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How Smart Contracts Can Decrease Information Asymmetry, Build Trust, and Revolutionize the Insurance Industry

Insurance is a multi-trillion dollar global industry driven by the need for businesses and individuals to manage risk. Instead of consumers taking on risk directly, they can transfer that risk to an insurance provider by purchasing a policy for a premium.

Insurance premiums account for close to 1/10 of the entire world’s economic activity. According to the Organisation for Economic Co-operation and Development (OECD), about 9% of worldwide GDP consists of direct gross insurance premiums.

Insurance spending as a percentage of worldwide GDP from 1983-2017. Source: OECD

Insurance is a driver of economic growth because most economic activity would not take place at scale without it. Airlines would not fly planes without insurance backing operational accidents. Consumers would not place bank deposits without deposit insurance guarantees. Auto manufacturers would not provide warranties for all automobiles without insurance for product recalls.

Insurance is a precondition to mass adoption of innovative technologies and a primary form of consumer protection. However, there are inherent trust problems that prohibit the insurance market from reaching its full economic potential. The combination of distributed ledgers, smart contracts, and decentralized oracles offers a way to upgrade the foundational infrastructure of insurance to benefit both insurance companies and policyholders.

The safety nets offered by new forms of digital insurance products will:

Provide new risk transfer products to currently uninsured populations Unlock participation of less sophisticated users in mass adoption of crypto-native products and services

In this research article, we argue that insurance products of the future will be transformed by the next generation of digital insurance contracts and risk transfer products. These ideas are similar to predictions offered below by Renat Khasanshyn, a co-founder of the decentralized insurance pl...

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