While Edward Lloyd is largely credited with commercializing the insurance industry, with the creation of his namesake firm, Lloyd’s, over 330 years ago, the original concept of spreading risk (or “mutualizing”) goes back even further. Hundreds of years before Lloyd’s was formed, Chinese merchants would spread their valuable cargo across multiple vessels, with each one carrying an equal share of another merchant’s goods. In this manner, no single loss would be catastrophic. This spread of risk, of course, also prevented a merchant from absconding with his ship’s goods and never reuniting with the other traders; he’d have too much to lose. In effect, they all had skin in the game, which remains one of the most elusive elements of modern finance. Both then and in 1686, when Lloyd’s was born in a London coffee house, the global insurance industry was a business of utmost good faith, as it remains today.
Thus a trust and efficiency engine like blockchain technology has the potential to drive radical change in the insurance industry while improving transparency and outcomes across the entire value chain. Intermediaries or “trust brokers” do not have to be written out of the equation — or disintermediated — as many blockchain enthusiasts argue. Rather, they can become early adopters of the technology. Admittedly, this shift will be hardest on the established monoliths in the industry, for it will require uncomfortable transparency and price corrections in their business models. This will be toughest on the portions of the industry that are the least differentiated, where consumers often decide based on price: auto, life, and homeowner’s insurance. However, even these commodity offerings can find ways to innovate and survive.