Many of us have side-stepped the subject of Blockchain, leaving it for the techies. This may be slowly changing. In a speech at the beginning of the month, Bank of England governor Mark Carney talked about virtual currencies. While doing so, he briefly brought the subject of the technologies behind them into the spotlight. In general, the headlines arising from the speech were far from positive concerning virtual currencies themselves. One headline read Carney calls for crackdown on crypto-currency ‘mania’ (BBC News). In another Carney calls for more cryptocurrency regulation (CNBC).
Whether virtual currencies are a good thing or a bad thing is a debate for another day. The headline that really drew my attention was Cryptocurrencies failing as money, but technology has promise: Carney (Reuters).
Intrigued, I dug deeper and found that Mr Carney had said that the blockchain technology developed in parallel with the new currencies was both “exciting and interesting”. Now, that’s the positive news in this story.
Why is blockchain exciting?
Blockchain technology is exciting because it offers a safe way of conducting business in the digital world. With the growing threat of cybercrime, a safe way of conducting business digitally really is exciting.
Put simply, blockchain enables digital contracts and transactions involving multiple parties to be executed in a secure, transparent, and auditable way.
Blockchain offers a system for maintaining a continuously growing list of ordered records, or blocks, on a decentralised network of computers,. It removes the need for a central registry or clearing house. It is secure because each block contains the encrypted content of the preceding one, along with its own data and a time stamp. This means that any change to one block involves changing other blocks as well and this cannot be done without the co-operation of the network members who added them.
…and why is it interesting?
Why would blockchain technology seem interesting to anyone other than a techie? Well, for the insurance market, the interest lies in the potential applications of the technology. Blockchain’s value-adding capabilities present an opportunity for insurers to improve the efficiency and security of their processes.
Major insurance players have already flagged their interest. Foremost is B3i – the Blockchain Insurance Industry Initiative. It was formed initially by 15 insurers and re-insurers including Aegon, Allianz, Munich Re, Swiss Re and Zurich. B3i commenced their first project in March 2017 as a Proof of Concept to create a Property Catastrophe XOL “smart contract” for excess of loss reinsurance. The B3i website explains how they chose this product because it represents the simplest form of contract on which to base their development and to test the capability and viability of the technology. Concurrently, they have been developing common standards under which this and other products will operate.
There is growing acceptance in the industry that smart contracts can offer the potential to track data-driven interactions securely on a blockchain without having to build different systems. Blockchain could enable the transaction flow across multiple layers of interested parties, from original insured to brokers to reinsurers and all the way to capital markets. It could feasibly redefine the standard for digital transaction processing and deliver significant efficiency gains.
…and can you ignore it?
Looking to the future, smart contracts have been mentioned in relation to underwriting, claims management processes, complex multi-party processes like subrogation.
But there are roadblocks: key issues that still need to be addressed include standardisation, systems integration, legal and regulatory frameworks, security and confidentiality.
The reality is that blockchain should not be ignored, although it could take several years before all the issues are addressed. When planning a technology strategy for the future, you should ensure that you do not preclude the possibility of using blockchain solutions – because it looks like blockchain isn’t just for the techies anymore.