Caspar Herzberg |
This article first appeared in the Winter issue of The Record.
Blockchain technology started life as a protocol that recorded bitcoin transactions between two individuals (mostly unknown to each other). It was developed in a way that would allow bitcoin provenance to be validated, would avoid double spending and in which an immutable ledger would be constructed and maintained by multiple non-trusted parties, without a central authority governing it.
Today blockchain technology has evolved to become a protocol that allows us to record any type of transactions transferring value. From tracking diamonds (Everledger is a great example of a firm that does this) or real estate properties, or even Delaware corporations or individuals’ identity, blockchain currently also provides a way of transitioning between the real and the digital world.
The biggest benefit of blockchain is that it enables multiple connected databases or data sources to communicate with each other with little need for human intervention nor a central authority overseeing this process. It allows multiple writers to agree on a chronological, transparent and auditable ‘history of truth’ that is encrypted and believed to be incorruptible.
However, despite the rapid uptake of the technology, it presents many challenges to insurers – namely around speed, scalability, two-way transactions and data confidentiality, just to name a few. We have been discussing many of these challenges with some of our clients, and the industry is acknowledging that understanding blockchain and its potential is only a first, small step of the journey. These discussions have now evolved to actually thinking of use cases and designing proofs of concept that can advance the use of blockchain among the insurance ecosystem. Large financial institutions – both banks and insurers – have joined efforts in two main consortiums – R3CEV and B3i – to solve these problems. Cross-industry efforts with players from other industries are also starting to bear fruit. This new and dynamic ecosystem is seeing large sums of capital come in, and shifts in alliances are expected as the technology matures and players start picking potential winners.
As a result, blockchain enabled solutions will transform the future of the financial services industry as we know it. They will allow for more disintermediation, for self-executing products and back-end processes and most importantly, for higher cost-efficiency that will allow reaching new, underserved markets. They will facilitate the growth of newly emerged structures – like P2P lending or P2P insurance.
Overall, the combination of blockchains, smart-contracts, internet of things and connected devices providing oracles, big data analytics and artificial intelligence has the potential to construct systems in which risks are measured, assessed, pooled and allocated to investors automatically, with full transparency and immutable records. While this is not going to happen overnight, it is certainly around the corner and has the potential to be highly disruptive.
Magdalena Ramada is a senior economist at Willis Towers Watson