To help, I interviewed one of the top analysts in the insurance industry, Meyer Shields of KBW.
Insurance, he says, is “ripe for disruption.”
First off, there’s a huge amount of inefficiency in the process of assessing risks, managing them, and providing claim reimbursement. Meyer estimates that approximately 30% of our premiums go to overhead. That’s a lot of money.
Secondly, the nature of the insurance business is such that there’s a lot of subjectivity that could be replaced by data. Every company has its own actuarial models which account not just for the likelihood of a loss, but the likelihood of a claim. The reality is, according to Meyer, that almost all of us could save money on a regular basis if we were willing to shop around on a regular basis, but we don’t. Some companies, like Progressive, are using more data, but the larger the data set, the more accurate the models and most companies don’t have a full view of the realities of the market.
Third, the business model relies on a significant number of 3rd parties. Most insurance policies are distributed through independent agents who are able to wield their position as the customer to beat down prices from insurers, but are also incentivized by their commission structure.
In a peer to peer insurance model based on blockchain technology, you would have a very small chance of a very large loss. There’s huge diversification and you have the opportunity to do away with many of the inefficiencies.
The industry needs a more dynamic model that can respond to real-time changes. Currently, insurance companies get paid upfront and they have no idea what it is going to cost them.
However, a model that was more responsive, say “pay as you go” where, for example, gas prices start to plummet, so people with less money will drive more (e.g. under 21) which increases miles driven, accidents, and claims, would allow for a more robust and efficient market.
For more, Jeremiah has a really good in-depth look at the market for crowd-based insurance.
There’s also a great article in TechCrunch that covers insurance.