Creating a decentralised insurance model with blockchain & smart contracts - Etherisc

This week we are taking a broader look on how blockchain can transform the insurance sector. Specifically, we will consider how blockchain and smart contracts can be used to create a decentralised insurance model.

With us we have Stephan Karpischek, co-founder of Etherisc. Etherisc is building decentralised insurance applications on the Ethereum blockchain. They began in 2016, pioneering a flight delay application utilising a public blockchain. Currently they are developing over 20 products and will soon release a product covering hurricane insurance for Puerto Rico.

Etherisc’s vision is much larger than simply developing its own applications. It is building an open and free protocol for decentralised insurance so that companies can develop their own insurance products using smart contracts.

 

Blockchain (and Ethereum) in two minutes

On a first level, a blockchain is a data structure. On a larger scale, blockchain is an experimental field where we can try and build new incentive schemes. It is an opportunity to re-evaluate how economic actors cooperate and make decisions. We can use blockchain to develop new financial instruments, and more generally a new financial system, that works better than the current financial industry and economic structure.

The Ethereum blockchain adds another infrastructure layer. At its core, Ethereum is meant to be an open space. Everyone can join the Ethereum network and develop their own applications and financial products. This means that Ethereum is supported by a large and diverse community of developers who make sure the blockchain rises up to any challenges it faces, such as cost of transactions. This makes Ethereum one of the most mature blockchains to tackle the decentralisation of the insurance industry.

 

The decentralised insurance model

1. The goal of decentralised insurance

So why should we decentralise insurance in the first place? In the current insurance model there is an asymmetrical relationship between the insured and the insurer. The insurance company manages both the risk pool and the pay-out. They are therefore incentivised against paying out claims, at the expense of the insured.

A decentralised model using blockchain offers a solution to this problem. Blockchain can be used to build automated systems that manage the risk pool just like an insurance company, minus the commercial incentive to withhold pay-out.

 

 2. Smart contracts as a public utility

A decentralised insurance model assumes that any company can provide their own insurance product. To achieve this, it is necessary to make the means of providing insurance easily accessible. Etherisc's solution to that is a smart contract that is freely available to copy and use. Anyone would be able to use this technology without requiring a licence.

As often happens with free software, funding can be an issue. Etherisc is using a token sale to fund this idea and has already raised enough money for a few developers to start work on this protocol. In the end, however, making smart contracts a public utility is a community project requiring the feedback and engagement of the developer community.