Keeping aside the details of B3i bankruptcy, why is the uptake in the industry very slow, and is there a real return on investment for many of the current blockchain/DLT industry initiatives?
The short answer is that there are many impediments that need to be resolved for a faster uptake. While it is disconcerting to see a leading innovator, in B3i, leave the arena, the killer applications of blockchain/DLT are still evolving and need some push through advances in the technology, broader education of benefits of a business network-based solution to problems of inefficiencies in the industry, concrete business cases with measurable near-time ROI and executive level support. The one application where the industry could see immediate benefit is an area where the industry may be too conservative to get into: cryptocurrencies.
The Impediments to Adoption
The impediments to adoption can be broadly classified as business and technical. Many of these impediments are being addressed.
- Collaboration as opposed to competition
Blockchain/DLT is effective when entities come together and form a business network. Forming a business network requires insurance entities to collaborate with a competitor. While the notion is that this will be for the betterment of the overall industry, for any business capability it is not easily accepted, especially when many businesses are doing relatively well despite all the inefficiencies. The push to collaborate will materialize only when insurtechs truly start disrupting the business processes of the industry. Also missing in the industrywide discussions is that insurance entities can still compete on their own terms while collaborating with their competition. The technology to enable this concept exists.
- Regulatory framework
Regulators are reviewing blockchain/DLT technologies. Many of them attend conferences that have specific tracks on this topic. However, there is a need for a comprehensive, industrywide framework that is fine-grained enough to the level of a sector and business capability.
- Compliance to regulations
While the regulatory framework is a work in progress, it is not clear if the compliance posture is satisfactory to regulators as business networks between insurance entities come into existence.
- Operational risk
The operational risk introduced by new technologies, especially solutions that are distributed across multiple entities of a business network, may be too opaque for insurance entities to jump in headlong.
The legal aspects of some of the features of blockchain/DLT technologies are still being addressed. For example, smart contracts are considered legal contracts in some countries, where they are enforceable. However, there is no clarity on the legality of these in many other countries, so it is not easy to implement these in some cross-border transactions. Even in a jurisdiction that recognizes smart contracts as legal contracts, there is not enough critical mass of use yet for legal aspects to be clarified and precedents established.
- Insurance for use of blockchain/DLT
There are many well publicized high-profile hacks of smart contracts in production in the public blockchain/DLT arena. While the context of enterprise use is mostly around private and permissioned blockchain/DLT implementations, the issue of hacking smart contracts is still something to be cognizant of, as the business network spans multiple entities and their varied security implementations. Hence there is a need for insurance that covers the risk of using smart contracts. This is an area that is still evolving and needs to mature for entities to be comfortable in using blockchain/DLT technologies.
The cultural acceptance of blockchain/DLT technologies and the concomitant implications for an insurance entity is one of the most important impediments for adoption. This barrier to adoption can be bridged with appropriate executive support. But, for this to happen, the real ROI and the benefits of a business network capability must be articulated well. Effective tools for quantitative measures of these benefits are yet to be developed.
- Business network operating model
Who creates the business network and who runs and governs it? Should I join an effort that my competitor started? Or can I start my own network for some business capabilities and expect my competition to join, provided I am willing to join the networks they initiate? The answers to these questions are critical for increased uptake in the adoption of blockchain/DLT in Insurance. There are some initiatives that industry membership groups have initiated, but how many can an insurance entity join? Is joining many networks depending on business capability scalable from an IT and operations perspective? The answer could be for an entity to create and be part of one network and let technical capabilities around interoperability help the entity participate seamlessly in many other business networks. This capability is still not mature.
- Public vs private blockchains
This is a topic that needs further discussion in the industry. In the early stages of discussion around the enterprise use of Bitcoin and Ethereum public networks, it became clear that private and permissioned blockchain/DLT technology is the only option for enterprise use cases. This is because of limitations of public networks regarding performance, speed and privacy. Public networks have started addressing these issues, but the extent to which the industry will accept the use of public networks for insurance transactions is up for discussion.
See also: Guide to Insurance on Cryptocurrency
The technical solution for blockchain/DLT transactions to seamlessly transcend the different underlying technology implementations is critical to the increased adoption in the insurance industry. The good news is that these technologies are maturing and that there is increased impetus behind making transactions interoperable between networks for multiple industries.
In the near past, as private and permissioned blockchain/DLT technologies were increasingly being evaluated for enterprise use cases, slow performance caused many implementers to pause their efforts. While many of the early platforms have fixed and improved their performance measures, some of the newer platforms still have technical limitations. Also, because there is an increasing focus on the use of public blockchain networks like Ethereum for enterprise use cases, the recent initiative to move Ethereum from proof-of-work consensus mechanism to proof-of-stake should alleviate performance concerns of this well-known public network.
Scalability of blockchain/DLT private and permissioned networks in terms of large number of participants and their operational base is an issue that is still being ironed out. However, public networks are better suited, and, with Ethereum changing to proof-of-stake very soon, this problem may be alleviated for some enterprise use cases that can be deployed on such public networks.
- Security and privacy
Blockchain/DLT networks span multiple enterprise boundaries. While the underlying technology is meant to allow secure transactions between inherently untrusted parties, the crossing of enterprise boundaries brings into focus the security posture of the weakest entity in the network. If entities in the network follow guidelines and implement continuous monitoring of adherence to these guidelines, the network could be considered secure.
Privacy of data and insurance transactions in blockchain/DLT networks could be a concern in two scenarios. In the private business network scenario, insurance entities may deem certain data and transactions to be private and keep them away from competition. Technology does exist for private data and transactions and is maturing. The other scenario is that of transactions on the public networks. Technology for increased privacy of the data is evolving, and clear strategy of an insurance entity to limit public network transactions to those that their privacy policies allow will go a long way in accepting usage of such networks.
The technology for neutral governance of the business network based on blockchain/DLT technologies is maturing. There is increasing need for discussion around a more decentralized way to govern such networks. The rapidly developing technology around DAOs (decentralized autonomous organizations) may be of help. Tools for such a solution need to be developed.
Crypto use cases for the industry
While the industry discussion is focused on use cases that improve the efficiency of insurance transactions across the value chain, there are two applications of blockchain/DLT that the insurance industry should take a deep dive into.
- The case for an internal coin/token
There is a lot of development and maturity in the realm of coins/tokens. How are these applicable for an insurance entity? One way to test these out is to create an internal coin. Such a coin could be for inter-entity transfer of value. This is especially useful for multi-country insurance entities that transact in inter-entity, multi-national currencies. There is a clear business case and ROI in such a scenario as currency exchanges could be minimized to avoid fees paid to banks.
- The investment scenario
Insurance entities should also consider investing premium dollars in crypto assets. While these are risky investments, insurance entities invest in risky assets today. Investing in crypto assets can help the insurance entity learn and accept blockchain/DLT technology.
True disruption caused by blockchain/DLT technology of the insurance industry will take a long time. Resolution to many of the impediments and cultural acceptance via increased use of crypto assets will slowly improve adoption. Upstart and smaller insurtechs cannot make an immediate impact on the adoption of blockchain/DLT technologies, as it is a team sport and will require large number of insurance entities willing to participate beyond proofs of concept and pilots and enabling production implementations of business capabilities.