Blockchain is best understood as the technology behind Bitcoin, but its potential applications go well beyond virtual currency – and its impact on the insurance sector is likely to be profound.
While “blockchain” conjures, at best, cloudy connotations of cryptocurrencies, and at worst, nothing at all, those who do understand it are convinced that it has the revolutionary potential of the internet for society as a whole – and seismic implications for the insurance industry.
Let’s remember that back in 1990, the word “internet” didn’t mean anything to most people either. In 1994, a host on The Today Show in America, asked “What is the internet, anyway?” Today, this question provokes laughter from the enlightened, or downright disbelief from digital natives who have never known a world without it.
History has proven that it’s not unfeasible for a nascent technology to come to dominate – you don’t need to understand the technicalities of the internet to live in a world shaped by it.
If the comparison seems hyperbolic, note that in 2015 Venture Capitalists in the US invested more in blockchain technology than they invested in internet startups in 1994.
What is Blockchain, anyway?
It’s an open-source distributed ledger. Put simply, if the World Wide Web is an internet of information, blockchain is an internet of value.
Any asset that can be described digitally can be exchanged. It provides a decentralised network where information can be recorded and shared by a community. Every time a transaction occurs, it needs to be verified and validated to become a time-stamped “block”. Based on a process of encryption and concatenation, these blocks form a chain which is virtually immutable and unhackable.
Don Tapscott, co-author of How the technology behind Bitcoin is changing money, business, and the world, describes “a distributed database where trust is established though mass collaboration and clever code rather than through powerful institutions.”
That’s a promising vision, but is the call for “blockchains not borders” a libertarian fancy, or a real challenge to the hegemony of traditional centralised institutions?
And what would the dominance of a technology that enables disintermediation mean for insurance?
A recent PwC report found that only 27% of people trust their insurer. By enabling transactions without the need for a third party, blockchain holds the key to what Deloitte describes as “democratised trust”. Actually, what it does is remove the issue of trust from the equation entirely.
Paradoxically, the new technology may take the insurance industry back in time – democratised trust implies a re-emergence of mutual pooling. It could foster a collaborative economy where individuals manage their risk more directly, while the disintermediated established insurers are gradually pushed towards a managerial or advisory role overseeing these mutual pools.
The decentralisation process would be accelerated by automated pay-out based on smart contracts built within the blockchain. To function, smart contracts need to be utterly unambiguous. Life insurance – with the binary simplicity of life and death – is a clear case for the smart contract.
But, before we get carried away with hash values and autonomous organisations, it’s worth remembering that, above all else, the value of new technology depends on its consumer application. The average customer doesn’t care about blockchain in terms of its technical intricacies. But if these translate into real-life benefits – such as removing added stress by triggering automatic pay-out after a bereavement – then there may be a strong case for application.
Insurance of the future might look radically different. In time, blockchain could enable truly personalised insurance solutions based on individual actions rather than statistical averages.
The financial services industry is certainly interested – and invested – in the technology. 45 major financial companies, from Bank of America to Ping An, are now members of a consortium led by blockchain company R3 CEV. The impetus now is no longer proselytising about its potential scope, but rather testing workable, relevant applications.
From a global perspective, emerging economies are perhaps most likely to lead in adoption. In line with the Daily Fintech thesis of “First the Rest then the West”, innovation will most probably be driven by the billions emerging into a global middle class, whose technological clean slate means they can leapfrog into digital adoption with greater ease.
Within the industry itself, it is likely that the first experiments with the technology will take place in car-related insurance, where the risk is common and easily scalable. Auto insurance is already around ten years ahead with its use of telematics, in comparison with the much slower adoption of wearables in health and life insurance.
Blockchain could be big. Very big.
But, as is the case with any major new technology, the problem is not a technological one. It is political. The ledger’s decentralised nature challenges the traditional dynamics of power.
As the leaders behind ThoughtWorks Fintech Lab have articulated, “All forms of explicit, concentrated power are susceptible to compromise or corruption.” And indeed, the financial heavyweights are weighing in before Bitcoin bites; Bank of England have recently developed their own digital currency, RSCoin.
Is this an attempt to reinforce the centralisation of power in what is essentially becoming a battle between blockchain vigilantes and the established pillars of finance?