Blockchain: Looking for Value beyond the Bitcoin “Bubble”
With all the media, press and speculation about Bitcoin, the focus on the underlying blockchain technology tends to take a back seat in most discussions in the media.
Let's start with the obvious question, what is blockchain? First off, blockchain is NOT Bitcoin. Bitcoin is one application of blockchain technology. Bitcoin is called a “crypto” currency but not in the sense that it is “shady,” nefarious, or in any other way illegal (although in its early days it was unfortunately the transactional mechanism for drug dealers and drug users and conjured up images of the dark web). Rather, “crypto” in this case referred to data and transactions that were heavily encrypted and therefore very secure – a good thing. Perhaps this is why users today prefer to think of these as virtual or digital currencies rather than cryptocurrencies. In fact, sovereign governments considering getting into the blockchain currency game (including the good ol’ USA – e.g. FedCoin) refer to them as digital currencies to avoid the crypto confusion.
The allure of digital currencies as a starting point for application of blockchain technology is straightforward: it solved a financial and logistical problem. Traditionally, facilitating monetary transfers (such as international money wires) required a third party (i.e. a bank) who charged a transaction fee for the service and often took days to clear. Using blockchain technology (through a highly secure, encrypted, trusted peer-to-peer, self regulating network adhering to strict protocols) these transactions could be executed instantaneously without third-party fees. Bitcoin transactions promised to be faster and cheaper – and still highly secure (all of this is still to be proven out – but the promise is high and hence the Bitcoin multiples and hype).
But blockchain technology will be useful anywhere a third party needs to be involved to complete a transaction (and charges a fee), where data shared is highly sensitive or confidential, where transaction or frictional costs (e.g. time) are high, and where transparency is paramount (the blockchain “ledger” provides a living, breathing chronicle of all peer-to-peer transactions that occur).
For insurance executives looking to understand and exploit this powerful technology, we think it most important to “focus on the math, not the calculator,” meaning do not focus on the technology but focus on what you are attempting to accomplish with blockchain technology.
So what are the applications to the insurance industry across the value chain? We think about it across 4 dimensions:
1. Do you offer/deliver/ manufacture an insurance product that requires near real-time delivery of proof of insurance?
a. Accelerated delivery of the proof of insurance would allow a business or consumer to proceed with a primary transaction, for example:
i. Taking possession of an auto
ii. Begin working a construction site
iii. Compliance with a regulatory authority
2. How is all the content for the lifecycle of an insurance contract shared?
a. The ability for insureds, brokers, insurers, reinsurers, data providers and regulators to participate in a blockchain of relevant information of an insurance contract
i. Quote, bind, issue, renewal, and cancellation can create distributed content.
ii. Proof of insurance
b. Removal of duplicate content from one stakeholder to the next down the value chain.
c. The ability to have one set of records in a blockchain would decrease the frictional costs in the areas of underwriting and loss adjustment expenses, thus truly taking out unnecessary expenses in the premium charged to an insured for an insurance product.
3. The ability to have detailed information shared across a defined user group would allow for enhancement of portfolio management between insurers and reinsurers. This could occur in many areas:
a. Primary insurers’ sophistication of pricing and segmentation
b. Treaty pricing for reinsurance
c. Dramatically decreasing the cost to assess and transfer a risk to a reinsurer on a facultative basis
4. The cost for an insured, broker, insurer and reinsurer to provide access to content as part of the relationship with key stakeholders will decrease as the content is distributed.
a. This could include:
i. Departments of Insurance
ii. Other regulators, regulatory agencies and administrative departments
iii. Banks and other lending institutions
iv. 3rd party data providers
Insurance is an industry that requires a great deal of data, transactional information and a chorus of stakeholders to provide a healthy ecosystem to support all global economies. Blockchain will be a disruptive, but potentially powerful and beneficial, force in our industry, not just for the financial transaction implications, but for the ability to leverage distributed insurance data throughout the value chain and take out unnecessary costs for our insureds.
To read the complete white paper, get your free download here: Capitalizing on Blockchain in Insurance (free download).
In simplest terms, blockchain is a technology that provides and enables a series of participating computers (nodes) to maintain and manage distributed (shared) confidential information. As each set of information or block is created, it is linked to all the associated information and shared across the participating group, forming a blockchain. The shared information can be any set of data or records that the participating group agrees to share in a blockchain structure (the protocol).
For those of you who want to see a few helpful, straightforward video shorts, check out these links:
For a slightly more technical (but still understandable to mere mortals) discussion, give this a quick read: