The insurance industry has always been an incredibly complex beast that is sometimes slow to adapt to change or even recognize when change is needed. This inherent resistance is most clearly evident in the industry's reluctance to embrace new technologies. Less than 25% of insurers have actually digitalized the value chain, and more than 10% are not focusing their efforts on leveraging digital tech in their business process, according to ACORD's “2022 Insurance Digital Maturity Study." 

Given how immensely beneficial some of these new technologies can be for the agencies and carriers that embrace them, these stats are perplexing, especially when it comes to Web3.

Web3 Defined

Web3 represents not only a vast new growth market for the industry but it is also a new model for reinventing the insurance value chain.

Back when the internet began, the entire online experience was highly democratized: Everyone was free to access and distribute information, which meant there was no more reliance on mass media, such as TV, radio, newspapers or magazine publishers.

Over time, this early iteration of the internet, known as Web1, gave way to Web2 in the 2000s when social networking sites (SNS) and mass media publishers began to establish control over how information is shared. While the shift to Web2 did bring more structure to the internet—making it more accessible to a wider audience—the Web2 evolution also led to a handful of big tech companies exercising near-total control over personal user data and how information is accessed.

With Web3, which first arose in 2021, the internet is evolving into a new iteration through the emergence of blockchain technology and token-based economies. In Web3, data is completely decentralized through a network of computers instead of a single server, allowing for the emergence of a more transparent and re-democratized version of the web where anyone can own and manage unique digital objects, also known as nonfungible tokens (NFTs).

The result has been an explosion of investor interest in this new NFT market, which climbed to a valuation of $41 billion in 2022, according to blockchain data company Chainalysis. In just one example, an NFT artwork sold for $69 million in 2021.

Advocates of Web3 include decentralized finance (DeFi) companies, which see in it an opportunity to raise funds through decentralized autonomous organizations (DAOs). These DAOs operate like headless corporations in which all members vote on decisions that are then executed through encoded rules. Additionally, you've got the ever-expanding world of cryptocurrency, which tends to be the currency of choice for most Web3 transactions.

Taken together, these developments have led to the creation of what is being called the Web3 economy—a fast-evolving market that represents broad opportunities, particularly for the insurance industry.

Opportunities for Insurance Industry

For agents and carriers, the Web3 economy represents a new frontier for insuring customers against both business and professional liability.

For instance, cryptocurrency, despite its many ups and downs, remains a fast-growing trillion-dollar industry. Even so, it's an industry in which businesses and investors by some estimates remain up to 96% uninsured, according to Daily Fintech. The same can be said for the NFT market, in which only a tiny minority of businesses and individuals have insured their risks.

The lack of insurance in these two markets stems largely from price volatility, a lack of historical data for determining the likelihood of loss, regulatory uncertainty, and the inherent anonymity of these markets.

Also, the size of the Web3 economy and the wide range of Web3-related assets presents broad opportunities for providing coverage. As the Web3 economy grows, so will the demand for insurers to provide appropriate coverage for investors, especially as government regulation catches up on how this digital economy operates.

For insurers, the key question will be how they can prudently underwrite digital assets and beat out competitors in the race to provide scalable policies.

Reinventing the Insurance Value Chain

Insurers can leverage Web3 technologies and capabilities to redesign how they provide coverage in the traditional economy. For instance, many insurers have already begun using smart contracts.

Smart contracts are software programs that are stored on a blockchain and run when certain predetermined conditions are met. These predetermined conditions can include anything that triggers a policy activation, such as an earthquake or a major flood. Smart contracts also make it easier to automate policies for certain types of risks, such as travel insurance claims that are activated when third-party data is provided for evaluation. This will increase processing time and provide insureds with greater transparency.

Another benefit of Web3 is the access it grants to new customers since anyone with internet access can purchase blockchain-based policies powered by smart contracts. This growth in borderless competition among global insurance providers has maintained a steady pace in the last year but remains limited since many insurers have yet to embrace a Web3 business model.

There's no doubt that the ever-growing Web3 economy presents a vast and new playing field for the insurers who are prepared to take advantage of it. However, those business leaders must understand the nature of the creation-destruction process: To survive, you need to embrace the technologies that represent the highest threat to your current business model before your competitors have done so.

Mohammad Sayadi is CEO at Djuno, a company that develops AI technology that helps businesses optimize their cloud IT infrastructure for better performance and lower cost.