Insurance is being disrupted (finally!). That is clear. First it was telematics, then the almighty cloud, then the ever increasing number of start-ups attacking insurers on different levels and the inevitable lot of labs and accelerators willing to help them out. In the last few months since I joined Ingenin, one of the most talked about topics in the media has been blockchain, however the concept still makes the insurers scratch their heads when it comes to what it is and what it does.
What is blockchain?
All the excitement around the implications of this (not-so-) new technology has left its definition in the shadow. A Deloitte report defines blockchain as “a way for exchanging value over the internet without an intermediary”. It has also been called a ledger because it records assets and actions such as transactions and their details: sender, receiver, what was sent, how much, when, where etc. OK, but we already have different types of software that do this! The best part of blockchain technology though is that all these details cannot be deleted or changed by anybody! Simply put, blockchain is a database that nobody can change once it has been created. And nobody owns it.
The database is created by a network of computers called nodes which record all transactions ever executed and allow users to access any detail from any point in time and from any location. This type of technology was first used in 2009 to support the digital currency Bitcoin. The cryptocurrency made blockchain famous and it is what the latter is most known for, however the technology has many other uses as will be explained further.
Why is it called blockchain?
The first part of the name, “block”, is given by the fact that each transaction is stored as a block of information and the “chain” part refers to the fact that every block is cryptographically linked or chained to the previous one. A block is made out of two main parts:
- a header which contains metadata e.g. a link (reference number or hash) to the previous block
- the content i.e. the details of the transaction e.g. how much was paid
How it works
In order for a user to perform a transaction over the network they need two codes for access: their private key and the receiver’s public key. I will use an example from Z/Yen Group to explain how it works. If Elena wanted to pay Mark a certain amount of money over the internet, she would have to use her private key and Mark’s public key to transfer the money across. You can see in the figure below what exactly happens next:
(Image source: Z/Yen Group Limited)
Note: miners are responsible for adding transaction records to a blockchain
Where do financial institutions come in?
Before I answer the question, you should know that there are two types of blockchain technology:
- unpermissioned / permission-less (open, decentralised, nobody can edit them)
- permissioned / private (distributed / replicated shared ledgers)
The technology, especially the latter type, is appealing to the financial world because it fits in with the attempt at digitalising data and information. While there already are platforms that help financial agents do that, they are merely cases of the emperor’s new clothes. They do not completely solve the problem of bureaucracy – for example, signing a cheque digitally still requires you to sign something. What is more important, different organisations still have their own version of data corresponding to the same assets and transactions. If you add lack of communication between organisations, you get a slow system which makes financial events a hassle for everybody. But do not despair, blockchain to the rescue! All the nodes in the network have the same version of the truth based on algorithms, making transactions more accurate, faster and transparent.
So what other superpowers does this almighty technology have?
- it doesn’t need a central authority to supervise everything
- it prevents double-spending through block validation by all the nodes
- it allows real time access to trade details
- it decreases administration costs
- it offers a complete audit trail
You may also wonder why the tech is considered more secure. First of all, it eliminates intermediaries. Second of all, as the network increases in size (new nodes are added on), it becomes more difficult to change the recorded information because it needs to be validated by a larger number of nodes.
Blockchain in insurance
If there is one thing insurers and customers agree on it is that buying insurance and sorting out claims are cumbersome processes, but applying blockchain to insurance might change that. Since data is increasingly used in the industry (gathered from wearables, IoT, telematics etc.), the blockchain would bring a number of benefits to the market. Blockchain could improve the claims system both for insurers and customers through smart contracts (short computer programmes that execute previously specified actions if certain conditions have been met).
The contracts between insurers and customers and claims can be recorded into blocks and validated by the network, this way only real claims are paid (e.g. the system would know if a claim has already been made for an accident / crime and would not approve further payments). In a connected home scenario, sensors would communicate directly with the blockchain technology to claim cash / assistance from an insurer. The integration of IoT and blockchain would not only reduce fraud, but also create streamlined processes that would improve overall customer experience, confidence and satisfaction. Moreover, insurance could turn into a peer-to-peer system, since the technology eliminates the central authority and insurers could become providers of expert advice and focus on mutual pooling mechanisms. As if that wasn’t enough, blockchain facilitates the entrance of new players into the industry e.g. start-ups who understand the technology better (see Tradle who have exhibited at our Connect the Dots event).
(Image source: Great Wall of Numbers)
Insurers have still to figure out how to implement such technology in their highly regulated industry. They can start by experimenting with private blockchains and collaborate with regulatory bodies to find out how the technology might be applied and how it will be maintained and paid for. The industry may need to adopt digital identity systems and management of personal data systems before it fully embraces blockchain technology.
Here come the cons
It might sound like insurers have found their Holy Grail, but there are some obstacles to overcome before the technology becomes fully implementable in their industry. Since it is a nascent technology, security and control issues still need to be solved. The tech is VERY VERY difficult to hack into, however not impossible. The latest disruptive technology in the financial markets is represented by quantum computers (see our tweet here) which can process data at incredibly high speeds and could crack public-key cryptography. Another challenge is scalability – the blockchain needs to reach a critical mass of nodes in order to be truly productive, which brings us to another problem: a more costly system than the current centralised one since higher computation power is required. Another aspect related to scale is speed – transactions need to be validated by all nodes, so the system might not use WARP speed to process all the data. In addition, at the moment, it is questionable whether financial organisations (regardless of their size) are willing to collaborate and share a network instead of developing their own blockchains – we know how hard it can be to give up control *sigh*. The next one is more of a mistake the insurers are making by thinking of ways to improve the current systems instead of using the new tech to develop unexplored solutions and opportunities. This might be because they don’t fully understand the technology yet, which brings us back to why I’m writing this blog. And one more thing: regulation!
Back to happy thoughts
Even if the technology is still raising question marks, it has already been successfully tested by seven Wall Street organisations including Bank of America, Merrill Lynch, Citi, Credit Suisse and JPMorgan. Advances have been made in the insurance industry as well with SafeShare being the first to offer a blockchain-based solution.
All in all, blockchain is here to stay. The long-term strategic benefits for insurance are undeniable which makes this technology one of the most exciting ones at the moment and definitely worth keeping an eye on. As advances are made to further develop its implementation, more questions will be answered and probably new ones will arise. Meanwhile, I hope the topic is a lot clearer than when you started reading this article and stay close for more updates here and on our Twitter and LinkedIn accounts.
Marketing Assistant @Ingenin