Author: Steve Anderson
If you are a fan of the HBO series "Game of Thrones," you might think the term "blockchain" describes battle armor. But blockchain is actually a new way to structure data and is the foundation that makes cryptocurrencies like bitcoin possible. It has insurance implications as well.
Let's get the bitcoin angle out of the way first. Bitcoin (including the so-called blockchain protocol governing it) was first described in 2008 by a pseudonymous person or group named Satoshi Nakamoto in a paper on the Cryptography mailing list. Blockchain made bitcoin—the first digital currency that cannot be controlled by a government, bank or individual—possible.
However, blockchain has the potential for much broader applications than just digital currency.
At its most basic, it is a distributed, public ledger that enables storage of data in a container (the block) affixed to other containers (the chain). The data stored can be anything: dated proof of an invention, a title to a piece of land, the details of a contract (smart contracts), or digital coins.
Anyone can verify that you placed data in the container because it has your public signature, but only your private key can open it to see or transfer the contents of the container. Like your home address, a blockchain container is publicly, verifiably yours, but only people you authorize have a key that allows them to open the front door.
Every 10 minutes, all the conducted transactions of a certain deal or series of deals are verified, cleared and stored in a block. This new block is linked to the preceding block, thereby creating the chain. To be valid, each block must refer to the preceding block. This structure permanently timestamps and stores exchanges and prevents anyone from altering the ledger. If you wanted to steal a bitcoin, you would have to rewrite the coin's entire history on the blockchain in broad daylight.
The blockchain creates a platform that allows trusted transactions to occur directly between two or more parties, authenticated by mass collaboration and powered by collective self-interest rather than by large corporations motivated by profit. Don and Alex Tapscott, in their book Blockchain Revolution, call this the "Trust Protocol."
The blockchain protocol makes decentralized governance possible. Normally, when you sign a contract, you either must trust the other party to honor the terms or rely on a central authority, such as the state or on an escrow service like Uber or Airbnb, to enforce the deal. Public blockchain ownership allows us to create self-enforcing smart contracts that automatically reassign ownership once contract terms are triggered.
Neither party can back out of the contract because the code—running in a decentralized public fashion—is not under anyone's control. It simply executes. The smart, autonomous contracts can even pay people for the output of their work.
Broad Uses of Blockchain
Nakamoto's invention has given birth to a new kind of platform—one with open architecture and a governance model but no central authority. Having no need for gatekeepers, it has the potential to put severe pressure on existing platforms that rely on costly gatekeepers. Financial services that claim 2%-4% of transactions simply for passing them on to someone else may in the future be hard-pressed to justify their existence.
Industries and firms worldwide are researching and experimenting with blockchain's distributed-ledger technology. For example, R3CEV is a consortium of more than 40 financial institutions that is working to design and apply distributed-ledger technologies to global financial markets. Additionally, in July 2016, Allianz and Nephila Capital completed a proof of concept around trading catastrophe bonds on a blockchain. Even the U.S. government is diving in: the Department of Homeland Security has stepped up its research and investment in blockchain technologies as it searches for ways to make government more secure, accountable and autonomous.
In insurance, blockchain could be the enabler that allows for actual peer-to-peer or crowdfunded insurance products, and Lloyd's is looking at how blockchain could be used to transform its London market operating model. Numerous startup tech firms are garnering investment to develop blockchain technology for insurance transactions. For example, Everledger is one that has built an inland marine aid. Imagine a customer wants to insure a high-value piece of jewelry. Establishing provenance of that item is key to validating claims and preventing fraud. Everledger has developed a process—in conjunction with major gem certificate houses across the globe—to create a digital "DNA" for diamonds and to register each by naming them with a unique identification code, which can be used by tradesmen as they buy and sell. The software creates a transaction record for each diamond as it trades hands, which can also assist in recovery if it is stolen for pawning or sale. There are many other players developing other blockchain-related platforms for a variety of insurance recordkeeping needs, so don't be surprised if you start seeing the technology pop up in your daily work.
As with any new technology that promises to disrupt existing business processes and models, some say the blockchain is a pipe dream and may be dangerous. Criminals could use bitcoin for transferring and laundering money, for example. But, whatever the perils, blockchain is in development for the insurance industry, and it may take off in a segment you're in.
Steve Anderson is President of The Anderson Network, a trusted industry technology authority, and leads ACT's 'Changing Nature of Risk' work group.