Insurance markets today. Example of insurance on blockchain.
The problem with the absence of trust in the insurance industry exists in part because of all the intermediaries and standards that are not clear to the customers. Today we live in the world of complex risks and management of these risks requires trust and speed that often is not present in the marketplace.
For example, a complex insurance policy that protects a business from adverse political outcomes may take over a year to create.
Consumer markets have their own problems. For example, according to an article in the Los Angeles Times from December 18, 2017, only 17% of homeowners in the state of California have an insurance policy that protects their homes from earthquakes. While these numbers make seem like they make no sense, some financial experts argue that for many homeowners the decision to take a risk in case of an earthquake is a better choice than having to pay outrageous insurance fees.
The current state of the insurance markets. Earthquake insurance in California.
The policies and rules in the state of California have changed after the 1994 Northridge earthquake. Before the earthquake, insurance companies by law had to provide homeowners with earthquake protection that was a part of homeowners’ insurance in the state.
However, after Northridge, insurance companies started refusing to provide any coverage to homeowners in the state of California. The response of the state was to create the California Earthquake Authority, which was an insurance pool by the state authorities.
The insurance that the homeowners would get from the pool required them to pay 15% deductibles. Practically speaking, this means that if an earthquake was to hit a home with the value of $500,000, the homeowner would have to pay $75,000 from his or her own pocket first before any insurance payments kick in. With this kind of math and expenses, it is not surprising that many of the California homeowners are choosing to not buy earthquake insurance at all. And for inside of the home, the insurance from the state would pay for damages of up to $5,000. Everything else would have to come for the pockets of the homeowners. Yet another problem with insurance market in the United States is that the market is extremely centralized. While the marketplace does have all kind of intermediaries, according to a report from 2015, three largest companies control about 48% of all the volume in the market. For consumers, this means limited choices and high prices.
Insurance on blockchain: a practical example
Imagine having to fly from San Francisco to New York City in February and having your original flight cancelled and rescheduled several days later because of a snow storm in New York. You bought flight insurance and because of the events that have occurred you are entitled to compensation. Both the airport in San Francisco and the airline can verify that the flight indeed was cancelled, but now you have a ton of work to do. You need to contact your insurance company, get proof from the airport, get proof from the airline, and then wait for the insurance company to approve your claim or request more information, which is a process that may take up to several weeks if not months.
Now imagine how the same process would work if the events surrounding the circumstances of the flights being cancelled and rescheduled were automatically becoming a part of a database in which records could not be disputed by any party, be it an airline, airport, insurance company, or an individual. Everybody would have access to the same records and know that records are true.
Moreover, the database could be connected to software that would submit your claim automatically, without you having to contact the insurance company or get proof of your flight having been cancelled. You would not have to waste time requesting information or confirming anything.
Because the insurance company knows that the records in the database are true and undisputable, it would process your claim almost instantaneously. This is exactly how insurance could work on a blockchain network, quickly, automatically, and with almost no human involvement. The costs of claim processing would be close to zero and the trust from all parties would be extremely high.