Article first published in Insurance Day
The financial services and technological industries are converging to explore the possibilities in blockchain, or distributed ledgers, the technology underlying the digital currency, bitcoin. Blockchain offers the potential to become an essential infrastructure component and is fast gaining research and development traction in many sectors.
A blockchain is simply a shared database or ledger. Given its broad meaning, it can be a database of virtually any recordable information (eg, the transfer of bitcoins). Blockchains store data in “blocks” and “chain” them together to form a cohesive, unbroken record of that information.
Individual blockchains are stored on and accessed from many computers. Any attempt to change the ledger stored on one will be authenticated (or rejected) by the entire network, making it very difficult to corrupt.
Arising out of the blockchain phenomenon is the concept of so-called smart contracts. Smart contracts are coded instructions that execute on the occurrence of an event. These often use blockchain technology to record and execute transactions.
While their common name is arguably a misnomer (they are not necessarily contracts in the traditional legal sense), their implementation can enable, for example, insurance monies to be transferred virtually immediately on the occurrence of a verified insured event (such as a delayed plane).
While these are early days for the wider use of distributed ledger technology, predictions are that it may revolutionise everything from the operation of the finance industry to the trade of precious gems. Such technology could permeate through and across industries and be used for purposes ranging from near-instant money transfer to identity verification.
The commercial insurance market has been slow to adapt to digitalisation in all forms – perhaps a reflection of its traditionally relationship-driven nature. However, even if (as seems likely) existing structures are retained, a myriad of inter-connected relationships involving brokers, reinsurers, third-party cover holders and binding authorities – all sitting on top of or parallel to the central insurer-insured relationship – may become a fertile hunting ground for disintermediation (the removal or reduction of intermediary parties).
We see four potential areas of opportunity in particular. These include administrative and process functions: the nature of many contracts with a variety of parties and obligations being impacted by single triggers is ripe with potential for distributed ledgers.
It also includes the fundamental transfer of risk from the client to the insurer’s balance sheet. This area, involving complex assessments of risk and agreements as to risk transfer may be less suited to a distributed ledger or use of a decentralised autonomous organisation (DAO), but the use of such platforms alongside wraparound contractual arrangements still offers opportunities.
Another opportunity sits around niches of risk transfer, such as parametric insurance (eg, crop insurance triggered by pre-determined weather data parameters), while insurance linked securities have obvious potential.
Finally, there are hybrid products, which, using the internet of things, use data through the term of a policy to update premium allocation.