Blockchain’s disruptive potential
For this week’s Insureblock’s episode we were extremely lucky to catch up with Magda Ramada Sarasola, Senior Economist at Willis Towers Watson, to discuss the disruptive potential blockchain can have in the insurance industry both now and in the future.
2 minute definition of blockchain
Technically the definition is that it is a shared distributed ledger, whose core concepts are that it is a way for people that don’t know each other and don’t trust each other but need a way to transfer value between each other. A good example of that is Bitcoin – the first blockchain technology used for transferring value without anyone actually overseeing that market. For this to successfully happen you need three things:
- The value being transferred arrives to its intended recipient without it being intercepted or modified. This a role which has traditionally been occupied by clearing houses or trusted partners. In a blockchain world you don’t need them
- You have to make sure that whoever is sending that information or that value owns it and hasn’t spent it before to avoid double spending
- The transaction is considered valid between the two parties and is successfully recorded onto the blockchain
So to resume blockchain is a means of actually transacting value in a way that you know doesn’t require anyone to be providing trust in that system (ie. no central intermediary).
Your journey to blockchain
4 years ago, Magda was working on a micro-insurance project for a client looking to expand in Africa. At that point she came across blockchain as a concept and spent a whole week on YouTube videos trying to understand what it was and then convinced her editor to run a piece on it. 45,000 visits were reached within a week of publishing her article and Magda’s life changed overnight as did her role. Ever since that day Magda’s journey became one of increasingly learning about the technology, thinking about the impact it would have to the insurance industry and actually developing solutions for her clients.
Blockchain’s disruption potential – short to medium term
In the short term it is about traditional insurers exploring blockchain in the content of how they interact as an industry to enabling shared databases in a semi trusted or trust less type of system. The use cases we are seeing are looking at interaction among peers, interaction among competitors, synchronisation or self-synchronisation of databases. At increasing efficiency and driving down costs around things like reconciliation in a semi trusted environment.
However, the actual attributes that makes blockchain a sociological revolution aren’t being used in that context. The same thing with smart contracts and how they are being explored in policies like marine insurance, supply chain management, and cat bonds, what we are doing is taking parametric insurance and using a very simple type of policy that we can automate and use a smart contract to automate that policy. Technically automation is something that doesn’t need the blockchain.
Magda sees the insurance industry using blockchain as an excuse to do automation that was long over due and that could have been done with other technologies. What a smart contract is automating is a relationship between two contracting parties that do not necessarily trust each other and have a conflict of interest and they agree on that contract and put it in a place where neither part can actually modify the terms. The first example of such an insurance policy was with the fight delay policy (eg. Etherisc & Fizzy). It wasn’t about it being automated, it was about customers willing to pay a premium for a policy being unstoppable and having an unbreakable escrow.
Whilst this makes a lot of sense for the end user what is the business case for insurance companies to be offering this kind of automation. Magda gives examples of companies that offer micro insurance policies for life insurance to help them reach a certain type of customer that may not understand how the policy works and who may not trust the how the policy works, but also as a means for eliminating claims processing costs.
These kind of policies, parametric or micro insurance policy that are dealing with a simple risk that can be put on a smart contract is the kind of short term activity we are seeing insurance companies taking on the blockchain. However, these are not using a lot of the attributes of the blockchain that actually may change the way we do insurance, the way we actually operate in a boarder risk ecosystem.
Start-ups & an ambidextrous carrier
Native blockchain start-ups realise that the power in the blockchain is actually about fully disintermediating certain activities and automating process in a trust less system. So technically what some of these start-ups want to do is underwriting without the underwriter. It’s about squeezing the insurance value chain and making the transition from risk to capital a lot quicker and more disintermediated for certain simple risks where the underwriting is straightforward.
In Latin America there is an insurance carrier that has launched a startup called, WeSura that operates like a start-up and who sell policies in a similar way like Trov but harnesses the power of social media to deliver a P2P powered insurance product that mutualises the risk.
Blockchain’s disruption potential – medium to long term
What we will see in the medium term is the development of infrastructure for these very automated or autonomous and distributed platforms to work and evolve to develop new and interesting solutions. Solutions are identity and provenance (eg. Everledger). Provenance solutions track or generate traceability of certain assets in a distributed ledger. Identity solutions to empower people through self-sovereignty of data and portability of solutions. This is a very interesting development because up to now individuals were never trusted with custodianship of their validated data because they have every incentive to actually manipulate it (Eg. your credit worthiness). With blockchain we can envision identity solutions where all the bits and interactions of how we deal with providers and the different parts of our personality that are being validated by those providers flow into a solution that the individual can just keep and give access to the third parties they choose to.
These third parties won’t necessarily be able to store individual’s details by monetising it but will have to generate the systems that have the ability to interrogate it with the individual’s permissions.
Consequently insurance companies will need blockchains and smart contracts that are capable of interacting with those portable identity solutions, provenance solutions, and new sources of data like prediction markets. So in the long term individuals may have smart contracts that can actually put together a policy that accesses the user’s identity solutions, provenance solutions (to prove they own the asset) and accesses prediction market to generate a policy or generate risk pooling to automatically place into a disputed capital market. That long term future is a future of automated risk placement platforms and true peer-to-peer risk neutralization platforms.
Magda shares many other fascinating points in this podcast of what the disruptive potential blockchain can have in the future. If you liked the podcast please do review it on iTunes. If you have any comments, suggestions on how we could make it better please don’t hesitate to add a comment below. If you’d like to ask a question to Magda feel free to add a comment below and will get her over to our site to answer your questions.
Meet Magda at the Blockchain for Insurance Summit
On the 21stof May Magda will be in London at the Blockchain for Insurance Summit. You can attend this event with our 30% discount voucher: 9700INS30