Insurance Article, The Insurance Times 2020, The Insurance Times January 2020

BLOCK CHAIN – MAKING INROADS IN MICRO INSURANCE

Venkatesh Ganapathy

Venkatesh Ganapathy completed his degree in chemical technology from the prestigious UDCT (University Department of Chemical Technology), Mumbai. He also has a diploma in supply chain management and a postgraduate degree in management from Southern New Hampshire University, Boston. He has two decades experience in the industry having worked for organizations like Castrol India Limited and Firepro Systems Private Ltd. He moved to full time academia in 2012 to explore his creative abilities in teaching, research and writing. He has published 15 books so far and 50 research papers that have been published in peer-reviewed national and international journals. He has been the recipient of numerous awards from Insurance Institute of India from where Venkatesh completed Fellowship in Insurance in 2004. In 2019, Venkatesh won an award for best technical papers from Risk Management Association of India (Managing Reputation Risks in the Digital Era) and  Insurance Institute of India (Pensions : Serving Millennial Customers). Presently associated with Presidency Business School in Bangalore, Venkatesh also teaches insurance at Christ University.

Today there is a greater need for personalized insurance covers that can meet the unique needs of customers. Traditional insurance industry faces the threat from emerging start-ups that are offering flexible covers through the use of automation and smart contracts.

Micro insurance is that insurance vertical that offers protection to low-income people against specific perils. The covers are offered at nominal premiums that are proportionate to the likelihood and cost of the risks involved.

Like other branches of insurance, micro insurance is sold and never bought. Western experts are scoffing at the narrow definition of micro insurance rather preferring a more inclusive definition of Micro insurance – products that are sold in the new sharing economy and those that offer solutions for challenges encountered in the sale and distribution of insurance. But the problem is that once these products are offered to all the strata of population, the distinction enjoyed by micro insurance ceases to exist. For developing economies, it is better to have micro insurance as a vertical dedicated exclusively for the marginalized sections of society.

In India, micro insurance is plagued with challenges like poor distribution ecosystem, lack of trust by insured and inordinate delays in processing claims. The trust deficit is the main reason why block chain technologies are making inroads in micro insurance – though these are early days in India. Micro insurance is a low premium – high volume sales business – so a conventional mindset of making profits through premiums may not be possible. Rather the need is to cross subsidize micro insurance through revenues generated from other insurance business models. Despite the fact that India has a huge marginalized population, volumes of micro insurance policies sold are meagre – as said earlier, trust deficit is the main reason. Either people have no faith that they will be paid the claims or claims are delayed much beyond the period of loss.

Micro insurance has to be event driven and simple. It has to be viewed with a different kind of lens. In fact, it should be viewed more as a social responsibility.

Insurance contracts are complex and the poorest of the poor have no recourse or inclination to read through such documentation. The process of selling and distributing micro insurance needs to be simplified. Traditional insurance processes will need circumvention to cut short the cycle time so that the process of collecting premium and disbursing claims is as smooth and seamless as possible.

Penetration of mobile phones in the Indian market is wide and immense. Using technology to improve the customer journey is what is needed. This is how smart contracts, artificial intelligence, and block chain technologies can demonstrate their disruptive power and reduce the complexities associated with traditional insurance buying and selling.

Thanks to the very nature of the insurance business where the value chain is splintered among different stakeholders – insurers, brokers, agents, third party administrators – no one seems to have a clear picture of the pain points of customers. As the focus keeps shifting to financial performance, reduction of overheads, product-based metrics and keeping the claims low – the insurance sector’s focus towards customers ends up being a mere rhetoric. Service marketing is now skewed towards “customer experience management” and insurance services must come to terms with this reality.

Better data management, customer engagement and innovative pricing – all these can be achieved through automation.

Pay-as-you-go insurance is becoming popular in the West. Artificial intelligence can help in simulating real time weather data to make accurate predictions. Claims can be paid out when there is a triggering event even without claim intimation from the insured. Block chain technologies have the potential to revolutionize the insurance sector in the medium to long term provided insurers invest efforts in sufficient due diligence to understand the intricacies involved in such technologies.

Even in motor insurance, questions are being raised about the premium charged on a flat basis without considering the usage of the vehicle. Similarly, we need to understand that micro insurance needs to become more transactional to achieve a modicum of success. Provide cover when it is needed and ensure that claims are paid on time. The more transparent the claims process, greater is the propensity for reducing the intensity of trust deficit that the poor have about insurance claims. There is an urgent need to introduce parametric covers for micro insurance.

Insurance companies have to eschew their fragmented legacy systems to stay relevant to the marginalized sections of the society. Block chain can engender greater trust among the insured. Considering the fact that experimentation has been an anathema for the insurance sector so far, the implementation of a disruptive technology like block chain has to be carried out in an incremental fashion.

Besides micro insurance, pilot testing/ field trial of block chain can be done in health insurance and life insurance. When it comes to implementation of technology, it has to be emphasized that the implementation has to be in a consistent and compatible manner. Scaling up can be done gradually.

As of now, insurance companies lack the wherewithal to derive greater value from block chain. This necessitates a greater need for collaboration of insurers with other stakeholders – startups, insurtech firms, technology solution providers. India also needs a regulatory check on the long term impact of such technologies on the industry.

The insurance industry in West has been experimenting with strategic alliances. Aon, Etherisc and Oxfam in Sri Lanka have collaborated to provide block chain enabled micro insurance to small holder farmers in Sri Lanka. The premiums are affordable for the paddy field rice farmers. The alliance has believed in empowering farmers.

The success of block chain technologies will eventually pave the path for innovative covers in micro insurance and other branches of insurance. A block chain start up called Strataumn has entered into a strategic alliance with Deloitte. They have used block chain to allow users to submit insurance claims through Facebook messenger.

As block chain technology keeps evolving, the insurance sector’s learning curve will pay rich dividends in the long run. Strategy is going to be the buzzword for the insurance sector in the near future. Let us wait and watch!

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