Blockchain technology, and specifically Non Fungible Tokens (“NFTs”), are a relatively new form of technology. The initial use case of blockchain stemmed from the 2007 Global Financial Crisis (“GFC”) in the form of Satoshi Nakamoto’s Bitcoin whitepaper. This subsequently went on to inspire several forks and new crypto currencies thus disrupting the traditional finance space during the 2017 decentralized finance (“Defi”) boom. Since then there have been new applications of the technology, but we are certainly early on in the road to mainstream adoption.

Ethereum has smart contract functionality which is a key ingredient for the functionality of NFTs. While most of the utility is in the experimental stage, with a huge explosion in interest during 2021, it is inevitable that there will be disruption across all industries to varying degrees.

This article focuses on the use cases within the Insurance industry. First we will review the existing challenges in the industry before covering potential solutions from NFTs and blockchain technology.

Article Outline:

• Industry Background
• Industry Challenges & Blockchain/NFT Solutions
• Real World Case Studies
• Risk Considerations
• Closing Remarks

Industry Background

The insurance sector is a highly competitive, heavily regulated industry with consumer protection being a prime focus. The GFC, driven by mortgage loans and facilitated by most stakeholders in the financial system, meant legislators increased scrutiny to mitigate systemic risk and prevent future events recurring.

The impact of the COVID-19 Pandemic saw sizeable payouts for business interruption insurance policies with astronomical liabilities being accrued as new legal precedents were set, following lengthy court cases. This caused a significant amount of stress on corporate balance sheets and large one off hits to their profit figures. According to Mckinsey, premium growth slowed (until last year) which would have exacerbated the issue and caused further adverse financial results.

The industry incurs significant losses due to fraud. According to the National Insurance Crime Bureau, fraud adds five to 10 percent onto claims for disaster policies. The Pandemic caused a drop off in the number of frauds, predominantly due to restrictions on travel and the insurance products associated with this. While certain insurance products are more susceptible to fraud than others, it is certainly rife across the industry as a whole and expected to worsen as the cost of living rises thus increasing the statistical likelihood of consumers resorting to fraud to make ends meet. This is a large challenge in driving costs down, but the benefits can be passed onto customers in the form of reduced premiums should the costs be curtailed.

The systems used are archaic and cumbersome. According to Capgemini “Over 60 percent of insurance providers find their policy administration systems out of date, expensive to run, inflexible and redundant. Market dynamics are forcing insurers to plot a course to replace these antiquated systems”.

Insurers are constantly searching for ways of innovating to enhance IT infrastructure. According to the Blackrock global insurance report, 59% of respondents (consisting of 362 senior executives across 26 markets) stated they intend to increase their technology spend on the previous year.

In the next two years, how do you anticipate changing your spending/investment in your technology and infrastructure (compared with 2020 spend)?

Blockchain can boost transparency, aid better compliance with regulations, and build excellent products and markets. It can also drive a positive change in consumer behaviour to better benefit the wider society. We will now take a look at possible solutions available to some of these industry challenges.

Industry Challenges & Blockchain / NFT Solutions

These solutions are general in nature and hence would need to be tailored to the specific type of insurance product offering, business model and size. The more complex listed insurers may require a more robust process which could take a longer lead time to implement when compared to a small insurance start-up which tends to be more agile.

Real World Cases Studies

1/ Nexus Mutual - Nexus Mutual uses the power of Ethereum so people can share risk together without the need for an insurance company. Areas the company look to cover include:

• Secure risk and potential bugs in smart contract code
• Be covered for events like DAO hacks or Parity multi-sig wallet issues
• Purchase Smart Contract Cover

While they are focusing on blockchain based cover, there are plans to expand to traditional types of insurance cover. The claim cover is put to a consensus vote as follows:

2/ Insurtech company, Ryskex helps provide insurers an easier way to assess and handle risks accurately through its blockchain-based platform.

According to Ryskex their platform “allows a global network of leading investors to take on these hard to insure emerging and systemic risks. It also enables insureds to find the appropriate coverage using our parametric risk transfer solution and hedge their risks as securitised intangible assets, which can be traded transparently and securely using blockchain technology.”

This solution offers greater transparency for both insurers and insureds while keeping administration costs low.

3/ Claimshare - Insurers pay out duplicate claims for the same loss on countless occasions. The ClaimShare platform can detect and prevent “double-dipping” across insurers without revealing any sensitive data. It is estimated that double dipping equates to $5-10 billion in fraud per year.

The platform integrates with existing insurance systems by using APIs, therefore a relatively seamless transition to using the new platform.

This diagram illustrates how the use of Claimshare amongst several insurers can prevent double dipping for the same claim:

Risk Considerations

• While this new technology could lead to a competitive edge it will likely require a reasonable level of upfront investment so insurers would need to establish whether they would benefit from first mover advantage or if they are at a smaller scale could be better off delaying until the larger listed competitors have taken the plunge.
• Sharing the right amount of data to be transparent but not too much so that it’s overwhelming. Competitive advantage may also be a consideration with regards to data being on the public blockchain.
• Education for all stakeholders involved may take time. Pitching the business proposal to investors for a budget to be approved for system implementation or providing guides for employees / policyholders on how to use the technology will consume company time and resources.
• Legal framework is not yet established with primitive regulatory guidance available. Those who adopt the technology early will benefit from first mover advantage, enhanced data but may be hindered by ambiguous regulatory frameworks and thus heightened legal costs.
• Secondary market places are available for NFTs, however ensuring the market place is appropriate for insurance products may reuire a separate, better regulated market place. This external market infrastructure may take time to implement.
  Internal infrastructure will also take time and resources to implement. While products like Claimshare seamlessly integrate with existing systems, there may be other solutions that cause slightly more disruption to BAU activities.
• As is the case with any policy being booked, there is a risk of payments to scam insurance providers or suppliers - many company use approved supplier lists as a means of mitigating this risk. The NFT’s provide the ability to verify the legitimacy of a contract. However a paying customer may not realise that the NFT they purchased was from an unverified collection and may complain upon arrival. The insurer’s reputation may be on the line and hence a compromise may be required depending on the specific circumstances. Should there be some due diligence undertaken by the secondary market places? This would need to be established between the insurer and marketplace as part of the distribution agreement.

Closing Remarks

Blockchain technology is already front of mind for many insurers with a significant number of Senior Executives ramping up their technology spend. The Blockchain Insurance Industry Initiative (“B3i”) has been growing since its inception in 2016, with 15 members collaborating to better understand the use case within the insurance industry.

While there is a key focus on blockchain tech generally, NFT use cases haven’t yet been fully considered within the insurance sector. The new form of digital asset offers numerous beneficial properties and will inevitably permeate across multiple industries to varying degrees - it will be interesting to see how it offers solutions to existing industry challenges over the coming years.

At OriginsNFT we leverage data-driven decision making, educational resources, and proprietary analytics to remain ahead of the curve with respect to blockchain tech and specifically NFTs. To find out more, please visit our website or Twitter.

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