The Blockchain Insurance Company

Within the past two years, Bitcoin, the first and most popular form of “cryptographic currency,” has entered the mainstream. With roughly $3.4bn worth of Bitcoin (BTC) in circulation, over a half billion dollars of Venture Capital invested in the space (including into one potential billion dollar company), and Fortune 500 companies such as Dell, Microsoft, Overstock, and Paypal accepting the digital currency, it is an impressive track record for any seven-year-old technology.

And Bitcoin is not just a reapplication of existing technology, for instance, the way that the consumer internet was really 1970’s technology in a new setting. The very concept that enables cryptocurrency, the system for running a distributed self-regulating database called the “Blockchain,” is just as new as Bitcoin itself: seven years.

Novarica recently released a report, Bitcoin and Insurance: Overview and Key Issues, authored by Jeff Goldberg and myself. It outlines a brief introduction to Bitcoin and Blockchain and its implications for the insurance industry. We argue that, while insurers have ample reason to be cautious about entering this market, it is nonetheless an important area for the CIO to keep on her radar.

In the short term, the most important implementation of Blockchain will be the Bitcoin currency, which, due to its high volatility, technological novelty, and current constitutional crisis, carries with it particular risks, detailed in a Lloyds June 2015 report. There are opportunities available for the properly positioned carriers who are willing to proceed despite those risks, though it is not necessarily transformational for the industry.

Blockchain, on the other hand, may have much wider implications. At a basic level, Blockchain enables the creation of trusted contracts in a publicly-verifiable setting. Insurance policies are also trusted contracts, and many people have wondered about possible ways insurance policies could be moved into Blockchain’s exchange. A Blockchain policy could automatically pay out a claim based on preset conditions or based on information from a trusted third-party (for example, a crop policy that pays out based on weather service reporting).

Imagining the potential impact of Blockchain on the insurance industry isn’t just the realm of technology analysts. The Society of Actuaries held an actuarial speculative fiction contest, and a submission by Gennady Stolyaro II called “The Blockchain Insurance Company,” which the title of this posts steals from, describes in great detail how auto-insurance in the age of self-driving cars might work. In the story, available here, set in the 2020s, the slightly Hal-esque autonomous car informs the retired actuarial protagonist: “There is no management. The company runs itself – on the blockchain. The public blockchain ledger keeps a record of the capital contributions from each account and the corresponding shares issued. A contractual algorithm is built into the blockchain to deposit and withdraw Bitcoins to and from each shareholder’s account in proportion to the company’s profits and losses.”

Although that story is obviously only one version of many possible outcomes, this is the kind of radical transformation in structure (both technological and organizational) that insurers should be open-minded about. One rule of thumb about genuinely new technologies is that they are over-hyped in the short-term, but often under-hyped in the long-term (hint: the Internet circa 1995). Whether or not one buys into the idea of sustained dialogue with our cars in the next decade, it is certain that the Internet of Things will require new forms of record keeping, of which it’s very likely that Blockchain technology will be a crucial component.

This blog entry has been republished with permission.

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The opinions posted in this blog do not necessarily reflect those of Insurance Networking News or SourceMedia.