The Financial Conduct Authority’s regulatory sandbox scheme is helping the UK become a fertile ground for disruptors in the insurance industry, cementing its position as a hub for innovation, according to the co-founder of a ‘decentralised insurance’ start-up.
“I think the UK is a very good role model for other regulatory bodies,” Stephan Karpischek, co-founder of Etherisc, told Insurance Business.
“The sandbox, in my opinion, is a great initiative – it lowers the entry barriers into the insurance market,” Karpischek said. “It provides a lot of small companies with a great opportunity to deploy and roll out their product in a protected environment, where the risks can be limited. You can work with real customers, real businesses, real products, and real business processes.”
Etherisc was founded in 2016 and develops decentralised insurance products and models, which have included flight delay coverage and crop insurance.
Karpischek, who has a background in banking, was working on blockchain training programs when he and his co-founders saw an opportunity to apply the technology to the insurance industry.
“We immediately saw the potential of blockchain technology, and, in particular, smart contracts on blockchain, for insurance businesses, so we set out to develop and publish the first insurance application on blockchain,” he explained.
That product was Flight Delay Dapp, described by the firm as the first decentralised insurance application which can issue policies and pay out valid claims completely autonomously, which it offers globally through a partnership with an insurer in Malta.
Due to blockchain’s nature as being based on a shared infrastructure, the technology has the potential to revolutionise insurance, according to Karpischek.
“The costs are much lower than with traditional insurance, and the process is much more open and transparent. All the transactions are visible and verifiable for anyone to see,” he said.
While the potential is clear, regulation across various jurisdictions – Etherisc has three legal entities in Germany, the US, and the UK, and is currently building a foundation in Switzerland – has been harder to navigate.
Despite that, Karpischek views regulation as essential to balancing the asymmetric relationship between insurance company and consumer – and believes blockchain is a further step in balancing those competing interests.
“We need regulation in order to protect customers from the overreach of insurance companies, which are in a very powerful position in relation to their customers – they basically dictate what the insurance contracts look like,” he said.
“As the customer, you are usually in a relatively weak position when it comes to claims - for example, the insurance company has a strong commercial incentive not to pay and you have to balance that with fraud.
“Under blockchain, things look very different, because the smart contract is a piece of software operating on a public blockchain, which is a shared infrastructure and a decentralised network. This smart contract doesn’t have an interest. A software doesn’t need to make profit. It’s the company, or the enterprise, that needs to make money.”
