ITIJ 221 | June 2019
Cyrus Maaghul looks at the five emerging trends that are fueling the growth of blockchain-based parametric insurance, and assesses its impact in the travel insurance sector
The travel insurance market is growing steadily around the globe. The size of the global travel insurance market is likely to be valued at over US$35 billion by 2025, according to Adroit Market Research. Globalisation, tourism and trade practices, among other factors, are driving the demand for travel and travel insurance.
Coincident to the global growth in demand for travel insurance is the emergence of public blockchain-related technology and new ways to objectively capture risk-related information (weather, transportation systems, flights, political events, disease outbreaks, crime, terrorism, and so forth) in real-time. This has created a perfect storm for the emergence of new and innovative travel insurance products and new types of insurance producers. The ability to capture verified real-time data enables insurers to develop improved predictive risk models and fashion more consumer-responsive products.
The power of blockchain
Public blockchains are facilitating the direct movement of value between marketplace participants utilising tokens or cryptocurrency. These public chains enable this with no bank or insurance company required in the middle. This is a powerful capability. Trust that doesn’t require a third party. When you look at how insurance companies operate, the core of their business is trust, pooling consumers’ insurance premiums. We entrust them with our money and governments regulate them to prevent intentional and unintentional malfeasance. That regulation comes at a cost that is passed on to the consumer or insured one way or another.
The cost to move tokens around the globe is low as they require no intermediaries, and these transactions can happen within minutes. The tokens can also be purpose built and designed only to be of value when trading with certain partners (hospitality, transportation, medical, and so forth) who accept the token.
This has created a perfect storm for the emergence of new and innovative travel insurance products and new types of insurance producers
Let’s look at how the advent of conditional payment logic or smart contracts and blockchain transparency has led startups and insurers around the globe to begin researching and experimenting with tokenising insurance products known as ‘parametric’ insurance. Parametric insurance (sometimes referred to as index-based insurance) is a type of insurance that does not indemnify or compensate for the actual loss, but rather issues a fixed payment upon the occurrence(s) of an objective triggering event. This type of coverage has been around for more than 20 years, covering events such as earthquakes and hurricanes. Parametric insurance – or warranties as some like to refer to it – has been used to complement indemnity products as a ‘front stop’ to get payments out quickly to insureds before full loss assessments are obtained.
With the confluence of five emerging trends, detailed below, the demand for speedy blockchain-enabled parametric insurance is poised to significantly rise in the years ahead across the risk spectrum:
- The rise of digital and social technology. Digital technology has spurred the demand for insurance coverage for data privacy breaches, system intrusions, theft of data, and now digital assets. Incidence of healthcare record theft, reputation attacks, derivative manipulations and cryptocurrency theft are evidence of new security vulnerabilities resulting from the growth of digitisation and social media. The rise of digitisation and the demand for – and value of – data, corporate and political reputation, and the new class of digital assets has spurred interest in new forms of protection, many of which can be covered with parametric insurance.
- The rise in business models with a large proportion of intangible assets. These entities run the risk of having their cashflow instantly and negatively impacted by certain events such as cyberattacks, terrorist threats, transit strikes and weather disasters. Businesses such Airbnb, Uber, Lyft, on-demand platforms, as well as traditional transportation and hospitality services are particularly vulnerable to such events. Parametric models are now being developed to demonstrate the correlation between these events (which are being indexed) and the loss in revenue and/or increase in business costs.
- The rise in global warming or climate change. Although not new, these atmospheric dynamics have also been a driver of new parametric products. Climate change is increasingly having a detrimental effect on businesses, governments, and non-profits across the world.
The rise in measurable and real-time data and the Internet of Things. This is a derivative of the rise in digital technology. Parametric insurance products require a measurable and objective index or data source as the trigger or threshold value. When this trigger or threshold value is met, the insurance policy would pay the customer a predetermined amount. As the use of wearable devices, geolocation technology, sensors, machine learning, and co-ordination management technology (e.g. DAOs) emerges, so will the development of new and innovative indexes and triggers.
As access to real-time data becomes prevalent, new and innovative pricing models can be deployed to enable new and better customised products for consumers and businesses. As the volume and type of data collected rises, the opportunity to leverage machine learning technology and provide more autonomous product management and operations will grow as well.
It is important to note that finding third-party and impartial reporting agencies or data sources also known as ‘oracles’ can be difficult and is one of the key blockers to the growth of the autonomous insurance market. However, I believe the number and types of oracles will rise with the increased adoption of decentralisation technology coupled with game-theoretic-based crowdsourcing that utilises digital asset incentives and disincentives.
- The emergence of smart contracts, blockchain technology, and digital currencies. The combination of these technologies is perfectly suited to enable the rapid creation and scaling of new and existing parametric insurance products. The use of smart contracts on both public and private blockchain networks with embedded triggers and oracle integration will enable the deployment of transparent, trust-less, and scale-efficient parametric insurance products across many industries with new and speedy payment capabilities. This technology will enable both creative startups and large enterprises to compete in this market together as the cost to build, maintain, and deliver products is driven down, making it attractive to businesses of all shapes and sizes around the globe.
Travel risk is very event-driven and much of the related event information can be captured in real- or near real-time. This enables insurance producers to build insurance programmes that can be activated when events occur. This capability allows for benefits including the processing of payments at very low administration and transaction costs, reducing payment latency, reimbursing medical personnel, interacting with security services, and simultaneously communicating critical data with healthcare, transportation, and hospitality partners.
There are now over a dozen insurers and startups working on blockchain parametric travel insurance-related products including HCXI, AXA and Etherisc. We think the work to date by both startups and insurers demonstrates a real opportunity to begin re-imagining travel insurance today.