Exclusive: Kennedys blockchain white paper – Reinventing insurance for the mobile generation

Kennedys is fast distinguishing itself as a law firm leader when it comes to blockchain. In this white paper, sent first to Legal IT Insider in the legal sector, the UK top 40 firm looks at how blockchain technology offers the potential to break down many of the structural issues that have created frictions and a lack of trust in insurance markets and gives examples of its current uses. The paper is packed with useful information from basic explanations around blockchain, to how how it can solve privacy issues, and it highlights some of the innovations taking place in the insurance sector that are relevant whether you work in the sector or not. Blockchain, Kennedys points out, is no longer about experimentation.
In the face of threats to the traditional business model and inevitably fearing their own ‘Uber moment’, insurance companies have been working to embrace a startup culture and invest in new technologies including blockchain – establishing substantial incubation and accelerator funds. These include Aviva’s £100 million venture capital fund – ‘Aviva Ventures’, AXA’s €100 million incubator – ‘Kamet’ and Allianz’s €430 million fund and incubator – ‘Allianz X’.
A number of new products have begun to emerge. Take US start-up Lemonade – a technology first and legacy-free insurance offering. Launched in September 2016 and powered by artificial intelligence and behavioral economics, Lemonade’s peer to peer (P2P) offering is based on small groups of policyholders that pay premiums into a claims pool. If there is money left in the pool at the end of the policy period, members get a refund.
Traditional insurance companies are also under threat from the likes of Google and Facebook, which have huge potential to leverage their warehouse of personal data to compete with incumbents. However, GDPR and the current political climate mean that there is a heavy focus on how data analytics are being applied – including by the likes of Facebook and Google. Step in Blockchain, which offers the potential to conduct online transactions without the need to give up control over our personal data. And rest assured, the $4.5trillion-dollar insurance market is not resting on its laurels.
Take a look at the paper (by clicking on the image above left) for a really concise summary of some of the latest blockchain initiatives, opportunities and risks, here are some of the key findings:
– One key issue blockchain can address with insurance contracts is the underlying principle of utmost good faith (uberrimae fidei). The principle means that every person who enters into a contract of insurance has a legal obligation to act with a standard of honesty greater than that usually required in most commercial contracts. It also means the insurer is required to trust they are being told the truth during disclosure by the policyholder. By contrast most other contracts are based on the principle of ‘let the buyer beware’ (caveat emptor), which means the buyer assumes the risk that a product may fail to meet expectations or have defects.
– Applying blockchain technology to contracts of insurance and personal data can be stored once to the blockchain with consumers able to control who has access. The data itself remains stored on the user’s personal device. Even then that data is often just verification data from a third party.
– Like all new technologies, there are issues and risks. Bugs in the code that supports blockchain and Smart contracts can be extremely costly. In June 2016, one third of a venture-capital fund was lost to unscrupulous users who exploited a vulnerability. During a pilot of blockchain enabled ‘Flight Delay’ insurance, decentralised insurance platform startup Etherisc allowed customers to buy insurance for past flights – thus guaranteeing a payout.
– The final big win for blockchain centres on fraud. In the UK, the ABI estimates that insurance fraud costs approximately £2.1 billion per annum. The figure for France is £3.9 billion per annum and in the USA, fraud is said to cost the industry over $80 billion a year across all insurance lines (5-10% of claims costs for US and Canadian insurers).