Author(s)
Source
Wake Forest Law Review, Vol. 50, pp. 671-709, 2015
Summary
So far, technology has not enabled disruption of the traditional insurance industry. However, cryptocurrencies like Bitcoin could support new decentralized insurance systems that bypass regulation.
Policy Relevance
A system of insurance supported by cryptocurrency would be difficult to regulate.
Main Points
- In the next half century, an upstart business model could use technology to radically disrupt the insurance industry, avoiding regulatory restrictions and costs to offer insurance at lower rates.
- Unregulated competition can test whether the traditional regulations are really beneficial; disruption of a regulated industry is most likely:
- When the new unregulated business model is legal;
- When existing regulation entails high costs;
- When provision of the new service is decentralized and hard to control.
- Cryptocurrency could enable an insurance company in one jurisdiction to offer insurance to those in other jurisdictions; third-party escrow agents could oversee the insurer's spending to block the insurer from absconding with the funds.
- Alternatively, smart contracts and cryptocurrencies could be used to offer insurance without the involvement of an insurance company.
- Participants would pay premiums into a fund using a cryptocurrency.
- A decentralized peer-to-peer mechanism could determine whether a loss had occurred.
- Periodically, the fund could be distributed to participants, with the amount of the payout depending on how much the participant had contributed and estimates of the risk of loss.
- This cryptoinsurance system would be similar to a type of mutual insurance historically known as “La Crema.”
- Each household in a village would annually declare the value of its property.
- If a house burns, the homeowners would receive a payout of the amount they declared, so that those who made larger payments would receive more in the event of loss.
- Traditional insurance regulation might be beneficial, as it is designed as consumer protection; for example, cryptoinsurance might undermine laws barring genetic discrimination.
- Cryptoinsurance would be hard to regulate directly.
- Regulators could confiscate payments to buyers of cryptoinsurance.
- Regulators could require the purchase of traditional insurance rather than cryptoinsurance.
- In the long run, market forces rather than the government will decide whether radical financial disruption is beneficial.