September 20, 2016
How Will Blockchain Affect Insurance?
by Dan Robles
Blockchain represents new risk opportunities that may not pool appropriately with those upon which today’s insurance products are based.
Ever since the dawn of civilization, societies have organized around the technology of their time. Likewise, people and corporations will reorganize around this new type of data and value exchange system known as blockchain technology. Blockchain technology represents a new set of both positive and negative risk opportunities that may not pool appropriately with the common set of business perils upon which today’s insurance products are based.
See also: What Problem Does Blockchain Solve?
The insurer is faced with four primary categories of concerns related to blockchain technology:
- How different would it be to insure a decentralized business or business processes than a centralized business? What historic data are still valid, what data needs to be collected anew? How much can the insurer rely upon a management system composed of nothing but software? How does an insurer assert dominion over economic value denominated in cryptographic tokens that are neither money nor property, according to the law? Who do you call when things go boom?
- The insurance industry itself is an administration-laden database – could it operate on a blockchain? What are the opportunities and implications of culling legions of brokers and staff? Ironically, would an insurer be willing to insure a company that had just culled legions of brokers and staff? If a company does not adopt blockchain technology and a competitor does, what perils are then imposed on the firm? How does the insurer preserve institutional knowledge in the wake of replacing brokers with software?
- The purpose of regulation of any kind should be to encourage or discourage specific types of human behaviors. If the human is taken out of the equation, what regulations are still needed? Are there any regulations that stand in the way? Are new regulations required? Can regulations be bypassed or shifted to another segment of a process? How fast can regulators respond to an unanticipated condition?
- Finally, everything about database management has very little to do with the thing actually being computed. Blockchain and crypto-currencies exist in a digital realm. Meanwhile, real people are doing real things in real life where real objects behave according to physical laws. How exactly will blockchain software reconcile or interact with the real world? How will risk transfer between machine and human and back again?
These are extremely important questions that are yet to be resolved. It is worth the time and effort to learn and understand the opportunities and implications of blockchain technology because the value of opportunities for adoption by the insurance industry are magnificent:
- Insurers may achieve extreme efficiency with internal processes
- Insurers may achieve great profitability insuring blockchain clients
- Insurers may discover vast new markets that were previously unviable
- Insurers may scale up or scale down (micro-insurance) at near zero marginal cost.
The insurer needs to know exactly what is being insured, the numerical probability that the peril will or will not manifest and the consequences of a failure or breakdown in the process. Problems may arise where an organization loses important institutional knowledge, adaptability and innovation due to the wholesale elimination of important administrative personnel. The insurance company must know the difference between what a blockchain can and cannot accomplish.
See also: How Blockchain Will Reorganize Society
Most importantly, blockchain has the potential to augment people. Blockchain technology allows people — whether staff or clients — to be elevated to a higher order of productivity. This is where true wealth is generated. The net value of this technology cannot be achieved by just firing up some blockchain, knocking off staff and cherry picking risk classes.
The great opportunity for insurance will be to mitigate risk from fault-prone processes, thereby reducing the need for regulation and eliminating friction from the financial system. This will help bridge the capitalization gap that currently hinders the great innovations that humans are capable of.
Adapted from; Insurance: The Highest and Best Use of Blockchain technology, July 2016 National Center for Insurance Policy and Research / National Association of Insurance Commissioners Newsletter: http://www.naic.org/cipr_newsletter_archive/vol19_blockchain.pdf