, the business of insurance for centuries has been the business of trust and good faith. Without these critical components the business simply can’t exist.

 

The need for trust

Today, when you buy an insurance policy for yourself, your household, or an organization, you would typically get some paperwork with some conditional statements. In a way, buying an insurance policy is similar to buying a lottery ticket because both insurance and lottery are about probabilities. The difference is that with lottery you get a payout if you win and with an insurance policy you get a payout when a critical event happens. There is another difference that, surprisingly to many, works better with a lottery than it does with insurance. If you win and the company that is running the lottery doesn’t pay, you have a way to get your money. With insurance, in case of a claim denial, especially with life insurance and the policyholder being dead, beneficiaries can find themselves in real trouble, trying to figure out what to do during the times of emotional distress and financial need. This is why the concept of good faith and history of payments for claims is so important. Without them, the insurance industry would not be able to exist.

 

 

 

The trust barometer and the current level of trust

The trust in businesses today is at all-time low. One of the most famous American public relations companies, Edelman PR, on a regular basis publishes Edelman Trust Barometer that you can see at https://www.edelman.com/trust-barometer. Both Trust Barometer 2018 and Trust Barometer 2017 show that trust around the world, be it trust into the honesty and transparency of elections, or trust between individuals and the businesses they patronize, is extremely low and stagnant.

According to the Barometer, over 70% of the surveyed markets show distrust towards media, non-government organizations, governments and businesses. According to Edelman, about 70% of people today worry that news they are getting from the media may be false and have a goal of misleading the consumers of the news, even when the news are coming from organizations that have solid reputations. This is the reason why media today has the lowest levels of trust compared to institutions in other categories. In 2018, the United States saw the biggest drop in trust and China was the country where the gains were the biggest.

 

The case of Wells Fargo

It is hard to blame the residents of the United States with not trusting the institutions with all the fake news scandals and businesses such as Wells Fargo, Uber, Target, and Experian trying to hide their missteps.

For example, Wells Fargo to this day is dealing with the consequences of account fraud and having its employees opening accounts and lines of credit for customers without their knowledge and consent. The clients of the bank started noticing unusual financial activity that included sudden fees and receiving new debit and credit cards in the mail as early as in 2011. In 2013, an article in the LA Times described the pressure that Wells Fargo managers had to deal with in regards to mathematically impossible requirements and goals they needed to meet.

The bank encouraged employees to open lines of credit for pre-approved customers without getting the consent of the customers. To prevent the customers from discovering what was going on, the employees would often use their own personal contact information. In April of 2018, media reported about new allegations against Wells Fargo. The allegations have to do with the bank forcing the customers to buy unnecessary insurance and may result in Wells Fargo paying additional fines to the government.