Sharing the Burden: How Blockchain is Enabling Peer-to-Peer Insurance Models
The traditional insurance model has served society well for decades, even centuries, but in more recent times, things are changing and they are changing at much faster rates than we have ever seen. For this change to be smooth, things need to be altered to complement each other, and this is where blockchain technology comes in. This relatively new technology has been discussed as being a huge game changer in the world of transforming peer-to-peer (P2P) insurance models.
What is Blockchain Technology?
To understand how blockchain technology is sharing the burden of peer-to-peer insurance models, we need to establish what this technology is.
Blockchain technology is an open ledger that works across a vast number of business transactions, such as through crypto and other kinds of assets and these transactions are not only verified but are renowned for being efficient, flexible, private and automated, making them more attractive options for businesses and individuals to go through.
When it comes to the insurance industry, blockchain technology applications have allowed these processes of transactions peer-to-peer to become much more efficient, where claims and cases are being financialized, processed and closed more attractively. The intimately related smart contracts provide coded logic so smart contracts and blockchain technology have merged into a reliable and powerful resource.
A good example of this is peer-to-peer insurance, a business model where individuals or economic agents join together and pool their resources for mutual aid. Coupled with blockchain technology, this model allows for the creation of a business that does not require centralised authorities and ensures an automated and trustworthy transaction environment. Instead of case-by-case claim approval through traditional underwriting, claims can be processed automatically when appropriate conditions are met. Premium payments can be facilitated via so-called digital wallets, digital escrow-type accounts storing fixed-valued exchangeable tokens.
All payments can be made using platform-specific tokens, further reducing transaction costs while ensuring that no user carries an exposure greater than the amount they put into their digital wallets. Both raining of claims and claim payments can be automatically enabled, executed, and recorded by blockchain technology. Thus, the practical need for an intermediary insurance company is removed.
Goodbye Middleman, Hello Efficiency
One of the key benefits of blockchain is that it acts as a secure and completely transparent ledger, which gets rid of the middleman. These self-executing contacts reside on the blockchain and can automate various tasks and transactions within the typical P2P insurance models. A good example of this is that the majority of smart contracts can handle claim processing and payouts based on pre-defined criteria, which explains why the need for intermediaries becomes obsolete. Making these processes more efficient and streamlining administrative processes could, in turn, reduce costs for participants.
Although these smart contracts are in place, that is not to say problems between P2P are eliminated. While the process has become smoother, there are still gaps of back and forth and complaints in place, which in turn could increase costs for participants in different sectors. While this is all hypothetical, there’s still a potential issue that could occur that needs to be addressed.
Secure and Transparent Data Management
A good bonus to blockchain technology is that it offers both a secure and transparent way to manage vast amounts of data that the average person would find overwhelming. All transaction data within the P2P insurance network is recorded on a secure and tamper-proof ledger, not to mention that it’s logged and recorded for reference forever.
This ensures transparency for everyone involved, allowing members to track their contributions, claims, and payouts in real time. There are no waits on anyone else and it’s extremely accessible for those who need it.
More Control and Autonomy
Unlike traditional insurance companies or models, the P2P model built through blockchain is decentralised. Decentralisation, simply defined, is the process of moving control from one whole organisation, whether it be the government, to smaller ones, whether that be small companies. Therefore, this essentially means giving companies more control over their insurance coverage and not leaving it all in the hands of one.
Additionally, blockchain technology can facilitate risk pooling and sharing across a wider network, preventing the need for third parties like WRS to step in. Connecting individuals with similar risk profiles, regardless of their location, can actually lead to more affordable premiums for participants.
Case Study: Lemonade
Lemonade, a US-based insurance company founded in 2015, is a prime example of how blockchain technology has been a role model for how blockchain has crushed traditional insurance models.
Back in March 2022, they turned to blockchain to protect subsistence farmers from climate change, not to mention they did this out of the kindness of their hearts. The new eco-friendly blockchain technology was able to help farmers make and receive payments with ease from their phones using both global stablecoins and local currencies.
Daniel Schreiber, the Director of the Lemonade Foundation Trust, has said, “By using a DAO (decentralised autonomous organisation) instead of a traditional insurance company, smart contracts instead of insurance policies, and oracles instead of claim professionals, we expect to harness the communal and decentralised aspects of Web3 and real-time weather data to deliver affordable and instantaneous climate insurance to the people who need it the most.”
This demonstrates that not only does blockchain within insurance have real-life applications but it can also help the best of causes.
Benefits of Blockchain for P2P
Decentralisation
This reduces the reliance on intermediaries and empowers individuals to participate directly in insurance markets.
Transparency
Blockchain provides a clear record of any and all transactions, which is essential for all processes within insurance firms.
Efficiency
Streamline processes for business while reducing administrative costs, which all go hand in hand to allow claims to be settled so much faster.
Challenges
Blockchain technology has many advantages that can be brought into P2P insurance models and everyday processes. there are also some challenges and opportunities for businesses to take advantage of. Regulatory frameworks need to adapt to accommodate this new technology, integrate it more effectively and frequently and make that transition. Additionally, building trust and establishing robust risk management are crucial.
Final Thoughts
Blockchain holds immense potential and practical applications for transforming the insurance industry, while it’s still open for interpretation about which insurance procedures this can apply to, which I am interested in seeing. As technology matures and regulations adapt, we can expect to see a rise in innovative P2P insurance models that offer greater transparency, lower costs and a more user-centric experience for policyholders.
