Most of the 10 million people who play Pokémon Go each day don't understand how it works, but still they play it. Why? Because it's fun and easy to play – there is no lead-in time. It's also a new way of visiting a place- usually your own neighbourhood or city. What if we simplified insurance in the same way and made it just another app on your phone?
Blockchain technology is a decentralized, peer-to-peer network. It's a virtual database and acts as a modern time machine, permanently and immutably recording all transactions happening on it over time. The use of cryptography ensures that participants to the network and transactions happening on it remain private. It runs on a consensus mechanism that is decentralized - transactions are validated by participants and not by a central authority as is usually the case in finance. Moreover, blockchain enables smart contracts, which self-execute when pre-defined quantifiable, verifiable and external data or parameters are triggered (eg paramteric insurance triggers for ILS).
Currently, the insurance eco-system consists of multiple, unconnected ledgers. If an insurance policy is triggered, the broker notes the loss on his/her system and then communicates it to the insurance company responsible for the claim, which notes it on its system (or ledger). The insurance company then issues a bill to the reinsurer, which notes it on the reinsurance company's system, and finally various bank ledgers are triggered to effect the associated payments. All of these activities are interconnected, but until now, dealt with manually, separately and in sequence. The "nodes" in the system, which connect the ledgers, are teams of human beings who operate payment and reconciliation processes, making the process lengthy, costly and subject to human error.
With blockchain, the nodes are computers, and the interconnectedness is ensured by the distributed nature of the network. This elegant meta-technology allows participants to (simultaneously and in real-time) access all the information across the value chain. Potentially, the whole re/insurance industry could operate from the same ledger. Participants such as different insurance companies could also operate their own separate blockchain network so that a claim made directly on their ledger could trigger the payment through a smart contract and trigger another payment from the reinsurer to the insurer using the same ledger or an inter-operating ledger. We could even envisage a virtual currency within the re/insurance industry used for all payments.
So blockchain technology not only has the potential to help us simplify our contracting but also our ability to cooperate across industries and functions.
A recent study by PwC found that while 56% of insurers polled recognized the importance of blockchain, 57% admitted they did not yet know how to respond. While there is much talk about blockchain at the moment with a limited number of re/insurance-related use cases, I believe it's only a matter of time before it becomes part of our everyday life, like barcodes: what once felt so innovative becomes a useful device that we don't really notice anymore. So maybe blockchain isn't just a trend this summer... unlike Pokémon Go!
What kind of advantages do you see in blockchain? And are there use cases you'd like to share as comments below? I would be glad to continue this discussion and consider developing some with you!
Location: Zurich, Switzerland