October 6, 2017
The Council is pleased to be joined by Pat Schmid of The Institutes for a discussion on Blockchain during our Insurance Leadership Forum (ILF) next week.
Blockchain has been highlighted an as emerging industry issue with the potential to be a game changer but there is still much uncertainty around what it is and how it works. To help provide clarity and gear up for the dialogue at ILF, we’ve asked Schmid several key questions.
What is blockchain and why is it important to the insurance and risk management industry?
Schmid: “A blockchain combines a distributed database and decentralized ledger that maintains a continuously growing list of records, called blocks, in chronological order. In most blockchains, new blocks and the data within (transactions, smart contracts, and so forth) are confirmed and verified through a consensus process called mining. This verification process removes intermediary validation and establishes trust without the use of a central authority, such as a bank.
Blockchain could have widespread ramifications across the insurance value chain, with many looking at blockchain technology and associated smart contracts (computer protocols that facilitate, verify and enforce the performance of a contract and that can be self-executing and self-enforcing) as opportunities to:
- streamline the flow and verification of data
- lower operating costs
- improve processes
- remove the need for intermediation
What are a few key insights the industry should be aware of?
Schmid: “The blockchain is significant in that it completely removes the need for verification by a central authority.
For example, through its underlying blockchain technology, bitcoin solved the double-spending problem, which stymied digital currencies before it. For those who have never heard this term, the “double-spending problem” relates to the risk, particularly when digital currency is exchanged, that a person could concurrently send a single unit of currency to two different sources. But bitcoin did even more. It reinvented the concept of monetary networks by providing a true peer-to-peer payment system and eliminating the need for intermediary banks, including central banks.
As important as that all is, blockchain applications are much larger in scope than bitcoin and its associated transaction protocol. More recent blockchains, like the blockchain associated with the Ethereum Virutal Machine (EVM), have further extended the blockchain disruption by establishing the use of smart contracts. These smart contracts could eventually automate large segments of the insurance experience, lowering insurer costs, which could be passed on to consumers.
In addition, insurers have traditionally been reluctant to share their data, even in efforts to tackle industry-wide problems, such as fraud or uninsured motorists. Blockchain provides a superior means to share information through its consensus process and security features. Original blockchains, like bitcoin’s or Ethereum’s, function as shared databases that are both public, in that transactions can be viewed by users, and anonymous, because the associated cryptography hides the identities of parties to the transactions. As business has grown more interested in testing this decentralized ledger technology, private and permissioned blockchains have developed. And the most recent advancements have led to development of permissioned chains on a public blockchain.
Regardless of whether the blockchain is private, permissioned or public, and whether it allows transactions or contracts, the very concept of the decentralized ledger has the potential to change financial services and insurance on the same scale as the internet did—maybe even more so. For insurance, blockchain could help increase market reach and customer personalization while also cutting costs.”
For those attending ILF, please join us on Tuesday at 8:00 a.m. MT for a deeper discussion on the development of blockchain.
For those who are not able to join, we will send highlights and takeaways as we continue to monitor and share issues impacting the market.
What We’re Reading
PremFina’s goal is to provide a way for brokers to more effectively communicate with their customers and offer finance to their clients. This would eliminate the need for lump sum payments. The company’s founder says that it is similar to Uber in the way that it connects the two parties.
Insurtechs can help carriers innovate, and carriers may even be able to learn some lessons from insurtechs that they are in direct competition with. Carriers are viewing insurtechs as an “external innovation lab.” Maybe it is possible that brokers can learn a bit from insurtechs as well.
Research shows that smart home technologies are being used to reduce claims, and that it is becoming more common to include smart products with insurance policies. By 2022, it is likely that the Far East and China will have the greatest market share of home insurance policies using insurtech.
Life Epigenetics holds the exclusive license for lifespan-predictive technology. They are looking to commercialize their product, which could transform the way life insurance and financial services underwrite and deliver longevity based products and services.
American International Group (AIG) has partnered with technology firm TradeIX to enable firms to access trade finance using a blockchain-enabled platform.