In this week’s episode we will look into how blockchain can reinvent the insurance value chain. Our guest is Risto Rossar, founder of Black Insurance. Risto has over 20 years experience in the insurance industry, having worked in insurance before launchingfive insurtech startups. Now he is focusing on Black, a blockchain-enabled, decentralised insurance marketplace.
Blockchain in two minutes
Risto focuses on blockchain’s value proposition, which he believes lies in replacing central authority bodies. Potential candidates include central and traditional banks, government branches, courts and (of course) insurance companies.
Blockchain does have a broader range of uses. However, Risto supports that other technologies can achieve these just as well and it is important to ensure the positive aspects of blockchain outweighthe challenges it entails.
Risto had been exploring how technology can improve the insurance industry long beforeblockchain. In 2001 he created one of the first online insurance brokers, IIZI, which became the biggest insurance broker in the baltic states. Through this he realised insurance brokers are not particularly scalable, so Risto launched Insly to help them become digital. Inslyadapted IIZI’s successful technology, sellingit as a software solution to over 300 insurance companies and intermediaries in 40 different countries.
Launching his owninsurance brokering business and providing IT solutions to over 300 other brokers around the worldled Risto to blockchain and ultimately founding Black Insurance.
The insurance value chain
Risto’s multifaceted experience covers the consumer and brokering perspectives, as well as providing software solutions to brokers worldwide. He is happy to share what he has learned through his journey about the state of the insurance value chain.
1. The industry’s strengths and weaknesses
The main strength of the insurance industry is that it is dominated by big insurance companies, offering certainty and stability in the insurance market. This is reinforcedby a strong regulatory regime, aimed at protecting consumers.
These qualities, however,also contribute to theindustry’s weaknesses. The strict regulations create high barriers to entry, maintaining an oligopoly and working to the advantage of the biggest and bettercapitalised insurers. This not only leads to higher premiumsbutitis also a source of systemic risk, meaning that the problems of the biggerinsurance companies can quickly spread across the market.
Another problem facing the insurance industry is the lack of innovation, withbig insurance companies beingvery slow to innovate. This is exacerbated by the fact smaller startups, whether they are brokers, agents or MGAs, do not control the product. It is the large insurance companies that control the product, limiting the opportunities smaller companies have to innovate.
2. What can blockchain bring
Risto believes that, from a technical perspective, today’s insurance industry does not need blockchain. Blockchain’s real strengthis its abilityto get rid of the trusted third party. Everything else can be done with existing technologies. It is important, therefore, for companies to consider if blockchain is the best way to implement futureprojects or if existing technologies are better suited.
From a broader perspective, blockchain is still adding value to theinsurance industry. Blockchain has been a catalyst for innovation, with the whole insurance value chain exploring different blockchain applications. While many of these projects could have been implemented without it, it is blockchain that spurred action and made them a reality.
AXA’s blockchain-based flight delay insurance, Fizzy, (which features in a previous episode) offers a good example. While it is a great product, Risto believes blockchain was not necessary. While the smart contract ensures customers do not need to trust AXA, they still need to trust the implementing code. Additionally, with the maximum payout being 500 euros, there is arguably no trust issue to begin with. Consumers would have trusted AXA even if it used a traditional database to pay claims automatically. Nevertheless, sincenobody tried to implement automatic flight delay compensation before, the blockchain implementation is still an important step forward.
3.Embracing blockchain: incumbents
The insurance industry is approaching blockchain in two different ways. On the one hand we haveinsurtechs, which are fullyembracingblockchain to provide innovative solutions and services.Incumbents, on the other hand,are taking more timid steps. Their focus inon figuring blockchain out, aiming formore incremental benefits. Risto believes that this is the right approach.There is no point for large insurance companies to heavily use blockchain within their IT systems.
To illustrate his argument, Risto draws our attention to Paul Krugman’s column, in which he criticises cryptocurrencies and says “fiat currencies have underlying value because men with guns say they do”. Traditional insurance companies already add value in a tangible and pragmatic way.Risto argues that a traditional insurance company on a blockchain is an oxymoron, since the they are two fundamentally different things.
Despite that, blockchain technology keeps getting better. Blockchain platforms, such as R3’s Corda, are constantly improving. Thenegative aspects of blockchain, such as transaction costs and a lack of scalability, are also quickly vanishing. This means it is reasonable to use blockchain even if there are no underlying trust issues.
The question then becomeswhich technologyis better overall. While a traditionalinsurer’s central business model should not be based on blockchain,many projects and servicescan be implemented on blockchain as well. This will also benefit the industry as a whole by promoting innovation.
4. Embracing blockchain: insurtechs
Risto recalls atime when insurance companies had a strong no cloud policy. It used to bevery difficult to sell cloud-based policy administration software to the insuranceindustry. However, the industry has now moved forward.
The same line of reasoning applies to blockchain. The insurance industry is gradually becoming more favourable towards blockchain, with insurers developing an open mind about examining how blockchain can improve their business. This makes life easier for many blockchain-focusedstartups as well, creating business and promoting innovation. Risto points out it is important for startups towork together with traditional insurers. It is not a zerosum game andtraditional insurance companies continue to play an instrumental role in the market.
Even the hype surrounding blockchain has something of value to add to the industry. Widespread adoption and experimentation helps solidify new technologies.Even ifmany startups are utilising blockchain merely because it is a buzzword, they do help further develop blockchain and figure out potential use cases.
Black Insurance is in the process of establishing a blockchain platform aiming to decentralise and democratise the insurance industry.
1. New value chain
Both through his experience with IIZI and by supporting over 300 other brokers, Risto noticed the current system is unnecessarily difficult towards brokers. It is very challengingfor brokers and MGAs to create new products and to find capacity for existing ones.
This stems from the difficulty in working with traditional insurance companies, which is what Black’s platform tries to solve. The Black platform draws inspiration from the Lloyd’s of London model, enhanced by blockchain.
One the one side of the platform are the brokers. When a broker lists their product, the platform provides a complete description of their business plan including elements such as the product, market strategy, sales volume and profitability.
On the otherside of the platform are syndicates of insurance professionals. The syndicates manage funds on behalf of investors. They also raise money in the form of ICOs. This involves selling Black security tokens, with each token representing one syndicate. The money raised by the ICO forms the insurance solvency capital. Then, the syndicate managers pick the products they want to invest that money in. Black then provides them the necessary licence and the marketplace to operate in.
With all the building blocks in place, brokers can sell their insurance products or even create their own virtual insurance company. When the products are profitable the whole value chain profits, including brokers, syndicates and investors.
2. The role of blockchain
Looking at Risto’s views on blockchain, we askedif blockchain was necessary to implement Black’s platform. After pointing our attention to another immutable technology implementing Lloyd’s (paper), Risto explained that blockchain offers the perfect toolkit to adapt the Lloyd’s model.
There are many marketplaces, such as Uberor AirBnb, that offer automaticpayments withoutblockchain. However, blockchain allows the use of tokens, the main reason Black is on blockchain. The tokens, which are sold to investors to fund the risk pool, are very easy to trade and do not require high levels of investment. They actlike perpetual bonds whose interest rate is connected to the profitability of their respective insurance portfolios.
This is what is known as the tokenisation of insurance capital. Stakeholders canconnect capital markets in a very trustworthy manner without the need of any trusted third parties involved in the insurance portfolios and the Black platform in general. As Risto points out,Black is creating a completely new asset class, offering the option to invest into financial instruments whose reward is determined by the insurance portfolio’s profitability. All the pieces fit together perfectly and blockchain is the glue that holds it alltogether.
3. Democratising the insurance industry
Black’s platform also works to democratise the way insurance works. It workssimilar to a crowd cube, as investors can fund products that would otherwise be difficult for brokers and MGAs to find access to capacity.
The addition of insurance syndicates also takes care of the issue of asymmetricinformation between brokers and investors. The syndicates’ expertise ensures the risk pool is deployed efficiently, acting as investment managers and engendering trust in the platform. Risto points out that, in a way, Lloyd’s is also a crowd funding platform, albeit occupied mostly by institutional investors. Historically, though, names were private individuals.
4. Black’s journey
Black has made significant progress in the ten months since the first seed idea. Brokers have shown a huge interest, with over $300 million of gross written premiums signed up to the platform.
On the technical side, Black is in talks with several strategic partners in the insurance industry to go to market more quickly. Black is also working with the Italian Technical University and several crypto experts to ensurethe platform works perfectly. Presently, Black’s most important goal is to start the next funding round and move on to execution. If you want to find out more about Black Insurance, check out their whitepaper or lightpaper.
Risto provided some fresh perspective on blockchain, both on the value it brings to the insurance industry and about how Black is using blockchain to revolutionise the insurance value chain.
If you liked this episode please do review it on iTunes – your reviews make a huge difference. If you have any comments or suggestions on how we could improve, please don’t hesitate to add a comment below. If you’d like to ask Risto a question, feel free to add a comment below and we’ll get him over to our site to answer your questions.
Thank you Risto!
2 comments on Ep. 29 – Re-inventing the Insurance Value Chain with Blockchain
Great interview Walid, I think this was one of the most refreshing takes on the insurance industry today. I especially liked the candid conversation on the value of blockchains in insurance and how Risto believes it only solves a very specific problem. Keep them coming!
Many thanks for your kind words Ben. Please don’t hesitate to let me know if there are any subjects you’d like for us to tackle.