Tag Archives: blockchain

What Is and What Isn’t a Blockchain?

I Block, Therefore I Chain?

What is, and what isn’t, a “blockchain”?  The Bitcoin cryptocurrency uses a data structure that I have often termed as part of a class of “mutual distributed ledgers.” Let me set out the terms as I understand them:

  • ledger – a record of transactions;
  • distributed – divided among several or many, in multiple locations;
  • mutual – shared in common, or owned by a community;
  • mutual distributed ledger (MDL) – a  record of transactions shared in common and stored in multiple locations;
  • mutual distributed ledger technology – a technology that provides an immutable record of transactions shared in common and stored in multiple locations.

Interestingly, the 2008 Satoshi Nakamoto paper that preceded the Jan. 1, 2009, launch of the Bitcoin protocol does not use the term “blockchain” or “block chain.” It does refer to “blocks.” It does refer to “chains.” It does refer to “blocks” being “chained” and also a “proof-of-work chain.” The paper’s conclusion echoes a MDL – “we proposed a peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power.” [Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, bitcoin.org (2008)]

I have been unable to find the person who coined the term “block chain” or “blockchain.” [Contributions welcome!] The term “blockchain” only makes it into Google Trends in March 2012, more than three years from the launch of the Bitcoin protocol.

Blockchain

And the tide may be turning. In July 2015, the States of Jersey issued a consultation document on regulation of virtual currencies and referred to “distributed ledger technology.” In January 2016, the U.K. Government Office of Science fixed on “distributed ledger technology,” as does the Financial Conduct Authority and the Bank of England. Etymological evolution is not over.

Ledger Challenge

Wuz we first? Back in 1995, our firm, Z/Yen, faced a technical problem. We were building a highly secure case management system that would be used in the field by case officers on personal computers. Case officers would enter confidential details on the development and progress of their work. We needed to run a large concurrent database over numerous machines. We could not count on case officers out on the road dialing in or using Internet connections. Given the highly sensitive nature of the cases, security was paramount, and we couldn’t even trust the case officers overly much, so a full audit trail was required.

We took advantage of our clients’ “four eyes” policy. Case officers worked on all cases together with someone else, and not on all cases with the same person. Case officers had to jointly agree on a final version of a case file. We could count on them (mostly) running into sufficient other case officers over a reasonable period and using their encounters to transmit data on all cases. So we built a decentralized system where every computer had a copy of everything, but encrypted so case officers could only view their own work, oblivious to the many other records on their machines. When case officers met each other, their machines would “openly” swap their joint files over a cable or floppy disk but “confidentially” swap everyone else’s encrypted files behind the scenes, too. Even back at headquarters, four servers treated each other as peers rather than having a master central database. If a case officer failed to “bump into” enough people, then he or she would be called and asked to dial in or meet someone or drop by headquarters to synchronize.  This was, in practice, rarely required.

We called these decentralized chains “data stacks.” We encrypted all of the files on the machines, permitting case officers to share keys only for their shared cases. We encrypted a hash of every record within each subsequent record, a process we called “sleeving.” We wound up with a highly successful system that had a continuous chain of sequentially encrypted records across multiple machines treating each other as peers. We had some problems with synchronizing a concurrent database, but they were surmounted.

Around the time of our work, there were other attempts to do similar highly secure distributed transaction databases, e.g. Ian Griggs and Ricardo on payments, Stanford University and LOCKSS and CLOCKSS for academic archiving. Some people might point out that we weren’t probably truly peer-to-peer, reserving that accolade for Gnutella in 2000. Whatever. We may have been bright, perhaps even first, but were not alone.

Good or Bad Databases?

In a strict sense, MDLs are bad databases. They wastefully store information about every single alteration or addition and never delete.

In another sense, MDLs are great databases. In a world of connectivity and cheap storage, it can be a good engineering choice to record everything “forever.” MDLs make great central databases, logically central but physically distributed. This means that they eliminate a lot of messaging. Rather than sending you a file to edit, which you edit, sending back a copy to me, then sending a further copy on to someone else for more processing, all of us can access a central copy with a full audit trail of all changes. The more people involved in the messaging, the more mutual the participation, the more efficient this approach becomes.

Trillions of Choices

Perhaps the most significant announcement of 2015 was in January from IBM and Samsung. They announced their intention to work together on mutual distributed ledgers (aka blockchain technology) for the Internet-of Things. ADEPT (Autonomous Decentralized Peer-to-Peer Telemetry) is a jointly developed system for distributed networks of devices.

In summer 2015, a North American energy insurer raised an interesting problem with us. It was looking at insuring U.S. energy companies about to offer reduced electricity rates to clients that allowed them to turn appliances on and off — for example, a freezer. Now, freezers in America can hold substantial and valuable quantities of foodstuffs, often several thousand dollars. Obviously, the insurer was worried about correctly pricing a policy for the electricity firm in case there was some enormous cyber-attack or network disturbance.

Imagine coming home to find your freezer off and several thousands of dollars of thawed mush inside. You ring your home and contents insurer, which notes that you have one of those new-fangled electricity contracts: The fault probably lies with the electricity company; go claim from them. You ring the electricity company. In a fit of customer service, the company denies having anything to do with turning off your freezer; if anything, it was probably the freezer manufacturer that is at fault. The freezer manufacturer knows for a fact that there is nothing wrong except that you and the electricity company must have installed things improperly. Of course, the other parties think, you may not be all you seem to be. Perhaps you unplugged the freezer to vacuum your house and forgot to reconnect things. Perhaps you were a bit tight on funds and thought you could turn your frozen food into “liquid assets.”

I believe IBM and Samsung foresee, correctly, 10 billion people with hundreds of ledgers each, a trillion distributed ledgers. My freezer-electricity-control-ledger, my entertainment system, home security system, heating-and-cooling systems, telephone, autonomous automobile, local area network, etc. In the future, machines will make decisions and send buy-and-sell signals to each other that have large financial consequences. Somewhat coyly, we pointed out to our North American insurer that it should perhaps be telling the electricity company which freezers to shut off first, starting with the ones with low-value contents.

A trillion or so ledgers will not run through a single one. The idea behind cryptocurrencies is “permissionless” participation — any of the billions of people on the planet can participate. Another way of looking at this is that all of the billions of people on the planet are “permissioned” to participate in the Bitcoin protocol for payments. The problem is that they will not be continuous participants. They will dip in and out.

Some obvious implementation choices are: public vs. private? Is reading the ledger open to all or just to defined members of a limited community? Permissioned vs. permissionless? Are only people with permission allowed to add transactions, or can anyone attempt to add a transaction? True peer-to-peer or merely decentralized? Are all nodes equal and performing the same tasks, or do some nodes have more power and additional tasks?

People also need to decide if they want to use an existing ledger service (e.g. Bitcoin, Ethereum, Ripple), copy a ledger off-the-shelf, or build their own. Building your own is not easy, but it’s not impossible. People have enough trouble implementing a single database, so a welter of distributed databases is more complex, sure. However, if my firm can implement a couple of hundred with numerous variations, then it is not impossible for others.

The Coin Is Not the Chain

Another sticking point of terminology is adding transactions. There are numerous validation mechanisms for authorizing new transactions, e.g. proof-of-work, proof-of-stake, consensus or identity mechanisms. I divide these into “proof-of-work,”  i.e. “mining,” and consider all others various forms of “voting” to agree. Sometimes, one person has all the votes. Sometimes, a group does. Sometimes, more complicated voting structures are built to reflect the power and economic environment in which the MDL operates. As Stalin said, “I consider it completely unimportant who in the party will vote, or how; but what is extraordinarily important is this — who will count the votes, and how.”

As the various definitions above show, the blockchain is the data structure, the mechanism for recording transactions, not the mechanism for authorizing new transactions. So the taxonomy starts with an MDL or shared ledger; one kind of MDL is a permissionless shared ledger, and one form of permissionless shared ledger is a blockchain.

Last year, Z/Yen created a timestamping service, MetroGnomo, with the States of Alderney. We used a mutual distributed ledger technology, i.e. a technology that provides an immutable record of transactions shared in common and stored in multiple locations. However, we did not use “mining” to authorize new transactions. Because the incentive to cheat appears irrelevant here, we used an approach called “agnostic woven” broadcasting from “transmitters” to “receivers” — to paraphrase Douglas Hofstadter, we created an Eternal Golden Braid.

So is MetroGnomo based on a blockchain? I say that MetroGnomo uses a MDL, part of a wider family that includes the Bitcoin blockchain along with others that claim use technologies similar to the Bitcoin blockchain. I believe that the mechanism for adding new transactions is novel (probably). For me, it is a moot point if we “block” a group of transactions or write them out singly (blocksize = 1).

Yes, I struggle with “blockchain.” When people talk to me about blockchain, it’s as if they’re trying to talk about databases yet keep referring to “The Ingres” or “The Oracle.” They presume the technological solution, “I think I need an Oracle” (sic), before specifying the generic technology, “I think I need a database.” Yet I also struggle with MDL. It may be strictly correct, but it is long and boring. Blockchain, or even “chains” or “ChainZ” is cuter.

We have tested alternative terms such as “replicated authoritative immutable ledger,” “persistent, pervasive,and permanent ledger” and even the louche “consensual ledger.” My favorite might be ChainLedgers. Or Distributed ChainLedgers. Or LedgerChains. Who cares about strict correctness? Let’s try to work harder on a common term. All suggestions welcome!

trends

InsurTech Trends to Watch For in 2016

The excitement around technology’s potential to transform the insurance industry has grown to a fever pitch, as 2015 saw investors deploy more than $2.6 billion globally to insurance tech startups. I compiled six trends to look out for in 2016 in the insurance tech space.

The continued rise of insurance corporate venture arms

2015 saw the launch of corporate venture arms by insurers including AXA, MunichRe/Hartford Steam Boiler, Aviva and Transamerica. Aviva, for example, said it intends to commit nearly £20 million per year over the next five years to private tech investments. Not only do we expect the current crop of corporate VCs in the insurance industry to become more active, we also expect to see new active corporate VCs in the space as more insurance firms move from smaller-scale efforts — such as innovation labs, hackathons and accelerator partnerships — to formal venture investing arms.

Majority of insurance tech dealflow in U.S. moves beyond health coverage

Insurance tech funding soared in 2015 on the back of Q2’15 mega-rounds to online benefits software and health insurance brokerage Zenefits as well as online P&C insurance seller Zhong An. More importantly, year-over-year deal activity in the growing insurance tech space increased 45% and hit a multi-year quarterly high in Q4’15, which saw an average of 11 insurance tech startup financings per month.

In each of the past three years, more than half of all U.S.-based deal activity in the insurance tech space has gone to health insurance start-ups. However, 2015 saw non-health insurance tech start-ups nearly reach parity in terms of U.S. deal activity (49% to 51%). As early-stage U.S. investments move beyond health coverage to other lines including commercial, P&C and life (recent deals here include Lemonade, PolicyGenius, Ladder and Embroker), 2016 could see an about-face in U.S. deal share, with health deals in the minority.

Investments to just-in-time insurance start-ups grow

The on-demand economy has connected mobile users to services including food delivery, roadside assistance, laundry and house calls with the click of a button. While not new, the unbundling of an insurance policy into financial protection for specific risks, just-in-time delivery of coverage or micro-duration insurance has already attracted venture investments to mobile-first start-ups including Sure, Trov and Cuvva. Whether or not consumers ultimately want the engagement or interfaces these apps offer, the host of start-ups working in just-in-time insurance means one area is primed for investment growth in the insurance tech space.

Will insurers get serious about blockchain investments?

Thus far, insurance firms have largely pursued exploratory investments in blockchain and bitcoin startups. New York Life and Transamerica Ventures participated in a strategic investment with Digital Currency Group, gaining the ability to monitor the space through DCG’s portfolio of blockchain investments. More recently, Allianz France accepted Everledger, which uses blockchain as a diamond verification registry, into its latest accelerator class. As more insurers test blockchain technologies for possible applications, it will be interesting to monitor whether more insurance firms join the growing list of financial services giants investing in blockchain startups.

Fintech start-ups adding insurance applications

In an interview with Business Insider, SoFi CEO Mike Cagney said he believes there’s a lot more room for its origination platform to grow, adding,

“We’re looking at the entire landscape of financial services, like life insurance, for example.”

A day later, an article on European neobank Number26, which is backed by Peter Thiel’s Valar Ventures, mentioned the company would like to act as a fintech hub integrating other financial products, including insurance, into its app. We should expect to see more existing fintech start-ups in non-insurance verticals not only talk publicly but also execute strategic moves into insurance.

More cross-border blurring of insurance tech start-ups

Knip, a Swiss-based mobile insurance app backed by U.S. investors including QED and Route66, is currently hiring for U.S. expansion. Meanwhile, U.S. start-ups such as Trov are partnering and launching with insurers abroad. We can expect more start-ups in the U.S. to look abroad both for strategic investment and partnerships, and for insurance tech start-ups with traction internationally to expand to the U.S.

What’s in Store for Blockchain?

Blockchain, blockchain, blockchain! What does that mean for insurance? No one knows yet, but that doesn’t stop blockchain from being one of the hottest topics in the insurance industry right now. This week, I take a look at the direction this puck is heading.

Hype or reality?

Last September, the World Economic Forum published a report titled, Deep Shift – Technology Tipping Points and Societal Impact. The report is based on surveys with more than 800 executives and experts about new technologies and innovations. The point of the report is to identify deep shifts in society that result from new technologies. These include areas such as 3D printing, driverless cars, wearables and artificial intelligence.

I was drawn to shift No. 16, simply called “Bitcoin and the blockchain.” By 2025, 58% of these experts and executives believed we would hit the tipping point for Bitcoin and blockchain. This was defined as:

“10% of global gross domestic product will be stored on blockchain technology.”

To put that into context, the total worth of Bitcoin today in the blockchain is about 0.025% of today’s $80 trillion global GDP.

Also of interest, especially given that it looks like Tunisia will be the first country to issue a digital currency on a blockchain, shift No. 18 was called “Governments and the blockchain.” Here, almost three out of four in the survey group expected that “governments would collect tax via a blockchain by 2023.”

It’s a reality then!

It’s certainly looks that way. And $500 million of venture capital money in 2015 can’t be wrong, can it?

The prospect of a seismic shift on a par with the impact of the Internet is compelling. That explains all the attention, predictions and excitement about blockchain. But, if we use the evolution of the Internet as a benchmark, the development of blockchain today for commercial use is equivalent to the Internet in, say, the mid-1990s, at best.

The debates on Bitcoin, on whether private or public blockchains will be used, on Sybase vs Oracle (oops, wrong century) are yet to play out. The ability of the Bitcoin blockchain to scale to handle massive volumes at lightning speed remains unproven.

Now, just as it was in 1995, blockchain technology is at an embryonic stage. Still finding its way, it has yet to prove it is a viable, industrial-strength, large-scale technology capable of solving world hunger.

That is why I am going to focus on the use case for insurance rather than the technology itself. (For one explanation of how blockchain works, go to Wired.)

The smart insurance contract

This is getting the most attention right now. The notion of automating the insurance policy once it is written into a smart contract is compelling. The idea that it will pay out against the insurable event without the policyholder having to a make a claim or the insurer having to administer the claim has significant attractions.

First, the cost of claims processing simply goes away. Second, the opportunity for fraud largely goes away, too. (I hesitate here simply because it is theoretical and not yet proven.) Third, customer satisfaction must go up!

One example being used to illustrate how these might work came from the London Fintech Week Blockchain Hackathon last September. Here, a team called InsurETH built a flight insurance product over a weekend on the Ethereum platform.

The use case is simple. In the 12 months leading up to May 2015, there were 558,000 passengers who did not file claims for delayed or canceled flights in and out of the UK. In fact, fewer than 40% of passengers claimed money from their insurance policy.

InsurETH built a smart contract where the policy conditions were held on blockchain. Using the Oraclize service to connect the blockchain with the Internet, publicly available data is used to trigger the insurance policy.

In this case, a delayed flight is a matter of fact and public record. It does not rely on anyone’s judgement or individual assessment. It is what it is. If a delayed flight occurs, the smart contract gets triggered, and the payout is made, automatically and immediately, with no claims processing costs for the insurer and to the satisfaction of the customer.

Building on this example and applying it to motor, smart contracts offer a solution for insurers to control claims costs after an accident. A trigger that there has been an accident would come to the blockchain via the Internet from a smartphone app or a connected car. Insurers are always frustrated when customers go a more expensive route for repairs, recovery and car hire. So, with a smart contract, insurers could code the policy conditions to only pay out to the designated third parties (see related article by Sia Partners).

So long as the policy conditions are clear and unambiguous and the conditions for paying are objective, insurance can be written in a smart contract. When the conditions are undeniably reached, the smart contract pays. As blockchain startup SmartContract put it, “Any data feed trusted by a counterparty to release payment or simply complete an agreement can power a smart contract.”

To understand this better, I asked Joshua Davis, the technical architect and co-founder at blockchain p2p InsurTech Dynamis, to explain. He said:

“You need well-qualified oracle(s) 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 places, people and things in the real world.  Without qualified oracles, there can be no insurance that has any relation to the world that we live in.

“As far as oracles go, you can use either a single trusted oracle, who puts up a large escrow that is lost if they feed you misinformation, or many different oracles who don’t rely on the same POV [point of view] or data sources to verify that events occurred.

“In the future, social networks will be the cheapest and most used decentralized data feeds for various different insurance applications.  Our social networks will validate and verify our statements as lies or facts.  We need to be able to reliably contact a large enough segment of a claimant’s social network to obtain the truth.  If the insurance policy can monitor the publishing or notification of our current status to these participants and their responses accurately confirm it, then social networks will make for the cheapest, most reliable oracles for all types of future claims validation efforts.”

Is this simply too good to be true?

Personally, I don’t think it is. Of course, a smart contract doesn’t have to be on the blockchain to deliver this use case.

However, what the blockchain offers is trust. And it offers provenance. The blockchain provides an immutable record and audit trail of an agreement. The policyholder does not have to rely on the insurer’s decision to pay damages because the insurer has broken its promise to keep the client safe from harm. As the WEF report states, this is an “unbreakable escrow.” The insurer will pay before it even knows what happened.

There’s another reason for going with the blockchain: cybersecurity!

With the blockchain sitting outside the corporate firewall and being managed by many different and unconnected parties, the cyber criminal no longer has a single target to attack. As far as I’m aware, blockchain is immune to all of the conventional cyber threats that corporations are scared of.

What happens when you put blockchain and P2P insurance together?

In December, I published a two-part article on Peer 2 Peer Insurance (here are Part 1 and Part 2). When you put the P2P model together with the blockchain, this creates the potential for a near-autonomous, self-regulated insurance business model for managing policy and claims.

Last year, Joshua Davis wrote an interesting white paper called “Peer to Peer Insurance on the Ethereum Blockchain.” He presents the theory behind blockchain and the creation of decentralized autonomous organizations (DAO). These are corporate entities with no human employees.

The DAOs would be created for groups of policyholders, similar to the P2P group model with the likes of Guevara and Friendsurance. No single body or organization would control the DAO; it would be equally “controlled” by policyholders within each group. All premiums paid would create a pool of capital to pay claims.

And because this is a self-governing group with little or no overhead, any float at the end of the year would be distributed back among the policyholders. Arguably, this makes the DAO a non-profit organization and materially increases the capital reserve for claims costs.

The big question mark for this model is regulation. There still is no answer to who will maintain the blockchain code within each DAO when regulations change. But, what does seem a dead certainty is that someone, somewhere is figuring out how to solve this.

Blockchain offers the potential for new products and services in a P2P insurance model. It should also open insurance to new markets, especially those on or near the poverty line.

For now, we must watch to see what comes from the likes of Dynamis, which is using smart contracts to provide supplementary employment insurance cover on Ethereum.

Innovation will come from new players

It has been my belief for some time that, in the main, incumbent insurance firms will not be able to materially innovate from within. As with Fintech, the innovation that will radically change this industry will come from new entrants and start-up players, such as:

Dynamis

SmartContract

Rootstock

Everledger (see previous article on Daily Fintech)

Tradle

Ethereum Frontier

Codius (Ripple Labs) (update: Codius discontinued)

This is particularly true with blockchain in insurance. These new age pioneers are unencumbered by corporate process, finance committees, bureaucracy and organizational resistance to change.

Besides, the incumbent insurance CIOs have heard this all before. For decades, software vendors have promised nirvana with new policy administration, claims and product engines. So, why should they listen to the claims that blockchain is the panacea for their legacy IT issues? But,  that is a subject for another post … watch this space!

Blockchain Technology and Insurance

What if there was a technological advancement so powerful that it transforms the very way the insurance industry operates?

What if there was a technology that could fundamentally alter the way that the economics, the governance systems and the business functions operate in insurance and could change the way the entire industry postulates in terms of trade, ownership and trust?

This technology is here, and it’s called the blockchain, best known as the force that drives Bitcoin.

Bitcoin has gotten a pretty bad rap over the years for good reason. From the collapse of Mt. Gox and the loss of millions –  to being the de facto currency for pedophilia peddlers, drug dealers and gun sellers on Silk Road and the darling of the anarcho-capitalist community – Bitcoin is not doing well in the public eye. Its price has also fluctuated wildly, allowing for insane speculation, and, with the majority of Bitcoins being owned by the small group that started promoting it, it ‘s sometimes been compared to a Ponzi scheme.

Vivek Wadhwa writes in the Washington Post that Chinese Bitcoin miners control more than 50% of the currency-creation capacity and are connected to the rest of the Bitcoin ecosystem through the Great Firewall of China, which slows down the entire system because it is the equivalent of a bad hotel Wi-Fi connection. And the control gives the People’s Army a strategic vantage point over a global currency.

Consequently, the Bitcoin brand has been decimated and is thought by too many to be a kind of dodgy currency on the Internet for dodgy people.

The blockchain, a core technology behind what drives Bitcoin, has been slow to enter the Zeitgeist because of this attachment to Bitcoin, the bête noire of the establishment.

But that is changing fast. Blockchain as a tool for disintermediation is simply too powerful to ignore.

People are now beginning to really look at the blockchain as an infrastructure for more than monetary transactions and what it has done for Bitcoin. Just as Bitcoin makes certain financial intermediaries unnecessary, innovations on the blockchain remove the need for gatekeepers from a number of processes, which can really grease the wheels of any business, including insurance companies.

How blockchain works and can work for the insurance industry

Because of the way it distributes consensus, the blockchain routes around many of the challenges that typically arise with distributed forms of organization and issues such as how to cooperate, scale and collectively invest in shared resources and infrastructures.

In the blockchain, all transactions are logged, including information on the date, time and participants, as well as the amount of every single transaction in an immutable record.

Each trust agent in the network owns a full copy of the blockchain, and, in the case of a private consortium blockchain (more relevant to the insurance industry), the transactions are verified using advanced cryptographic algorithms, and the “Genesis Block” sits within the control of the consortium.

The mathematical principles also ensure that these trust agents automatically and continuously agree about the current state of the blockchain and every transaction in it. If anyone attempts to corrupt a transaction, the trust agents will not arrive at a consensus and therefore will refuse to incorporate the transaction in the blockchain.

Imagine there’s a notary present at each transaction. This way, everyone has access to a shared, single source of truth. This is why we can always trust the blockchain.

Imagine a healthcare insurance policy that can only be used to pay for healthcare at certified parties. In this case, whether someone actually follows the rules is no longer verified in the bureaucratic process afterward. You simply program these rules into the blockchain.

Compliance in advance.

Automation through the use of smart contracts also leads to a considerable decrease in bureaucracy, which can save accountants, controllers and insurance organizations in general an incredible amount of time.

While the global bankers are far out of the blocks when it comes to learning, understanding and now embracing blockchain technology, the insurance industry is lagging. Between 2010 and 2015, a mere 13% of innovation investments by insurers were actually in insurance technology companies.

There are some efforts to tap innovation, as the Financial Times in the UK recently wrote. European insurers such as Axa, Aviva and Allianz, along with MassMutual and American Family in the U.S. and Ping An in Asia are setting up specialist venture capital funds dedicated to investing in start-ups that may be relevant for their core businesses.

Aviva recently announced a “digital garage’ in Singapore, a dedicated space where technical specialists, creative designers and commercial teams explore, develop and test new insurance ideas and services that make financial services more tailored and accessible for customers.

And others are sure to follow in the insurance industry, particularly because both the banking industry and capital markets are bullish on investing in innovation for their own sectors – and particularly because they are doing a lot of investment in and around blockchain.

Still, the bankers and capital markets are currently miles ahead of the insurance industry when it comes to investing in blockchain research and startups.

Competitors in the capital markets and banking industries in terms of blockchain solutions include: the Open Ledger Project, backed by Accenture, ANZ Bank, Cisco, CLS, Credits, Deutsche Börse, Digital Asset Holdings, DTCC, Fujitsu Limited, IC3, IBM, Intel, J.P. Morgan, London Stock Exchange Group, Mitsubishi UFJ Financial Group (MUFG), R3, State Street, SWIFT, VMware and Wells Fargo; and the R3 Blockchain Group, whose members include the likes of Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, J.P. Morgan, Royal Bank of Scotland, State Street and UBS.

Then there are start-ups like Ripple and Digital Asset Holdings, led by ex-JPMorgan exec Blythe Masters, who turned down a job as head of Barclays’ investment bank to build her blockchain solution for banking.

There are others in the start-up world moving even faster in the same direction, some actually operating in the market, such as Billoncash in Poland, which is the world’s first blockchain cryptocash backed by fiat currency and which passed through the harsh EU and national regulatory systems with flying colors. Tunisia is replacing its current digital currency eDinar with a blockchain solution via a Swiss startup called Monetas.

There are both threats and opportunities for the bankers… so what about the global insurance industry?

Every insurance company’s core computer system is, at heart, a big, fat centralized transaction ledger, and if the insurance industry does not begin to learn about, evaluate, build with and eventually embrace blockchain technology, the industry will leave itself naked and open to the next Uber, Netflix,  AirBnB or wanna-be unicorn that comes along and disrupts the space completely.

Blockchain more than deserves to be evaluated by insurers as a potential replacement for today’s central database model.

Where should the insurance industry start?

Companies need to start to experiment, like the bankers and stock markets, by not only working with existing blockchain technologies out there but by beginning to experiment within their own organizations. They need to work with blockchain-focused accelerators and incubators like outlierventures.io in the UK or Digital Currency Group in the U.S. and tap into the latest start-ups and technologies. They need to think about running hackathons and start to build developer communities – to start thinking about crowdsourcing innovation rather than trying to do everything in-house.

Apple, Google, Facebook and Twitter have hundreds of thousands of innovators creating products on spec via their massive developer communities. Insurance companies that don’t start lowering their walls might very well find themselves unable to innovate as quickly as emerging companies that embrace more open models in the future and therefore find themselves moot. Kodak meet Instagram.

The first step for insurance companies with blockchain technology will likely be to look at smart contracts, followed by looking for identity validation and building new structural mechanisms where parties no longer need to know or trust each other to participate in exchanges of value.

Blockchain technology, for instance, can also allow for accident or health records to be stored and recorded in a decentralized way, which can open the door for insurance companies to reduce friction in the current systems in which they operate.

Currently, the industry is highly centralized, and the introduction of new blockchain-fueled structures such as mutual insurance and peer-to-peer models based on the blockchain could fundamentally affect the status quo.

As comedian and writer Dominic Frisby once penned, “The revolution will not be televised. It will be cryptographically time stamped on the blockchain.”

Some of the many questions that the industry should explore:

  • What kind of effect will blockchain technology adoption in markets have on the the public’s perception of risk?
  • Today, the insurance industry is centralized, but what could it look like if it were decentralized?
  • How could that affect how insurance companies mutualize?
  • Can the blockchain improve customer relations and confidence?
  • Can smart contracts built on the blockchain automate parts of the process in how business is done in the insurance industry?

If you want to explore further, sign up to express interest here about our coming event in London: Chain Summit Blockchain Event for Insurance.

New Insurance Models: The View From Asia

Recently, I chaired the 4th annual Asia Insurance CIO Technology summit in Jakarta, Indonesia. The experience brought me into contact with an entirely different set of insurers and insurance technology players. I was rewarded with a fresh view on the challenges and opportunities of insurance during an era of disruptive innovation, as well as a new perspective on how Asian insurers are creating and launching products, defining new channels and new models to out-innovate the competition.

I should state at the outset that Asian insurers aren’t doing everything differently than North American and European insurers. It is a global era. In many ways, their competitive issues are similar. We are all having the same conversations. As I considered the similarities, however, it made the small differences stand out. Just as Asia is hours ahead of the Western world throughout the day, I had the strange feeling that I was listening to the ends of conversations that are only beginning in other parts of the world. Because populations, cultures, use of digital technology and the nature of businesses vary, I thought I would share a short list of insights from my eavesdropping in an effort to shed light on how disruption is being embraced elsewhere and how it could ripple through the industry. I’ll center my thoughts on models, mandates and marketing.

Models

Everyone is discussing models. Business models. Technology models. Distribution models. Transaction models. There is good reason. It’s a model v. model world, and Asia-Pacific insurers know that the model is the center of a business. For the outer layer to be responsive, the business model can’t be a slow-moving leviathan. Disruption has the disturbing tendency to render perfectly good models obsolete. Creating a responsive, obsolescent-proof business model is of great interest to Asian insurers, which are responding to radically different consumer expectations and competitive models than in prior decades.

Traditional insurers at the conference (as well as challengers) are aggressively rethinking the insurance business model. Some believe that insurance will be run more in an open ecosystem, becoming more fragmented and niche-focused, building on the micro concept. If an insurer can embed products in other business models/industries, especially those with high-frequency transactions, then they capture the opportunity for both a new distribution channel and a new product. New Distribution Channel + New Product = New Market Opportunity.

These are areas where insurers can see quantum leaps in growth, yet they are also the areas where insurers are most susceptible to start-ups beating them to the punch.

Mandates

Three clear mandates stood out above all others for Asian insurers – the role of CIOs, the necessity of new cyber security solutions and a new, enterprise-wide look at analytics.

For CIOs, the clarion call was for a rapid advancement and widening of scope for their role within the insurance organization. CIOs must become change agents and grow in influence. They must be active in technology review and adoption, more collaborative with CMOs regarding digital platforms and data sharing and more effective at translating business vision into system and process transformation.

Cybersecurity is a never-ending mandate that also seems to never have the perfect solution. It was universally agreed-upon that today’s security measures have the frustrating trait of being mostly temporary solutions. Blockchain technology (currently in use by Bitcoin, among others) was discussed as a more permanent solution for many security issues. Blockchain use makes transaction fraud nearly impossible. Verification of transaction authenticity is instant and can be performed by any trusted source, from any trusted location.

On a broader note, however, it was conceded that security is no longer just an IT issue, but it is a board-level, organization-wide imperative because security concerns the full enterprise. Boards must fund and address cybersecurity across three aspects: confidentiality, availability and integrity.

Enterprise-wide analytics was another organizational mandate. Some Asian insurers are moving toward using end-to-end analytics solutions that cross the enterprise in an effort to gain a single client view and execute a targeted pipeline, with unified campaigns and advertising. Analytics will also give them risk- and assessment-based pricing, improved predictability for loss prevention and better management of claims trends, recovery and services.

Marketing

Insurers are rapidly moving from product-driven to customer-driven strategies and from traditional distribution channels (such as agents) to an array of channels based on customer choice. At the same time that Asian insurers are looking at relevant business models, they are diving deeply into how marketing tactics may completely shift from a central hub to a decentralized “micro” model. The industry spark has been a short list of both established insurers and start-ups that are capturing new business through new marketing methods, new partnerships and new market spaces.

ZhongAn, for example, is selling return insurance for anything bought on Alibaba. Huatai Life is promoting unit-linked policies on JD.com and selling A&H insurance via a WeChat app. PICC Life has found a distribution partner in Qunar.com, an online travel information provider. These examples require a completely different, high-volume, interaction-based, data-rich, small-issue marketing plan. That kind of marketing will prove to be of great value to insurers that have added flexible, transaction-capable core insurance systems…that are cloud-based to scale rapidly.

Aggregators are now commonplace in insurance, and Asian insurers are looking at how this channel will affect their business, as well as how to use aggregators as a tool for competitive advantage. GoBear, currently selling in Singapore and Thailand, was given as a prime example of how aggregators represent the future of insurance shopping. GoBear isn’t just an aggregator. It is an innovator, revamping the concept of insurance relationships. GoBear Matchmaker, for example, will allow a prospect to pick insurance but also allow the insurer to pick prospects/clients. GoBear Groups will leverage groups/crowd sourcing.

What do these M’s add up to?

Insurance business models, mandates and marketing are all ripe for inspection and change. In some ways, Asian insurers are in a better position for these ground-shaking industry changes because so many of them recognize the stakes involved and the cultural shift required to thrive. Asian populations and culture are ready to embrace technology solutions to meet consumer demands. As all insurers globally address their models, mandates and marketing, it will be fascinating and educational to see how quickly the different markets adapt and are emerging as innovative leaders and how these regional innovations will influence other regions as they turn into global solutions.

One thing was clear to me in my time in Jakarta – Asian insurers are optimistic, active and excited about the road ahead.