Ep. 141 – How can blockchain and insurance be good bedfellows? – Insights from AXA

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Laurent Benichou, is Head of Blockchain Europe & US, that sits within the Group Emerging Technologies and Data team at AXA. In this podcast we discuss the main takeaways from his experience with Fizzy and more importantly we discuss how can blockchain and insurance be good bedfellows. Laurent shares with us some of the main mistakes insurers make with blockchain but he also the main blockchain opportunities that exist in insurance.

 

What is blockchain?

In August 2018, Laurent defined on Insureblocks blockchain as:

“A blockchain is a fully distributed database. This means it has no single point of failure and no central managing authority.

Blockchain’s technical characteristics, such as its immutability and cryptographic verification, create numerous convenient features including fast and easy payments, smart contracts and the ability to indefinitely store information.”

At that time his answer was a very technical one which he believes misses the essence of what is blockchain. Today, Laurent defines blockchain as a digital system of uncensored value transfer. The winning present blockchain use cases are ones around the exchange of value, such as Bitcoin and lending with stable coins.

 

Main takeaways of Fizzy

In September 2017, AXA launched Fizzy. Fizzy is a fully automated flight delay insurance policy that runs on the Ethereum blockchain and allows customers to get indemnified as soon as they arrive to their destination. The process is fully automated, with a smart contract deciding whether customers are eligible for indemnification.

In November 2019, over 2 years after its launch AXA closed Fizzy. Laurent describes Fizzy as an opportunity to test out a new type of product based on blockchain technology. It provided his team with an incredible experience, which grabbed a lot more media attention that they had anticipated. They gained a lot knowledge during that experience on things such as: how to use a blockchain, how to handle gas fees on Ethereum, importance of auditing a smart contract, and much more.

Taking the learnings from Fizzy, Laurent has the following top tips for aspiring blockchain projects:

  • It’s always easier to convince people with a functioning proof of concept than with a PowerPoint.
  • Never underestimate the cost and complexity of distribution especially when it comes to a B2B to B2C model.
  • All new digital services need to be API and mobile first

 

Does blockchain and insurance make bad bedfellows?

On the 24th of August 2020, Laurent wrote on Medium an article entitled “Navigating blockchain opportunities in insurance”. The first line of his article states:

Unifying Insurance and Blockchain has so far been the most difficult task of my entire career”.

Laurent believes that insurance can play a part in protecting the crypto sector. He also believes that at their core both blockchain and insurance share a common element together which is about the exchange of value. However, they both tackle this common element in very different ways. Because of that difference it can be very difficult for them to work together in spite of the benefits blockchain can provide to insurance and insurance to blockchain. He is hopeful that the two will be able to work together.

In the article Laurent lists out some mistakes he has witnessed while seeing “Blockchain projects” being developed, boosted or stopped in the insurance industry:

  1. Blockchain with or without tokens
  2. Add blockchain but leave the rest unchanged
  3. Ignoring the most obvious opportunities
  4. Refuse cryptocurrencies their status of financial assets
  5. Assume you can catch up later

 

Mistake 1: Blockchain with or without tokens?

Most insurers look at blockchain and decided to focus on the technology without looking at the tokens themselves.

Looking at blockchain technology without the tokens is minimising the number of total use cases you could look at. Laurent gives the example of using blockchain to track a container of rice through an audit trail and a system of signatures. This has some level of use even without a token. However, if you were to tokenise the container of rice you could for example add instant payment to transfer the value of the container of rice. In addition, the value received for that container of rice could be used as a collateral for a loan. Tokens open up new possibilities in terms of financial services. That is why for Laurent, the most revolutionary use cases out of blockchain are the ones that includes tokens in public blockchains.

B3i’s work that focuses on streamlining money streams between insurers and reinsurers is confidential information and thus shouldn’t happen on public blockchains. Most of the work that insurers do on blockchain is related to B3i or Risk Stream Collaborative that requires scalability and speed which public blockchain isn’t quite right for them.

However, Laurent, believes that when use cases come out that involves the retail customer there will be a need to evaluate tokens and public blockchains.

 

Mistake 2: Add blockchain but leave the rest unchanged

Laurent reminds us that blockchain is not magic and when you consider using it you have to ask yourself the question of do you want to plug into it or do you wish to replace your existing system with it. Whether it is blockchain or the cloud when it came out, disruptive technologies have a range of problems regards compliance, security and other issues.

As insurance works in a regulated industry Laurent believes that it is best to plug blockchain into an existing system rather than starting fresh with blockchain.

With regards to the point of not just connecting to legacy technology but to legacy culture, Laurent believes that legacy culture can help to stress test ideas. Additionally, if your idea is fact based and there is a culture of change management within your incumbent then legacy culture will not prevent you from doing the right project.

 

Mistake 3: Ignoring the most obvious opportunities

The insurance industry should appreciate that the most immediate opportunities are not related to how crypto can support insurance but how insurance can support crypto. The cryptocurrency sector is a multi-billion dollar industry where a number of insurance products can be designed from insurance of wallets to insurance of custodians to insurance of smart contracts and many other opportunities.

Decentralised insurance might the future of insurance or it might not be. Initiatives like the ones from Nexus Mutual, regarding decentralised insurance, provide the insurance industry with some great learnings.

With regards to what role regulators can play, Laurent believes that regulators can help institutional investors better understand the crypto space which can ultimately help the retail sector to get active in that space too.

 

Mistake 4: Refuse cryptocurrencies their status of financial assets

According to Laurent, institutional investors are now seeing Bitcoin as the equivalent of digital gold. The Financial Times reports “2020: The year Bitcoin went institutional”. Institutional investors know that Bitcoin is an asset, not only to store value, but also to increase the return of a portfolio for the same level of risk. In a difficult year like 2020 which has been plagued with quantitative easing, the pandemic high levels of state debt, having crypto assets within an institutional investor’s portfolio can help protect that portfolio’s value. That is why companies like Fidelity have launched Fidelity Digital Assets to provide crypto services to institutions.

Insurers aren’t yet investing in crypto currencies yet but Laurent isn’t ruling out the fact that it could happen in the future.

 

Mistake 5: Assume you can catch up later

Laurent believes that siting on the sidelines regarding blockchain is a dangerous game: “if you say, Okay, I’m on the sideline, and I’m going to be the first follower, because I don’t want to be the first one, the pioneer, and then have the problems of the pioneer and so on. At some point, you may realise that you’re not the first follower at all, you are one of the last followers.”

Blockchain solutions have the potential to be very disruptive, which means if you sit on the sideline for too long blockchain may have completly changed your value chain and disintermediated you.

Thus, it is important for incumbents to be constantly testing out new solutions so if a paradigm shift happens in the value chain you will have something to offer.

 

Blockchain opportunities in insurance

There are a number of blockchain opportunities within insurance. Laurent names the following ones:

  1. New insurance opportunities: insuring the crypto world
  2. New investment opportunity: hedge against fiat fall
  3. Reshaping insurance and finance
  4. Process opportunity: more timestamping in insurance processes

 

Opportunity 1: New insurance opportunities: insuring the crypto world

The problem and advantage of cryptocurrencies is the lack of a central party. It can be a problem because if your money gets stolen in the crypto world there isn’t a bank to go to, to help you resolve the problem and reimburse you your money. What cryptocurrencies need is security. This is provided by solutions such as experienced custodians and hardware wallets to name a few. However, you can’t rule out the fact that at some point somebody may be able to steal your cryptocurrencies. This is where insurance can become interesting because it could provide a complimentary layer of protection that security solutions cannot bring but that insurers can bring.

Insurers can insure investors cryptocurrencies to the dollar value of that cryptocurrency no matter what happens to their wallet.

 

Opportunity 2: New investment opportunity: hedge against fiat fall

The COVID pandemic has put states in very high levels of debts with increased usage of quantitative easing. The expected post-COVID economic recession combined with sharp quantitative easing might lead to episodes of hyperinflation, potentially boosted by investor defiance towards sovereign and corporate debt.

As we increasingly live in a digital world so does the risk of cyber attacks. When you look at all those risks together then you could foresee a potentially very difficult economic situation. Hedging against a fiat fall with investment in Bitcoin could be a useful store of value in the future.

 

Opportunity 3: Reshaping insurance and finance

The idea that insurance can only be provided by insurers is more and more disputed by new technology and digital disrupters. Traditional barriers to entry to the insurance sector are falling: actuarial expertise is challenged by new armies of data scientists, claims management is becoming useless with parametric insurance and IoT, public smart contracts eliminate the need to trust a big financial brand on the promise of a future payment, capital can be accumulated through liquidity pools and regulation is becoming irrelevant and powerless to regulate decentralized protocols and money flows. Under this new context, the insurance sector has to reinvent itself, disrupt itself before being disrupted, and find new areas where it can bring value.

A number of new entrants have entered in sectors that insurers could have played a role. For example being an oracle (Chainlink), being a custodian (BitGo), insuring exchanges (Binance’s SAFU), inventing distributed insurance protocols (Etherisc), creating decentralized liquidity pools (Uniswap), insuring DeFi / hedging in DeFi (Nexus Mutual).

Insurers should start researching in all of those sectors to determine which ones they should explore investing in.

 

Opportunity 5: Process opportunity: more timestamping in insurance processes

In insurance processes like a claims process or an underwriting process there are tools that assigns tasks to individuals that don’t always require a signature for that task. This creates scenarios were you’re not 100% sure whether someone has done or not done the task and if they were authorised to do it. This isn’t always exposed to the retail customer.

The opportunity with blockchain is to have audit trails with signatures that are completely exposed to customers. For example, a car crash claims process can have the necessary audit trails from the moment the claims process was started all the way to the payment with all steps being time stamped, provable and digitally signed.

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