ABeam points out decentralized finance’s opportunities and threats for insurers

As the global community is gearing towards building a concrete new capitalism fueled by web3 technology, there still are aspects for insurers to discern

When the Internet was created, it was intended for quick and convenient access to information. However, as it evolves over the decades with rapidly increasing users all over the world, the Internet has been dominated by platformers where information is exchanged. This incident arguably allows these so-called “big techs” to collect, abuse, monopolize and even manipulate the users’ information they have acquired. To fix this, the concept of web3, the third generation of the Internet, has surfaced in 2021. With the emergence of blockchain technology. The essential idea of web3 is to decentralize the data exchange, allowing creators own digital contents without third-party interference. 

Undoubtedly, web3 attracts attention of market proliferates. One of the leading use cases of web3 is DeFi (decentralized finance), which does not rely on centralized financial intermediaries such as exchanges or banks. Instead, DeFi uses smart contracts, which automatically execute contracts on the blockchain. DeFi has several advantages that including low operational costs and transaction fees due to the absence of a centralized intermediary and high transaction transparency since it operates based on smart contracts that anyone can refer. Also, DeFi does not limit itself to providing financial functions but also many other aspects of digital usage. 

DeFi insurance is another example of web3 use. While conventionally, insurance covers the monetary loss risk to physical things such as people and property. Instead, DeFi insurance mainly covers risks to digital assets (e.g., crypto assets traded on DeFi). Moreover, it is often managed by a decentralized organization called DAO (Decentralized Autonomous Organization), built on a blockchain with a common purpose. As for the claim process, the conventional insurance payment is determined by an examiner using the insurance company's core system. In contrast, in some cases in DeFi, the payment decision is automated by a program that can be referred to by anyone using smart contracts, making the process highly transparent.

DeFi presents both opportunities and threats to existing insurance companies from the three perspectives of "market," "business model," and "service”.

The growing web3 market represents a significant business opportunity for established insurance companies. On the other hand, emerging insurance players covering DeFi assets risk may enter the traditional insurance market, posing a threat to established insurers. In fact, in emerging markets, DAOs have been formed by companies, organizations, and tech companies, including insurance companies, to provide agricultural risk insurance. 

From a business model perspective, salaries of insurance company employees and agency commissions are generally comprised of the premiums paid by policyholders as operating expenses. DeFi insurance, on the other hand, has a cost advantage over existing insurance companies. In addition, DeFi insurance often automates the claims payment process through a program, i.e., a smart contract. As a result, DeFi insurance may force established insurance companies to rethink their commission business model. However, insurers can unbundle their functions as they participate in the DAO economy for monetization opportunities with a new business model. Furthermore, they can gain greater transparency in the decision-making process and operational rules, which leads to greater customer trust.

As for service, because DeFi insurance is based on blockchain and smart contracts, and it can be purchased by anyone anywhere. As some DeFi insurance products have already emerged, borderless competition has begun. However, the fact that most of insurers haven't yet gotten involved in the DeFi insurance movement may disadvantage them. Moreover, insurers can improve operational efficiency by integrating blockchain technology into their business processes. Also, they can develop and launch new services based on the ever-changing web3 concepts and trends. 
 
Given the current system limitations and regulations, it is not easy for insurers to enter the "business to cover assets on DeFi." Therefore, insurance companies need to take the first step to learn about DeFi insurance by researching advanced cases and protocols, as well as participating in DAOs. 

ABeam Consulting (Thailand), one of the leading global business and digital transformation consulting firms, strongly believes that insurance companies should be able to develop new services based on the web3 concept after a short-term aspect. This is because the web3 mechanism can increase customer contacts, urge people to change their behavior in ways that could not be achieved with the traditional insurance, and develop services to solve social issues. 
 

ABeam Consulting (Thailand) Ltd. is a subsidiary of ABeam Consulting Ltd. – headquartered in Tokyo having 6,900 people serve clients throughout Asia, the Americas and Europe providing consulting services in Thailand since 2005, ABeam Consulting (Thailand) has more than 400 professionals serving clients in Thailand with expertise in business and digital transformation services that create the future together with corporations and other organizations. As a creative partner leading the way reliably through change, we contribute to industrial and societal change. 

Please contact us at contactthailand@abeam.com or visit https://www.abeam.com/th/en for more details.