Digital disruption: Blockchain and the smart insurance contract
What is blockchain and how will it change your business?
Blockchain. It’s the financial services buzzword of the moment but what is it? What isn’t it? What might it be? In the Fintech space alone there are a slew of would-be suppliers and would-be users claiming that blockchain will revolutionise any number of applications, including insurance.
So let’s look a little closer at the technology.
Decrypting the blockchain
We’ve all heard of Bitcoin, right? Well it all started with the blockchain. The ownership of Bitcoins, including transfers of ownership, is recorded in a distributed ledger – the blockchain.
The blockchain consists of concatenated blocks of transactions and allows competitors to share a digital ledger across a network of computers without need for a central authority[i]. The best part? No single party has the power to tamper with the records, so the math keeps everyone honest.
If you believe the hype, there’s no problem that can’t be solved by putting it ‘on the blockchain’. Current proposals in the market range from peer-to-peer trading, to legal and contractual execution, and identity management solutions – all powered by blockchain[ii]. It’s something that’s taking off on local soil too, with local start-ups as well as larger companies like Australia Post and CBA investigating blockchain-enabled solutions. The latter of which recently joined a consortium of global banking institutions to test how distributed ledger technology (blockchains) can transform trade financing for modern financial markets.
But enough of the technicalities. Let’s investigate what innovations blockchain can deliver for the insurance market?
The future of insurance
In the United States, insurer giant John Hancock has begun work on multiple blockchain “proofs-of-concept” designed to show how distributed ledger technology could reinvent established insurance industry processes[iii]. And while the company is currently keeping mum on the details, Ernst & Young recently published a report that called out peer-to-peer insurance and faster distribution of “regionalised or personalised” products among its list of opportunities for insurers using blockchain[iv].
The World Economic Forum has also published a report which surveyed 800 technology experts –the majority believing that by 2025 we will hit the tipping point (10% of global GDP product stored on blockchain technology)[v].
Digital disruption
Naturally, with any technological innovation also comes a degree of disruption – just ask Australian tech entrepreneur Anthony Goldbloom who has issued a warning for a number of professions that their jobs will be particularly vulnerable to digital automation in the coming years. One of these was – perhaps surprisingly – the legal profession, with recent reports suggesting the nation’s top law firms will be disrupted by “smart contract” technology.
But how can such a highly-skilled and specialised workforce be on the brink of disruption, you ask? The answer – blockchain.
The blockchain and smart contracts
The threat lies in trust being coded into computers via the digitally distributed ledger technology. “Smart contracts” as they are called, are an application on the blockchain that refer to computer protocols which verify and execute the terms of a contract, removing the need for humans to monitor compliance and enforcement[vi].
Smart contracts are fast gaining attention outside of law firms too, and the notion of automating the insurance policy once it is written into a smart contract is compelling. While many blockchain-enabled smart contracts are still in the prototype stage, there are four key areas that their application into the life risk insurance profession could potentially address.
- Lower operating costs, as the contract would be self-sufficient after its creation and no costly human interaction would have to take place afterwards.
- Avoidance of the textual ambiguity of traditional contract could speeds up claims processing, as well as help prevent legal disputes.
- Reducing the opportunity for fraud due to the programmable nature of smart contracts.
The overarching benefit of all of this would, of course, be the improvement in client engagement and satisfaction. But is it really feasible to use smart contracts in everyday insurance transactions?
The short answer is, yes. According to blockchain start-up SmartContract, any data feed trusted by a counterparty to release payment or simply complete an agreement, can power a smart contract[vii]. The long answer? It is much more complex.
Blockchain peer-to-peer insurer, Dynamis, says that before any smart insurance contract can be made, you need a well-qualified oracle to establish what “conditions” exist in the real world and when they have been “undeniably reached”. An oracle is a bridge between the blockchain and the current state of the real world. Without qualified oracles there can be no insurance that has any relation to the world that we live in[viii].
What these oracles look like at the moment is a point of contention, however Dynamis believes that in the future, social networks will be the cheapest and most used decentralised data feeds for various different insurance applications[ix]. This does not simply mean relying on our Facebook, Twitter or Instagram profiles, which rarely the best sources of truth. It ideally will also take into account our accounts from institutions such as the tax office, Medicare, and Births, Deaths and Marriages, as insurers will still need to be able to reliably contact a large enough segment of a claimant’s social network to confirm whether their claim is verifiable or not.
The future of finance
Of course, for all its efficiency and simplicity merits, blockchain is no panacea, and will likely be one of many technologies that form the foundation of the next-generation in financial services. However, blockchain – and its various functions – are definitely something advisers need to be keeping on their radar over the next few years, as experts predict that Australia’s relatively uncompetitive financial landscape could allow major blockchain players to move faster than in other markets.
Watch this space.
———-
Prepared by Zurich Australia Limited ABN 92 000 010 195 AFSLN 232510. This publication is dated 14 April 2016 and is of general nature and does not take into account any personal objectives, situations or needs. This information is a summary for financial advisers only and there are relevant exclusions and conditions that you should consider before making a decision or recommendation about the product. You should refer to the current Zurich Wealth Protection Product Disclosure Statement (PDS). CLYH-011661-2016
[i] R. Hackett, ‘Wait, what is blockchain?’, Fortune Magazine, May 2016.
[ii] ‘Bitcoin, Blockchain and distributed ledgers: Caught between promise and reality’, Deloitte, 2016.
[iii] M. del Castillo, ‘Insurance giant John Hancock begins blockchain tests’, CoinDesk, April 2016.
[iv] Ibid.
[v] R. Huckstep, ‘The Smart Insurance Contract on Blockchain – hype or reality?’, Daily Fintech, January 2016.
[vi] J. Eyers, ‘Lawyers prepare for ‘driverless M&A’ as smart contract era dawns’, AFR, 19 June 2016.
[vii] http://smartcontract.com/
[viii] R. Huckstep, ‘The Smart Insurance Contract on Blockchain – hype or reality?’, Daily Fintech, January 2016.
[ix] ibid
