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18 September 2017Analysis

Blockchain part 2: captives in a volatile world

The scenarios will be considered on the basis of the anticipated business relationship, which revolves around the business models used in traditional insurance concepts or existing captive solutions. Selected framework conditions act as a basis for the examples that have been constructed. They offer perspectives on the potential offered by blockchain technology for the captive market.

Customer-to-customer insurance by a captive

Blockchain means that intermediaries can be eliminated. Intermediates/third parties can be done away with to the greatest extent in a customer-to-customer insurance company. Due to increasing municipal debt and cautious investment policies, citizens of the city of Herford, one of the deeply indebted communes within the German region of Eastern Westphalia-Lippe, decide to set up an initiative: an infrastructure insurance company.

To protect their existence and to offer protection against heavy financial burdens cropping up at short notice, homeowners pay into an insurance policy to cover themselves against being charged road development contributions, which can run to five-figure sums and thereby represent a significant burden for individual households.

A blockchain application is used for this. It protects against embezzlement, and decisions can be made on it by consensus, even using pseudonyms. The administrative costs for this are less than regular bank account management fees.

The captive company will invest 5 percent of deposits of the insurance premium in cryptocurrencies to diversify risk and generate additional profits. They have already been able to partner with developers working within the open source environment of the Ethereum blockchain to create a d-app, a decentralised application. Internet-savvy users can set up smart contracts themselves to confirm and accept members, for example.

The participants in the initiative, including some landlords, are already planning to use voluntary self-disclosure to document a rent index for the various districts of the city so that they can represent the slowing-down of rental prices to the municipality of Herford in a transparent manner. The direct benefit and low costs ensure that tenants are very interested in this. A housing association has already signalled its support and will add regional information and rents. It expressed interest in establishing the approach as a comprehensive solution via a platform—which opens up the services to a broader group of users.

It is hoped that this will create a better image compared to its competitors, and it wants to use transparency and cooperation to create a good starting point, with positive brand recognition, in the face of strong government regulation. This product is to be coordinated within a captive insurance company, specifically founded for this business model.

Business-to-customer insurance by a captive

A UK fittings manufacturer changed its strategy in 2005 so that it would be able to supply products to the international market at lower cost, and has been the global market leader in the premium fittings sector for years. Currently, the company handles bricks-and-mortar sales via a network of retailers comprising wholesalers and property developers. The company is placed under increasing pressure due to strong online retailers.

Due to the order situation in the construction sector, the company’s target groups have reached their limits in terms of sales, and additional growth potential remains unused. This makes diversification into the fields of the Internet-of-Things and the SmartHome an attractive prospect. XY Sense, an intelligent water sensor, informs the user about water damage and frost risk via an application. The company uses this to target the end customer, and expand its spectrum of services to include digital services.

This scalability can also give rise to further expansions in linked service areas. Property and liability insurance can be offered directly to the customer via the existing smartphone application during the initial installation. The integrated robo-advisor, a digital assistant, decides whether an expert needs to evaluate the situation on site in more detail, based on information on the household, family status, and the devices or values to be insured.

The company considers a lump sum figure for this, as satisfied customers are more valuable than the loss caused due to attempted fraud, during the early stages of working in the SmartHome environment. The initial risks can be balanced out with subsidies from the sale of fittings.

In a loss event, the insured uses the app to document the situation and will automatically receive a direct advance payment via the smart contract which has been saved. The customer can either use the payment for reimbursement or as credit towards the purchase of a reduced-price replacement via the online shop run by the company. The information is documented in the blockchain via the customer’s app.

Plumbing and heating companies commissioned by the company rectify the damage and also confirm the documented damage with an entry in the blockchain via the partner app. Documenting this in the blockchain ensures pseudonym-based transparency, and acts as proof for the UK company and for those affected by water damage. A valuation of the app and services can also be permanently stored in the blockchain. Insurance transactions are processed via the internal captive set up specifically for this. The captive is managed as an independent profit centre, and acts as an additional corporate pillar.

Business-to-business insurance by a captive

An American online mail-order retailer is aiming to introduce its business services to the mobility and logistics market. The company brings transport drones to the market to cover its own needs, and for consumers, and quickly finds itself forced—within the applicable regulations—to take out an aviation insurance policy for unmanned aircraft. The first patents have already been registered. For this purpose, the company founds a captive insurance company so it can bear the risk itself.

As the risk is unpredictable and the appropriate state-specific laws do not exist, the company develops an aviation insurance policy for the global market. This can be purchased at the same time as a drone, thanks to collaboration with the leading manufacturers. The models’ serial numbers and policies, as well as the risks covered, are now clearly stored in the blockchain.

The company offering this has stipulated certain minimum technical standards for the manufacturer. All the documents are saved in their own decentralised, private blockchain. Customers create their own community where they can discuss suggestions for models, risks to be insured, feedback on service and support, and their requests as customers. This means that drone-related services can be improved and further developed to suit customer and company alike—the open source approach.

Even maintenance intervals and a digital black box are recorded in the blockchain, thereby boosting safety and transparency. The data is available in real time. Smart contracts ensure that financial losses incurred in a loss event by users or investors are limited. If, for example, a transport drone causes an accident which leads to multiple people being injured, smart contracts mean that orders for the drone that caused the accident can be frozen, current users of the drone in question can be informed of this via the company’s own dashboard, and stakeholders can be notified of the expected fluctuation in share price. The captive is responsible for regulating and coordinating the dashboard, and the damage.

Insurance-as-a-service by a captive

A global branded drinks producer, headquartered in Austria, offers pre-made insurance products for high-risk sports under its brand. These are passed on to the end users in question via selected partner companies. In addition to the platform and insurance services, the company offers its corporate customers training sessions, and assists them with establishing the portfolio within its partners’ existing business models.

The Austrian company acts as the owner of the captive in this regard, and underwrites, supports and manages the insurance policies. Partner companies are selected using criteria such as solvency, existence of European headquarters and compliance with applicable EU regulations. In addition, they must contribute to enhancing the brand, while having strong branding and good brand recognition themselves.

The captive insurance optimisation service run by the Austrian company offers assistance with meeting the criteria, marketing and modelling the business field. As a result, the Austrian company creates an attractive service market for itself that is related to niche sports, and, thanks to its partners’ heterogeneity, is also able to reach new target groups for its core product.

Policies, transactions and the exchange of information happen via the blockchain, and the digital processes boost operating efficiency as a whole

Blockchain technology is used to manage all the insurance services through the Austrian company’s captive for the partner company and the end customer. Policies, transactions and the exchange of information happen via the blockchain, and the digital processes boost operating efficiency as a whole. Costs can be allotted via the captive solution in a transparent way, based on who incurred them, which benefits partner companies and end customers. Partner companies benefit from secure infrastructure that uses fewer resources because of the insurance-as-a-service approach.

Digital contract management and billing in real time, automatic management and documentation of proof in a loss event, for example, or the reduction of human interaction thanks to smart contracts, boost functionality and reduce costs for the partners. In addition, partner companies can benefit from a shared database and collaborate on the development of insurance products.

The market is also cultivated to suit the target group, thanks to the exchange of information, eg, customer profiles, between the companies. The option to pay with cryptocurrencies can reduce transfer costs and accelerate transactions or refunds due to the consent mechanisms involved. At the same time, this eliminates currency fluctuations. Incentives and gamification elements boost sales for all the participating partners, and can tap into new potential outside insurance services.


The blockchain is a general ledger that enables the transfer and recording of digital assets without an intermediary or broker. The same technology that makes bitcoin possible can also be used to track agreements between two parties, such as insurance, and for the storage and later execution of “smart” contracts.

Marcus Schmalbach is a lecturer in business administration at a university of applied sciences in Southern Germany and a PhD student in the field of captive insurance companies at the University of Gloucestershire, UK. He is head of BlockART Institute which is doing research in the field of blockchain and alternative risk transfer. He can be contacted at: