1. Introduction
Some have documented that the blockchain is the greatest revolution since the internet. Indeed blockchain is receiving increasing attention from academia and industry. The South Korean government believes the country faces a global transformation called the Fourth Industrial Revolution and has announced blockchain, artificial intelligence, big data, cloud, virtual reality, augmented reality, autonomous vehicles, and drones as innovation growth industries [
1].
A blockchain is a chain of previously validated blocks of transactions that constitute an immutable distributed, decentralized digital ledger that, when combined with a digital transaction validation process, allows for peer-to-peer electronic transfer of an asset without the need for an intermediary [
2].
Smart contracts generally recorded onto a blockchain and validated by the network are computer programs, the correct execution of which is automatically enforced by underlying legal agreement without relying on a trusted authority [
3].
In the banking industry, blockchain has been used to transfer money between parties without having to rely on banks through simplifying the business process while creating safe, trustworthy records of agreement and transactions [
4]. As the insurance industry lagged behind banking because of their conservative attribute, just started to invest to explore the possibilities of blockchain and smart contracts for their business [
5]. Consultancy firms investigated applicability of these technologies on the insurance domain and anticipated that blockchain and smart contracts enable to improve customer engagement by providing a greater degree of transparency and to the perceived fairness of claims handling. They also expected to enable blockchain and smart contracts to offer cost-efficient production for emerging markets and develop insurance products related to the Internet of Things (IoT) [
6,
7,
8]. For example, when accidents or crimes occur, claims written by the legal language are typically complex and difficult to understand are processed automatically using blockchain and smart contracts. Additionally, fraud related to the integrity of a policy or claim will be reduced by sharing all transactions written to it and will minimize counterfeiting, double booking, document or contract alterations [
9].
The blockchain based system, aiming to realize an automated, real-time, and immutable feedback loop between the insurance company, its customer, third parties and potential auditors, was proposed for one of the emerging market, cyber insurance that deals with an insurance product used to protect businesses and individual users from internet-based risks [
10]. Also, there are studies providing insurance products combining blockchain and smart contracts with other technologies such as IoT, artificial intelligence (AI). On-demand car insurance system using smart contracts and IoT that increases the significance with the amount of data is introduced for decreasing policy modification costs [
11]. While blockchain can assure safety and reliability, adding AI capabilities can greatly benefit the healthcare insurance sector. Presently, AI is mainly used for detecting abnormalities in X-rays and CT scans, a task performed at least as accurately and quickly as humans can, and assuring a great level of cost and time reduction about the healthcare insurance claim processing [
12]. Several companies have launched a blockchain based system or insurance for securing documents and customer satisfaction [
13,
14]. Similarly, blockchain and smart contracts are expected to offer benefits to both insurance companies and policyholders, but the focus of this study is consumer benefits. This is because the insurance premium, the main source of income for an insurance company, should be determined by the benefit of the policyholder rather than by the cost of the insurance company. Indeed an improvement in the function or quality of a product is of no use unless the consumer recognizes its value and reflects it in their decision to purchase the product [
15].
On the other hand, it is true that there are concerns that the hype cycle for the insurance sector shows blockchain and smart contract at the beginning stage of the curve, which means this technology has not been fully explored yet [
16]. It will cost much money to invest in blockchain and smart contracts, but the Korean insurance companies must decide seriously whether make the number of investments now to be in a position to take advantage of efficiencies and opportunities can deliver long-term business sustainability. They faced the issue of measuring the benefit of the consumer about these technologies. Many researchers use the principles of WTP that is the maximum amount of money a consumer is willing to spend for a product or service to measure the value [
16,
17,
18,
19]. This is based on the individual theory of consumer behavior (i.e. consumers are able to evaluate the utility of benefit from technologies in monetary units) [
17].
The purpose of this study is to help insurance companies make a decision on investing in a new business ecosystem and an adjustment to the insurance premium by providing information about the consumers’ WTP for blockchain and smart contracts in South Korea. Knowing consumers’ WTP, companies can estimate the incremental revenue from insurance premium and pursue a pricing strategy suitably customized to their marketing environment and see valuable sources for increasing the profitability of the product offered [
18]. As mentioned above, many researchers and practitioners have explored blockchain and smart contracts in the insurance sector, but have not studied on additional WTP, realistic values felt by consumers. In addition, this study provides the effect on WTP by the characteristics of a consumer as covariates.
The remainder of this study is organized in the following fashion. In
Section 2, the description of the research design is given. This consists of research target and sampling, survey format and survey instrument.
Section 3 explains the methodology used in this study and explores data from the survey.
Section 4 provides results and discussions considered by insurance companies. Conclusions are presented in
Section 5.
3. Methodology and Data
3.1. Empirical Model
This study used OOHB DC CV method known as Cooper et al.’s approach. A list of bid ranges, and , where , is decided. According to the number of , all respondents are divided into groups which have a similar number of respondents. Only one of the bid ranges is selected at random and one of these two bid prices is presented randomly to about the half of respondents in j group. The other of these two bid prices are presented at random to the other half of respondents in the same j group.
For example, if the half of respondents in a group are asked whether they would be willing to pay the amount of the bid and the answer is “yes”, then they are asked additionally whether they would be willing to pay the amount of the bid . If the response is “no”, then there is no additional question. And then the other half of respondents in the same group are asked about the amount of the bid . If their answer is “no”, then they are also asked additionally whether they would be willing to pay the amount of the bid . Consequently, there are six possible responses to the OOHB DC CV survey: “no”, “yes-no”, and “yes-yes” when the lower bid is shown in the first and “yes”, “no-yes”, and “no-no” when the higher bid is shown in the first. Let if ith respondents answer “*”, and 0 otherwise. Of course, * represents above six responses.
As shown by Hanemann [
28], corresponding probabilities for six responses are denoted by
:
where
denotes a cumulative distribution function of WTP and
is the households’ true maximum WTP for the blockchain and smart contracts in insurance that is the subject of the survey.
These can be compressed into three groups according to the probabilities as follows:
Following a logit model that is most widely used by researchers in studying WTP,
is assumed as:
where
are the parameters.
Therefore, the log-likelihood function
becomes:
The parameters can be estimated with maximization of the log-likelihood function.
3.2. Data
The dataset used in the analysis consists of 1000 responses obtained from CV survey. The households’ characteristics of the sample are summarized in
Table 1. The mean (median) of sample gross household income per year was KRW 62,283,800 (60,000,000), the average education period was over 14 years, the average age of respondents was 45.58 years old, the ratio of gender was almost one to one, about 70% of the sample consisted of married people and the sample households held 3.04 insurance policies on average. This sample is similar to the population parameters, according to data released by KSIS 2017 Census. The average gross household income per year of the population was KRW 56,100,000 (USD 50,089), the average age of the population was 43 years old, the average ratio female was about 50% and the average ratio of married people was 60% in 2017. This means that the sample represents the population well.
The bid ranges (in Korean Won; KRW, 1 USD = 1120 KRW) used in valuation question were (3000, 10,000), (8000, 15,000), (13,000, 20,000), (18,000, 25,000), (23,000, 30,000), and (28,000, 33,000). According to the number of bid ranges, 1000 respondents were divided into six groups. Each group had almost same sample size (164~168 respondents).
Table 2 shows the bid values of each bid range and response summaries. 187, 167, 140 people responded “no”, “yes-no”, and “yes-yes” respectively out of the 494 people who are offered lower bound bid first and 162, 175, 169 people responded respectively “yes”, “no-yes”, and “no-no” out of the 506 people who are offered upper bound bid first. One important result of this analysis is the fact that over 64% out of 1000 respondents said they were willing to pay either the first or the second bid amount.
5. Conclusions
Since the concept of blockchain and smart contracts based on blockchain was first introduced in the 1990s, they have been at the center of great interest in academia and industry.
Blockchain technology can be highly secured by design and efficient for huge data. So, insurance companies processing entirely data-driven work have explored the power of blockchain technology. The smart contracts enable entire process to be automated and the contracts to be self-executing in nature. Thus for an insurance company and policyholder, it becomes very important to use it.
Some people addressed that blockchain and smart contracts have not been fully explored yet in the insurance sector but consultancy firms anticipated they will improve customer engagement, reduce cost, and development new insurance productions. Indeed French major insurance company AXA launched a new flight-delay insurance product using smart contracts in 2018. Under these circumstances, Korean insurance companies are wondering whether to invest in these technologies for their business sustainability.
The focus of this study is to help Korean insurance company make decisions on investment in blockchain and smart contracts and adjust premiums with consumers’ additional WTP. It is meaningful that the utility of technology is considered as the determinants of premiums compared to current studies that considered demographic and socioeconomic variables. About 65% of the sample respondents are willing to pay some additional premium for blockchain and smart contract. This means that two out of three people are positive about insurance contracts using this technology than the premium they currently paid for and indicates the need to expand the insurance products using blockchain and smart contacts.
This study conducted the survey on 1000 heads of the household or homemaker that represents population well in South Korea and estimated insurance consumers’ additional WTP for blockchain and smart contracts using OOHB DC CV method. As expected the higher the additional insurance premium, the less likely the probability that the respondent would be willing to pay. The median WTP excluded covariates effect has the value of KRW 16,111.71 (USD 14.39) per year for household holding entire insurance policies. This can be a useful baseline for insurance companies to raise premiums and prevent negative public opinion about the high rate of premiums and an estimate of incremental income from the insurance premium. Considering the total number of households in South Korea, the aggregated additional WTP is about 8 percent of the net income of the insurance industry in fiscal year 2017.
The findings from a model containing covariates also useful to design an insurance product by the characteristics of the consumer. The insurance premium is determined based on risk when designing an insurance product. In this case, although the insurance premium is different by measuring the risk arising from the characteristics of the consumer, the preference by characteristics for the insurance product is not considered. Using the results of this study, an insurance company can determine the superior customer of insurance product in advance by referring to changes in WTP according to the characteristics of the consumer and thus enable the classification strategy of products. People with high-income, high education, and more insurance contracts were more likely to pay extra for insurance policies using blockchain and smart contacts. The strategic development of insurance product targeting high-income and educated consumers will increase the number of policyholders, which in turn can increase insurance premium revenues.
What was regrettable during the study was that some informative data were not available, so this study were not able to estimate the additional WTP by insurance types, subscription period, and the amount of premium, and additional WTP for the people who cancel an insurance policy before end of the agreed term.