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INDUSTRY
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Banking
Banking on purpose-led ecosystems
SOLUTIONS
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Cyber Insurance
Reinventing the Insurance Industry with a Digital-first Strategy
Highlights
- The insurance industry is vulnerable to hacking and other exploits by cyber criminals, but Web3 can help reduce risks and build customer trust.
- Web3 enables decentralized technologies such as blockchain, which enables “smart contracts” and other emerging capabilities.
- Blockchain in Web3 insurance can reap huge benefits for users and will disrupt the product development value chain.
In this article
Impact of Web3
Web3 insurance denotes the use of web3-enabled technologies, such as blockchain and crypto-backed and smart contracts, in creating insurance products.
With the advent of Web3 – the third generation of World Wide Web technology – blockchain technologies, smart contracts, and new ways to transfer the risk via decentralized technologies are coming onto the market. This has profound implications for the insurance industry.
While Web3 is still new and its potential is yet to be fully explored, the technology is already part of the industry. Web3 insurance is already an accepted term—it denotes the use of Web3-enabled technologies, such as blockchain, smart contracts, decentralized applications that run on a blockchain network rather than on a single computer, and crypto-backed financing, in creating insurance products.
Insurers need to learn about technologies such as blockchain, evaluate what they can do for their business, and leverage them to build new products or services or enhance existing ones.
Yes, Web3 is set to disrupt the insurance value chain. Let’s see how. But first, the advantages
The Web3 advantages
Web3 technology brings several benefits to the insurance industry.
- Transparency: An insurance contract is built on trust and faith. A customer needs confidence that the insurer will fulfill the contract. Blockchain technology enables transparency, reducing customer worry about the credibility of an insurer.
- Ownership: Traditionally, only the insurance company has the authority to create a contract. Blockchain contracts provide ownership to the community that shares the blockchain.
- Governance: Blockchain protocols are used to govern the blockchain network.
- Smart contracts: These are simple programs stored on a blockchain that run when predetermined conditions are met.
- Decentralized autonomous organizations: Part of a blockchain network, these are emerging as legal structures with no central governing body but whose members share a common goal to act in the best interest of the entities.
- Decentralized applications: Running on a blockchain or peer-to-peer network of computers instead of a single computer, these are free from the control of a single authority and allow participants of the network to build on it.
Insurers can use these features to create new products and policies, prevent exploitation during contract exchange, and reduce the likelihood of contracts being hacked.
Whenever there is an instance, insurers can automate claim processing and payment processing, drastically reducing the possibility of disputes between the insured and insurer. As per a crypto research report, automation reduces the insurer’s operation costs by 25%, while also reducing the chances of fraudulent claims.
Also, there is an option for customers to purchase insurance from a platform, that is, a group of coverage providers, rather than from a single insurer.
Web3 products
Some insurers have already embraced Web 3 technologies and there are already a few Web 3 insurance products in the market.
Crypto-currency wallet insurance: This covers protection against theft of crypto-currency during a cyber-attack.
Collateral protection for crypto-backed loans: In crypto-backed financing where crypto holdings are used as collateral when a loan is processed, the borrower must pledge collateral with a greater value than the amount borrowed. Hence, there is a need for providing coverage to the collateral pledged by the borrower. Collateral protection coverage reduces the risk for the borrower and lender involved.
Smart contract cover: This coverage helps the insurer in the event of a smart contract getting hacked and funds being fraudulently moved from one account to another. For example, the funds might get moved to an email address that doesn’t belong to the original investor. So, this type of coverage protects against any permanent loss.
Data monetization for on-chain insurance products: Web3 insurance products require high-quality, trusted sources of data for any type of smart contract. This is to ensure that the underlying infrastructure is secured from any threat. Any data provider can monetize Web APIs and sell the data to blockchain applications.
Leveraging the Web3 features listed above, insurers can optimize their operations, provide efficient services, and build new avenues of growth.
Web3 - Moving ahead
An opportunity for insurers to reimagine their business.
Investors and businesses who want to participate in the Web3 ecosystem face significant risks, both financial and non-financial. These risks represent a commercial opportunity for insurers, assuming that they can be managed prudently. Currently, the market is underinsured (less than 1% of digital assets are insured) and there is room for growth with increased adoption. The ability to access insurance may also contribute to the widespread adoption of digital assets.
Web3 offers the potential to transform the insurance industry. It gives insurers the opportunity to reimagine their business models and introduce new forms of mutual funds or platforms. Companies do not need to restrict themselves to replicating traditional insurance in a Web3 context.
Figure 1: Insurance Block Chain & Web3
A figure depicting the ten reasons, such as strategy, efficiency, innovation, perception, partnerships, competition, service, trust, equity, and adoption, that impact insurance blockchain and web3.
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