As insurtech start-ups try to disrupt the insurance industry, a relatively common theme is insurtechs eliminating or reducing the roles of intermediaries such as brokers.
However, one insurance start-up entrepreneur suggests going the opposite way: brokers bypassing insurers. Risto Rossar (pictured), co-founder of Estonian start-up Black Insurance, shared his opinion on innovation in the insurance industry with Insurance Business.
“The ‘operating system’ of insurance … is slow, riddled with red tape, and technologically redundant,” Rossar said. “Insurance products are one of the most obvious bottlenecks. In order for a start-up or other innovator to have the control over the very insurance product they sell, they should have an insurance license, a substantial organisation to support the compliance, and capital in the magnitude of millions, or dozens of millions. The playing ground is obviously rigged to benefit the incumbents, who have shown to be complacent and innovation-averse.”
He said that to enable innovation, this bottleneck must be removed.
“Our mission is to provide brokers, whom we believe to be the best positioned to drive change, an ‘operating system’ where they can launch their own insurance products, raise the required capital from investors, and use our umbrella license. It’s essentially creating a path in the value chain that bypasses insurers entirely.”
According to Rossar, to bypass the insurer, Black is working on a solution to ‘tokenise’ insurance risks, through blockchain and cryptocurrency technology.
“To sell policies in the amount of US$1 million, you would need about US$400,000 of reserve capital to backstop the losses,” he said. “This capital is what earns the capital rents in the insurance value chain.”
Rossar said that an insurance company consists of the following elements: the aforementioned capital, an insurance license, and a lot of administration to match the capital with the customer-side risk.
“We are taking these functions apart and decentralising them by using crypto token and blockchain technology,” he said.
“Tokenising insurance risk means pooling up customer-side risk into portfolios of policies, and minting the risk-taking capital into crypto tokens,” Rossar said. “Any given token is then a risk carrying investment asset, seeing returns if the losses are low. Here, we have taken over the capital pooling function of the insurers. The administrative function can largely be automated by using blockchain and smart contracts.
“We end up with a vivid marketplace that enables frictionless innovation and does away with valueless, costly clerical tasks. Brokers get to innovate around their products, investors get access to a new crypto asset class, and customers get to enjoy the future Ubers and Spotifys of insurance.”
Brokers of the world, unite!
Rossar believes that brokers, due to their closer relationship with customers, have more potential to innovate the industry, compared to large, multinational insurers.
“As opposed to the big, oligopolistic insurance companies, the bulk of the brokers are small, agile and entrepreneurial,” he said. “Many of them, even the old guard, work a lot like tech start-ups in some regards. They are close to the customers, and lack the internal inertia caused by bureaucracy and red tape.
“We have had more than 50 brokers signing up for the Black platform, with some $350 million premium revenue shared between them, and I’ve spoken to many. They tell a recurring story of frustration – one of a desire to innovate, only to be met by a stone wall on the insurers’ side. Many of them have only one question: ‘When can we start?’”
Innovation to counter cyber risks
Cyber risks are some of the largest concerns facing the industry today, given the ubiquity of the internet, society’s increasing dependence on it, and the largely unknown nature of the risks.
According to Rossar, traditional insurers have demonstrated a lack of understanding of the emerging cyber risk market and are slow to react to changes.
“When we crowdsource insurance capital as per Black’s business model, it’s very likely that there are investors out there who are willing to invest into insurance portfolios that are taking on cyber risks,” he said.
“To compare with the peer to peer loan market – there are financially healthy individuals and companies that are turned away by banks due to some guidelines established by bureaucrats in the headquarters who might have never seen an actual borrower, while the more agile P2P lenders have been able to step in and profit.
“Quite similarly, we want to give this decision making power to the free market, and are confident that it will not only enable crypto covers to pop up, but many other insurance categories as well.”