Blockchain and Insurance: Parametric Insurance and Oracles Network


#1

Hello everyone,

If you look at my validator intro, you will notice that I am an insurance guy. I believe that blockchain technology will play a critical role in the insurance industry sooner than most people realize. I also believe that the Oracles Network has the potential to be an early role player, if not a critical role player, in facilitating adoption of blockchain technology in the insurance industry. I want to highlight a few areas of opportunity for blockchain technology in the insurance industry and discuss the benefits that the Oracles Network can bring to the table. Today, I want to discuss:

Parametric Insurance

Parametric insurance is a type of insurance that makes a specific payment whenever a certain condition, often called a triggering event, is met. Insurers like parametric insurance because it eliminates some of the administrative work involved like the claims handling process where claims adjusters determine if a claim should be paid and what the value of the claim is. If you ever filed an auto claim or a homeowner’s claim, you might remember it being a long drawn out process with annoying paperwork involved. Well, parametric insurance mitigates this by automating the process, which also had the added benefit of reducing fraud. This saves time and reduces costs for the insurer. Blockchain can help expand parametric service by automating the process entirely, which further drives costs down for insurers and can drive down premiums for everyone as well. AXA Fizzy’s smart insurance for delayed flights is a great example of parametric insurance utilizing Ethereum smart contracts today. Eventually, insurance data and technology may push a majority of insurance towards parametric insurance. Can you imagine a reality where the moment you car is rear ended, it transmits data to your insurer and you receive a claim payment automatically and shortly after? It might be our reality, and blockchain is critical to making this reality come true.

Where Does Oracles Network Fit In?

As I mentioned above, AXA Fizzy is already using Ethereum Smart Contracts to automate most of the delayed flight insurance process. This is great for AXA as it reduces costs, but it could be better. Right now, Ethereum transactions can sometimes lack consistency (imagine if you want to purchase a policy but the transaction is delayed by a slew of ICOs all happening on the same day) and don’t scale very well, which sometimes drives up the costs of transactions. As you can imagine, these can both be critical issues when the entire point of parametric insurance on a blockchain is to consistently reduce costs and to consistently save time (imagine all of the customer support calls when transactions are delayed and people are expecting instantaneous results). Despite this, insurers are still racing to research and adopt blockchain. Just imagine if these issues could be solved! Well, Oracles Network might be the answer. The Oracles Network deviates from Ethereum with its Proof of Authority (PoA) consensus, which aims to be more consistent and cheaper than the Proof of Work (PoW) consensus mechanism used by Ethereum (the Oracles Network team FAQ describes the PoA consensus very well!). Oracles Network also builds upon the Ethereum protocol, which means that the smart contracts that companies like AXA are using will be compatible on the Oracles Network as well! So, if it’s easy to deploy the same program on the Oracles Network, and it is cheaper/more consistent to deploy it on the Oracles Network as well, why wouldn’t insurers want to? I believe that they will, and it’s just a matter of time.

Thanks everyone! Feel free to ask questions, and if anyone is interested, I will continue releasing more. There are many more areas of insurance where blockchain is making a huge difference!


#2

Great writeup, thanks.


#3

I wanted to make another post as a follow-up to my last post.

So let’s take a look into a future where insurers begin to use blockchain to issue parametric insurance policies. Insurers are beginning to reap the benefits of blockchain technology. Not only have they saved money by automating the insurance process, they also are saving money by reducing fraud! However, it might be too idealistic to assume that fraud will disappear entirely. Instead, I think we will see a different kind of fraud which will necessitate:

Fraud Registries on the Blockchain

Data needs to flow to smart contracts in order for our parametric insurance policies to identify when a triggering event has occurred. Unfortunately, this flow of data might be viewed as a point of attack for those looking to commit fraud. What if a group uses false identities to purchase an insurance policy and uses cyber attacks to tamper with the data source? They could cause the smart contract to automatically payout without the triggering event actually occurring.

What can insurers do in this situation? They could work together to build an on-chain fraud registry. Insurers would enter fraud-related data into the registry, and they can upload this data into smart contracts, which can then be used to automatically flag fraudulent claims. However, we do not want the fraud registries to exist on public blockchains where everyone can view them. Putting them on public blockchains could reveal people’s personal information and would ensure that bad actors know which data not to use. Instead, insurers could use a private, local blockchain network to share fraud-related data, but now we are introducing a second blockchain network, which means additional costs. Insurers will want to mitigate these costs if possible, which will require the private, local blockchain network to be similar in nature (helps ensure minimal learning curve and resource expenditure) and easy to deploy.

Where Does Oracles Network Fit In?

If you haven’t read the Oracles Network team’s article on Horizontal Scalability via Connected PoA Networks, I recommend giving it a read. To quote the Oracles Network team: “Similar nature of networks allows connectivity, seamless value transfer, and speed at which these networks can be established.” Eventually insurers will be able to create their own clone of the Oracles Network Core allowing them to participate in the “clones swarm”. This would allow insurers to easily and inexpensively create their own localized copy of the Oracles Network blockchain.

Why not just use Ethereum though? As we mentioned in our parametric insurance discussion, Oracles Network is cheaper and more consistent. It also offers another benefit that should not be underestimated. Oracles Network allows the insurers to easily designate validators for the local network. This can be leveraged to align the participating insurers and to ensure that they are all fully vested in the success of the fraud-registry network.

Thanks for your time everyone. Feel free to reach out to me with thoughts/questions.


#4

Rocco,

Thanks for the write up and diving into Fraud Registry use case.

My read is that fraud data is here is a “private” shared resource by Parametric Insurance Issuers.

I can see how this use case can be generalized to other forms of “private” shared resources in other domains i.e., medical records for both Heath Care * Health Insurance, loan/credit repayment history for Loan Issuer/Risk Assessment …

Thoughts?


#5

John,

That is a great observation, and I agree entirely. There are many use cases where there will be a need for “private” shared resources, and I believe the local networks that arise from this need will be a significant driver in the growth of the “clones swarm”.


#6

Rocco,

I think “clone, swarms” sounds very cool but for me I think in more of terms of “private consideration and public action/benefit” ( think first heard from Igor in these terms, more or less ) where:

“private consideration” is a private/clone Oracles Network where sharing of domain specific “private” data or some other private consideration occurs

“public action” is the public Oracles Network where the domain specific service is provided

these networks are connected via bridges.

Anyway, this is my interpretation of “clone, swarms” and comes with usual disclaimers. :slight_smile:


#7

John,

You make a very good point, and I want to clarify further by quoting the Oracles Network team:

“Whether in Australia or Finland, using Oracles Network DApps, an initiator can launch a new PoA-based network by distributing the keys to the validators, authorities in that community, who might, but do not have to, include some of the validators from the Oracles Network Core. That means the model of consensus by the known individuals would be transferred into the context of a specific community.”

The reason I wanted to quote this is to emphasize that the Oracles Network Core chain will not be the only “public action/benefit” network. There will be many “public clones” of the network whose purpose is to serve a specific community.

Let’s take Reddit, a popular community-driven website, as an example. What if the Reddit community decides they want to implement an on-chain, informal tipping system to allow users to reward other users for submitting high quality content (some sub-communities are already doing this using Ethereum tokens with varying degrees of success)? Well, the Reddit community could clone the Oracles Network Core then appoint community specific authorities as validators for the cloned network. In this case, it would probably be users who frequently and consistently deliver high quality content.

I would argue that the above proposed network is a public action/benefit network, because any member of the Reddit community can participate in the network. I would also argue that the proposed network encourages public participation, because appointing well-known community members as validators can help build trust in the network.

These are my thoughts. We might be making the same point with some confusion around the exact semantics though. :smile:


#8

Rocco,

Just curious in the above use what is your understanding of the relationship ( if any ) between the public-reddit-clone and the main OraclesNetwork.

Would this public-reddit-clone be available to anyone with internet connection and a parity client? There seems to be some implicit binding between a reddit user and participants ( tipper/tippee ) in the public-reddit-clone Would the “tip” be a POA token or some other token?


#9

John,

This is a very difficult question to answer, because (based on my understanding) there seems to be many ways this relationship can be structured. Let’s look at the two options on the opposite ends of the spectrum:

  • A clone network is created with it’s own version of the POA coin. This network, which has its own validators, can be a self-sustaining ecosystem and does not necessarily need to interact with the Oracles Network Core. In this example, the clone exists independently of the Oracles Network Core and the relationship between the two is minimal. Why would they want to use this structure? It offers the greatest control, but it comes at the cost of more administrative work.
  • A token is created on the Oracles Network Core. This structure would utilize the existing Oracles Network infrastructure, including the existing validators. In this example, the token exists on the Oracles Network Core and is entirely dependent on the core network in order to function. Why would they want to use this option? This is the “easiest” option with the least administrative work, but it offers the least control.

The extent of the relationship between the two networks can fall anywhere on a spectrum between fully dependent to fully independent. It’s ultimately up to each community to decide.


#10

Hey @rfm! I wanted to introduce myself. I work on the web development team at the National Association of Insurance Commissioners (NAIC) and share some of your passion for the early adoption of POA in the insurance industry. The NAIC also has affiliates like the National Insurance Producer Registry (NIPR), a non-profit tech company, that processes millions of transactions and fees for the states and industry and I believe they are a great candidate for early adoption as well.

Recently, I reached out to one of our executive officers to get some of their thoughts on blockchain as well as how the regulators currently view it. While this may not be breaking news I​ thought I would share the response.

What are blockchain uses for regulatory practices?

  • There are not really any established blockchain uses for regulatory practices as of yet – at least in the insurance area. However, there are several entities/groups, such as IBM, the American Association of Insurance Services (AAIS), The Institutes, and the reinsurance consortium B3i, to name just a few, that are exploring possible uses of blockchain in the insurance space and some of these involve compliance (for example IBM has done a presentation to insurance commissioners about the possible use of blockchain to address anti-fraud issues). The insurance regulators, and their support organization (NAIC) are also starting to take a look at blockchain from a compliance standpoint. Their still early in the process, but there appears to be a fair amount of interest.

How do you feel blockchain will influence the insurance industry?​

  • I feel there is a strong potential for blockchain to have a significant impact in the insurance area. For example, AAIS envisions an entire eco-system based on the blockchain, which also leverages insurance and reinsurance policies that are essentially smart contracts. From an insurance company perspective, this eco-system would include the financial/accounting side, i.e., premium dollars coming in, commissions paid to insurance agents, other expenses tied to business generation, as well as claims settlement and anti-fraud.

How do the regulators feel?

  • For most regulators, the blockchain is a fairly new concept so many are trying to get a better understanding of what the blockchain is and generally how it works. As noted above, however, insurance regulators are starting to hear more and more from industry players about the blockchain and its possible applications in the insurance and compliance area. Of course insurance regulators in some states may be more interested than regulators in other states (this is one of the challenges of how the state-based system of insurance regulation works in the country), but there is definitely an education process that’s underway.

Just like you, I want to be a driving force in the adoption of POA and I strongly agree that the POA consensus should help improve their confidence in the tech. Education and thought leadership are some of the most important efforts right now. The broader adoption of cryptocurrency in finance will also create momentum in the insurance industry.

If you ever need anything, any resources at my disposal are available to you and the community.​​

Would love to keep hearing more of your thoughts (comments from others are welcome​ too).​​