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FOR INSURANCE
Reimagining the Bond of Trust
One of the worlds oldest financial products and the $5tn industry
that powers it may be in for change. In this CoinDesk Research
report, we explore how blockchain technology is being used to
enhance insurance services and products potentially altering
forever how they are accessed and delivered.
REPORT
www.coindesk.com
Blockchains for Insurance
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Blockchains for Insurance
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Blockchains for Insurance
From this bond, trust is created, with many more Digital and paper-based systems of record
useful and specific promises to pay evolving are how relationships in the bond of trust are
from there. Death, injury, loss and other hazards secured today. But blockchains are changing
can all trigger an eventual insurance payment. how data is disclosed, claims are managed,
Because verbal commitments can be easily capital is used for underwriting, and how
made, broken or forgotten, a vast paper-based payments are made through automating
records network evolved what we today business logic. These developments create new
recognize as the insurance industry. data points, secure valuable digital interactions,
and create new products and platforms that are
Accountability and auditability are two tools possible with smart legal code.
that shaped the industry. These two tools have
been used to secure relationships between all These innovations hint at major change to
the parties involved in the insurance industrys the bond of trust that is the foundation of the
bond of trust. This has meant measuring risk insurance industry.
while keeping score of who owes what to whom
and how good these parties are at delivering on After all, insurance is an intangible asset. It is
promises made. Insurance adjusters, brokers, not a physical thing, consumers are buying a
actuaries, underwriters, capital managers and a risk managed outcome. Relationships manage
host of other professionals and clerical workers these outcomes. Blockchain technology is
hold tight to deliver this bond of trust. tightening and digitizing the ties that bind the
trust used to sell risk managed outcomes. If the
Trust happens to be what blockchain technology startups and incumbents are able to realize the
is all about. goals discussed in this report, the relationships
underlying the bonds of trust themselves may
In the case of bitcoin (and in reaction to the change.
2008 financial crisis), an unknown developer
or developer group going by the name Satoshi For this reason, many of the over 30 companies
Nakamoto released a white paper describing and startups featured in this report believe there
how a chain of blocks could be used to create will be a revolution in the industry.
digital ownership through a protocol that would
decentralize authorization and authentication.
The result is the unique combination of
technologies and cryptography we call a
blockchain today.
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5 1
PROMISE TO PAY
4 2
BOND OF TRUST
P&C Insurance
Today: Insurance adjusters primarily use manual and physical processes.
Blockchain: Insurance adjusters gain new cryptographically secure data points to
investigate fraud.
Title Insurance
Today: Art authentications and land title searches require expensive professional
services.
Blockchain: Title holders have access to new inexpensive authentication tools.
Sharing Economy
Today: Brokers sell personal and commercial insurance policies separately.
Blockchain: Brokers are sidestepped with dynamic premium offerings processed
from high state of change.
Risk Modelling
Today: Actuaries provide risk data points for all of those involved in the industry.
Blockchain: Actuarial sciences are disintermediated by prediction markets.
Blockchains for Insurance
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Blockchains for Insurance
But the story of blockchain tech in insurance So, a person with knowledge of a secret (a private
begins with a U-turn on this evangelical push. key), can decrypt a hash and discover the original
Using the cryptography upon which blockchains file. Hashes can be used to establish a digitally
are built, entrepreneurs are leveraging these new unique identity that can bridge the physical
secret-keeping tools to fight insurance fraud. and digital world, providing a reference point to
Using these cryptographic tools, physical items confirm physical identity. An item with a unique
can be authenticated in the digital world. private key can correspond to one hash stored
in a network. Startups are working on property
The effect ties the physical item to the digital and title insurance by tokenizing high value
world. It creates a reference that ensures the physical items. They are putting what are called
physical item is the unique item it is purported to digital fingerprints for these physical items into
be. blockchains, there to be read at any time, forever
without unnoted amendment or change, while
Tying a physical item to a blockchain for keeping track of who has looked at them.
identification using cryptographic tools could
prove to be a powerful tool to fight insurance
fraud.
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Blockchains for Insurance
address insurance
fraud:
1. A high-value item is
created and a digital
fingerprint is issued by a INPUT DATA INPUT DATA INPUT DATA
trusted entity, which acts
to authenticate its point of
origin.
0100001
1110010
0101011
#
sha256Hash
1101011
1010010
0101011
Function
1111011
0010010
0001011
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Blockchains for Insurance
Output Data
Private Key
3. A high value item can then be checked against its hash through an associated private key.
This has the effect of binding the physical item to the digital world for reference.
+ =
0100001
1110010
0101011
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Blockchains for Insurance
Heres a look at the full orchestration of the tech and business model:
Attempts
to Sell
Authentication
Notifies Request
Producer, Creator,
Manufacturer
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Blockchains for Insurance
Everledger
Everledger provides a perfect (and often-cited)
illustration of how this approach works.
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Blockchains for Insurance
Art
As a sign of its willingness to enter new markets, built by expensive specialist investigators and
Everledger invested in Vastari in 2016, an online appraisers, and premiums are increasing as
marketplace that connects private art collectors high-profile art forgery cases are made public,
with museums for exhibition deals. Vastari is bringing more risk for insurers.
also a startup, it completed a funding round in
January 2016 that valued the company at $2.3m. The largest defective art title case in US history
was recently uncovered, where counterfeit art
The companys product will write information was sold for $80m over a period of 15 years. The
about works of art into bitcoins blockchain, discovery led to the bankruptcy of Knoedler, the
as well as their own private blockchain. oldest and most prestigious art dealer in New
Everledgers plan is to make each art institution a York City.
separate node on its blockchain so that they can
be complicit in adding counterfeit security and As forgeries become more difficult to detect,
insurance to the market. the competition amongst the niche insurers is
growing. It is within this competitive landscape
The goal of Everledgers work with Vastari is not that Vastari, Trace and several other businesses
quite the same as its work with diamonds from are seeking to operate.
an insurance perspective. Diamonds are a part of
line-item insurance. For high-value items where Mohamad el Boudi, founder of Trace, aims to
the history of the creation of the item is important, use blockchains to help art dealers and galleries
such as with art, there is another insurance keep track of their collections and protect
product consumers buy: title insurance. against counterfeits. His goal is to create a
certification system for artwork that allows it to
Title insurance covers a buyer when an be tracked from the original artist all the way to
artwork is stolen before it was purchased, or the successive sellers. This would eliminate the
is a counterfeit, rendering the title defective. need for the specialized and expensive work of
In the art world, it is a niche insurance product art forgery investigators.
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Blockchains for Insurance
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Blockchains for Insurance
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Blockchains for Insurance
SafeShare Global is a startup looking to fill this When would we know our financial system is
market gap in insurance products tailored for the working? The commercial think tank started in the
sharing economy. For one particular new 1990s, giving it a head start and allowing Z/Yen to
product, the company has partnered with another embrace the blockchain revolution at full speed.
startup, Vrumi, to create the first blockchain They have already developed several interesting
insurance solution for this growing sector. projects that span multiple partnerships within the
insurance industry.
London-based Vrumi is a network that connects
professionals who need work space with Z/Yens work with SafeShare involves
individuals who have rooms to spare in private a timestamp. No centralized authority can
homes. Basically, a person leaves their home manipulate how the timestamps are authorized,
and goes to work while someone else arrives creating an automated network able to handle
and works from that persons home. the state change recording and broadcasting
required to power insurance for the sharing
Unlike AirBnB, Vrumi chose to avoid developing economy. So, SafeShare, Vrumi and their
customers can track when a home
an umbrella insurance offering with its attendant
is a home and when it is an office and what
risk. Instead, it started a partnership with
insurance premiums apply when. The timestamp
SafeShare Global.
is already in commercial use.
SafeShares technology comes from Z/Yen
Lloyds of London, an insurance market
Group, a London-based commercial think tank,
of brokers and underwriters, has found
venture firm and consultancy with a long history
this timestamp credible enough to offer to
with ideas similar to blockchain technology. Its
underwrite insurance contracts using it. Using
founder, Michael Mainelli, has a bright and active
SafeShares timestamp, Lloyds 24-hour opt-in
mind. So bright and active, in fact, that it turns underwriting contracts are enabled.
out that for the last 20 years, he and Z/Yen have
been building something akin to permissioned, Mainelli explained Z/Yens partnership with
cryptocurrency-less blockchains. SafeShare and what the implications for the
future of the insurance industry may be:
Mainelli, who has built over 200 cryptographic
shared ledger systems, described the The instantaneous speed of
relationship of Z/Yens approach and bitcoins verification for coverage via a
blockchain: distributed ledger will allow insurance
to be obtained on an ad-hoc basis by
Its not a consensus system. Its woven the user, rather than having the liability
broadcasting. Theres no mining, but solely with the service provider, he
you get what you want: an irrefutable said. Removing the need for funds to
evidence trail. be transferred through a network of
payments will likely decrease frictional
Z/Yen arrived at blockchains through a guiding costs and ultimately reduce the price
philosophical focus: to answer the larger question, of coverage.
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Blockchains for Insurance
The ad-hoc basis is what is so disruptive, as Individuals might bet on natural disaster,
much of the industry is based on annuities death of an essential leader, election
or annual payments. The entire client-broker of a ridiculous leader, industry-killing
relationship revolved around the ceremony technological innovations, crippling
of signing the annual coverage contract. regulatory activities, pandemic, disruptive
By eliminating the business practice of weather or other harmful events. Many
corporate boards have already signed legal
purchasing insurance on a yearly basis, the
commitments to reduce/hedge the above
relationship between the insurer and insured
risks to the greatest extent of their ability.
is being rewritten, allowing for dynamic Any hedging would thicken the market and
premium adjustments based on more specific draw in profit-seeking speculators, who
circumstances and slices of time. would produce actuarially fair prices as
they competed against each other.
The models currently used are built by Sztorc said that prediction markets themselves
actuarial scientists. But, the use of blockchain create the insurance product. What that means
technology for prediction markets may change in the context of this report is that the bond of
the relationship between risk modeling and trust that makes up the insurance industry would
underwriting, completely flattening the bond of be flattened. The pentagon of participants in
trust into a simple marketplace. the bond of trust would no longer exist or need
to exist, as the prediction marketplace would
deliver an efficient product that protected
Prediction Markets consumers according to their specific needs.
While this report will look closer at Bloq, Sztorc is also realistic about the true limits of such a
one of the more interesting startups in the revolution: People do not like the accuracy this
blockchain world, Bloqs chief economist, coder information can communicate. The hurdles to
and statistician Paul Sztorc, has been prolific such a change happening to the insurance industry
at sharing his insights about the potential for are not limited to technology. And, for change to
predictions markets. He spends more time happen, millions of users would need to be
commenting on prediction markets on YouTube involved in the market for it to reach a useful scale.
and in writing than anyone in the world.
As difficult as that seems, one ethereum
His own explanation of prediction markets is a application is already showing signs that
helpful description of how they work: prediction markets could be built to this scale.
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Blockchains for Insurance
Augur
Augur is a prediction market platform that
rewards a user for correctly predicting future
events by allowing them to purchase and
sell shares in the outcome of these events.
Essentially, people can bet on what outcomes
they think are likely or unlikely.
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Claims Management
Wholesale Insurance
Today: Bespoke insurance products involve complex agreements between
the insured and many specialized parties.
Blockchain: Shared systems of record simplify the cost to create and coordi-
nate bespoke and specialized insurance products.