Blockchain’s Future for Insurance: Hope or Hype
After having finished reading Reinventing Organizations and contemplating how organizations in the future could be put together differently, I’ve shifted my reading for this quarter back to processes and technology starting with the illuminating opus to blockchain titled Blockchain Revolution by Don and Alex Tapscott, et. al.
Published in May 2016, this text is a fantastic overview on the potential disruption and opportunities that blockchain technology may create, covering everything from improved healthcare and reduction of back office costs for finance to better models for nation state governance. However, I couldn’t help but think about whether or not blockchain technology might apply to one of the most pernicious problems for insurance technology leaders — maintaining legacy administration systems.
What follows in this article is certainly not a thorough analysis of the space, but rather a quick primer and some questions for insurance executives to consider as we begin wading into these waters.
The Promise of Blockchain
Bain and Company recently announced survey results in which 89% of financial market executives expected distributed ledgers to be adopted by financial institutions by 2020. It certainly appears that thinking about blockchain and its application to insurance is becoming a leadership imperative.
According to Tapscott and others, the potential use cases for blockchain in the financial industry are numerous and revolutionary: from a single source of customer data provisioned at will and in control of the individual (e.g. medical records, driving history, health and wellness data) to smart contracts that hold the promise to remove the accounting and lifecycle management burden of insurance contracts from the carrier all together. Blockchain technology aims to increase transparency, reduce transaction costs, mitigate risks (e.g. settlement, counter party, agency, and systemic risks), and increase speed all while creating new opportunities for value innovation.
For a quick primer on the potential of blockchain technology, please see the following video:
It takes but one step to begin imagining policy administration systems going the way of the dodo bird. Visions of such a utopian future become intoxicating siren songs for those of us dealing with 20–30 year old systems. In this vision, insurers may no longer need to manage their contracts internally, but instead utilize the blockchain to transparently execute the provisions in the policies they sell. We could live in a world without legacy system migrations, without customizing monolithic packaged systems, and without building proprietary systems … it could be magic.
But before IT leaders jump into the fray to experiment and retool their teams for this coming change, I have collected a set of questions I believe should be considered carefully.
Are Smart Contracts Really “Smart”?
Smart contracts are simply a programming paradigm that allows the terms of a contract between two or more parties to be executed in a distributed fashion, algorithmically enforced on the blockchain. A quick google trends search shows that there has been an uptick in interest in “smart contracts” over the last 24 months, and not without good reason.
Smart contracts are touted as the logic execution engine of the blockchain — a way to remove the requirement of central processing intermediary between two or more parties. With smart contracts, one can specify how an insurance contract should work and simply “deploy” the contract to the blockchain. This would allow for a complex set of events and digital asset transfers to be coordinated on the blockchain itself — transparent with well understood rules and enforceable via the consensus mechanisms built into the blockchain.
The potential applicability to insurers who manage contracts today in legacy systems is staggering. What little more do we do than agree to underwrite a set of risks identifiable by the occurrence or nonoccurrence of verifiable events in exchange for asset transfers in the terms of premium payments to and claims / returns from the contract itself. Sounds easily done with smart contracts, right? But this potential is not without avid detractors and failures worth noting.
Gideon Greenspan at Coin Sciences has pointed out in numerous posts the challenges of immutable smart contracts running away from their original intentions. The failure of The DAO (an autonomous organization built from smart contracts on the Ethereum blockchain) is a spectacular example of well intended code being subject to an unforeseen race conditions resulting in the unintended transfer of assets to a bad actor.
In addition, some of the initial smart contract purveyors in the insurance space, including InsureETH (a flight insurance smart contract that featured in the 2015 London Fintech Week Hackathon) and Dynamis have seemingly been short-lived or idle since mid-2016. Perhaps these are failed prototypes left to die and wither on the vine, or a result of consolidation of talent and knowledge to other blockchain ventures.
One notable exception is Etherisc, whose similar flight insurance smart contract had a short run in September of 2016. The lessons learned published by the contract authors are worth reading along with some of the compelling use cases they have developed. It is clear that maintaining momentum for some of the even simplest use cases in insurance seems to be difficult at present, but not impossible.
Where are the Trusted Oracles?
The insurance industry still relies on a set of validated external information to operate including: identity (to whom are you selling coverage, and what/whom are you covering), events (occurrences that trigger coverages — accidents, deaths, disabilities), and payments.
Tapscott covers the potential disruption to the payments space well in numerous chapters in Blockchain Revolution. The blockchain-enabled payments model seems to be well established with the emergence and continued success of Bitcoin over the last 9 years. But the reality is the the industry is still in its nascent stages when it comes to defining networks of trusted oracles for identity and events that could power an insurance industry at scale.
Take identity for example: Proving who you say you are requires third party validation in some form, often from a state or financial institution. Though the vision of blockchain technology outlined by Tapscott is to shift identity ownership back to the individual and allow for discrete control, a quick look of the state of blockchain based identity management startups shows a troubling trend of numerous pools of solutions vying to be first or the emergence of walled gardens built around existing providers.
For an insurance ecosystem to flourish, we will either need to see critical mass from a single provider (e.g. Facebook or Google), the emergence of trusted networks of identity, or the emergence of even broader digital initiatives from nation-state technology leaders like Estonia, who now offer governments services to non-citizens for business formation based on blockchain technology. This momentum may ultimately come in the form of more governments adopting blockchain technology first in order to store identity and records such as land titles and taxes.
Insurance leaders should have their eye on this emerging ecosystem and how it develops. Monitoring the progress of consolidated oracle providers like Oraclize and Smart Contract as well as the sources and methods used by other Ethereum-based insurance providers will be instructive. In addition the Blockchain Insurance Industry Initiative (B3i) formed in October 2016 by Allianz and others should be on any insurance executive’s radar map for monitoring the emergence of this ecosystem by incumbents.
Blockchain Skills for the Future
Here in Asia, where there is still a large divide between business and IT, between which is the the type of knowledge and expertise that a blockchain enabled business will require. Companies would do well to begin developing business engineering expertise that relates to their firms’ core competencies and span finance, product, and operational knowledge.
The knowledge and skills that gave rise to internally managed systems in the 80s and 90s, migrated to expertise in configuring, integrating, and customizing packaged system the 00s and 10s, may be now giving way to knowledge of cryptography, blockchain architectures, and smart contract construction. Yet these skills are hardly even mentioned in today’s skill matrices and development plans.
Building these skills for the future may require unconventional approaches: We should consider identifying high performing, curious coders and ask them to design a business idea coded in Solidity. We should be taking our rocket scientist credit analyst and have her learn Python to begin building a base of programming knowledge. Better yet, let’s teach our top strategists how to code and expose them to the emerging ecosystem of smart contracts and DAO powered enterprises.
A cursory look at blockchain conference schedules and attendees shows that many leaders who are challenging existing business models come from a background of deep understanding of implementation and potential of blockchain technology. Whether they intend it or not, the digital innovators of the future are not coming from the C-suite, they’re quickly becoming the C-suite. And they are doing so in an open, collaborative fashion as evidence by the Etherisc Whitepaper open to all for comment.
Blockchains and crypto currencies themselves can be fairly obtuse concepts. Innovating in this space will require lateral thinkers to dream up the business models of the future and we should begin cultivating that leadership now.
Putting in All Together
Of course, this vision is not without numerous challenges including: formal validation for smart contracts, expanding use cases beyond parametric insurance, predicting operating costs for blockchain transactions, legal ramifications of cross border asset flows or labeling your business “insurance”, or the aforementioned challenge of reliable and ubiquitous identity.
When considering the viewpoint of industry incumbents, I believe that those who can either quickly collaborate to form such ecosystems, quickly integrate such blockchain based technologies into their existing operations, or cultivate the right talent to guide the operating models of the future will have the upper hand. These firms will find new ways to reduce backoffice costs, streamline the application and underwriting process, or offer compelling product features and find new sources of value.
I’m excited to watch this space unfold.
(Note: The opinions contained within this article are the author’s personal opinions and not necessarily held or endorsed by his employer. This article was originally posted on LinkedIn)