Blockchain’s disruptive potential

For this week’s Insureblock’s episode we were extremely lucky to catch up with Magda Ramada Sarasola, Senior Economist at Willis Towers Watson, to discuss the disruptive potential blockchain can have in the insurance industry both now and in the future.

 

2 minute definition of blockchain

Technically the definition is that it is a shared distributed ledger, whose core concepts are that it is a way for people that don't know each other and don't trust each other but need a way to transfer value between each other. A good example of that is Bitcoin – the first blockchain technology used for transferring value without anyone actually overseeing that market. For this to successfully happen you need three things:

* The value being transferred arrives to its intended recipient without it being intercepted or modified. This a role which has traditionally been occupied by clearing houses or trusted partners. In a blockchain world you don’t need them

* You have to make sure that whoever is sending that information or that value owns it and hasn’t spent it before to avoid double spending

* The transaction is considered valid between the two parties and is successfully recorded onto the blockchain

So to resume blockchain is a means of actually transacting value in a way that you know doesn’t require anyone to be providing trust in that system (ie. no central intermediary).

 

Your journey to blockchain

4 years ago, Magda was working on a micro-insurance project for a client looking to expand in Africa. At that point she came across blockchain as a concept and spent a whole week on YouTube videos trying to understand what it was and then convinced her editor to run a piece on it. 45,000 visits were reached within a week of publishing her article and Magda’s life changed overnight as did her role. Ever since that day Magda’s journey became one of increasingly learning about the technology, thinking about the impact it would have to the insurance industry and actually developing solutions for her clients.

 

Blockchain’s disruption potential – short to medium term

In the short term it is about traditional insurers exploring blockchain in the content of how they interact as an industry to enabling shared databases in a semi trusted or trust less type of system. The use cases we are seeing are looking at interaction among peers, interaction among competitors, synchronisation or self-synchronisation of databases. At increasing efficiency and driving down costs around things like reconciliation in a semi trusted environment.

However, the actual attributes that makes blockchain a sociological revolution aren’t being used in that context.  The same thing with smart contracts and how they are being explored in policies like marine insurance, supply chain management, and cat bonds, what we are doing is taking parametric insurance and using a very simple type of policy that we can automate and use a smart contract to automate that policy. Technically automation is something that doesn’t need the blockchain.

Magda sees the insurance industry using blockchain as an excuse to do automation that was long over due and that could have been done with other technologies. What a smart contract is automating is a relationship between two contracting parties that do not necessarily trust each other and have a conflict of interest and they agree on that contract and put it in a place where neither part can actually modify the terms. The first example of such an insurance policy was with the fight delay policy (eg.