Chain for Life: How Blockchain Can Revolutionize the Insurance Industry

Blockchain technology is a complete electronic record of public transactions without a central authority. The record is a ledger of all transactions that follow a set of protocols and are recorded in a carefully designed, distributed data structure. The data structure is decentralized and shared by all nodes in a system or network, such as computers. Encryption and problem solving work used to verify blocks prevents multiple transactions and double spending, thus ensuring the integrity of the ledger. Blockchain does not require a central authority or trusted third party to coordinate communication, verify transactions, or monitor behavior. Blockchains can contain collections of documents and record assets. In general, blockchains are secure peer-to-peer storage ledgers, similar to peer-to-peer music sharing systems such as Napster.

In January 2009, blockchain technology was first used publicly to create Bitcoin, a protocol based cryptocurrency. Despite the social and economic problems with Bitcoin, and the technical flaws of Bitcoin wallets, blockchain technology has proven to be reliable. In fact, Bitcoin is a perfect demonstration of the robustness of blockchain technology, showing that this technology can withstand all types of attacks, whether from criminal gangs or national security agencies.

The application scope of blockchain technology goes far beyond Bitcoin or the hundreds of other cryptocurrencies that use it. Blockchain technology can be applied to the financial field. Traditionally, the financial field requires a central trusted third party, such as transaction reporting, depositary receipts, performance bonds, trade finance, etc. Since 2009, blockchain applications have expanded to areas beyond currency, such as smart contracts and decentralized autonomous organizations. Some of these applications have been developed and are being tested.

People need to use trusted third parties in many aspects of the financial field, such as custodians, payment service providers, and risk aggregators (that is, insurance companies). Trusted third parties provide four functions in the financial field:

1. Prove that the items being traded actually exist

2. Avoid multiple transactions, for example, someone selling the same item twice, or double spending

3. Record transaction history to prevent disputes

4. As an institutional service member or member

If trust in the technology continues to grow, blockchains could largely replace the two roles of trusted third parties: preventing multiple transactions and providing a verifiable public record of all transactions. Emerging applications, such as smart contracts and decentralized autonomous organizations, may allow blockchains to play the role of autonomous organizations in the future.

This report explores the question: How will blockchain technology revolutionize the life insurance industry? We will discuss it in 4 topics, all of which are related to blockchain insurance.

Suppose you have a portable, secure, globally available personal data stored in a blockchain, and you can share your health records or driving records with a trusted third party at any time. You can submit your health records to a new doctor or get a life insurance quote, or you can submit your driving records to an airport counter to get a safe discount on car rental. Your personal data storage record may include your biometric data, so you can prove your identity at any time.

Authentication: Blockchain technology and related applications can change the way people manage identity and personal information. Blockchain-based identity mechanisms can benefit people from personal data storage and management, as well as data use permission frameworks, where third parties such as insurance companies and even distributed reputation rating agencies need to obtain permission to use data. Individuals no longer need trusted third parties to store or manage their information. These applications can reduce identification and claim fraud, increase trust in products, reduce costs and thus increase market share. Blockchain technology expands the scope of things that can be stored and recorded in a decentralized manner. Interesting applications may appear in these related areas: accidents, health data records, daily data and related authentication functions. The concept of never losing data will change society's view on identity, privacy and security.

Suppose regulatory borders become less important? With the help of blockchain applications, insurance products can be both local and global. Furthermore, insurance marketing can be locally adjusted in almost real time.

Space: Blockchain technology can facilitate communication between different individuals and spaces, further blurring the boundaries between local and global. Blockchains are distributed across many different computers, often across different regions. Blockchain applications allow us to communicate and transmit value and information across regions. Blockchain technology and related applications are global in space and quantity, but can also be adjusted to meet the specific needs of people in specific regions. The two-way relationship with space supports the tailoring of insurance products, market expansion in space, and near-real-time marketing and product pricing adjustments across time and space. Furthermore, blockchain technology can change the insurance model from today's absolute centralized and spatially anchored model to a peer-to-peer two-way interactive insurance platform, where geography becomes a relatively insignificant choice.

Suppose there are no more disputes over last words and wills. When someone dies, the coroner examines the circumstances of death and the cause of death and records them on the blockchain, then publicly announces their last words and will, their health records are donated to medical research charities, and their life insurance is automatically paid out.

Time: Blockchain technology timestamps interactions and records liabilities over long periods of time. Blockchain applications may affect our concept of time in two contradictory directions. By aligning insurance products across space (market coverage) and time (specific event insurance), blockchain may shorten the concept of time. Consider the collaborative economy model of Uber or Airbnb, where users can use their cars like taxis and their homes like hotels. If these products can be specific to the date of use, it will affect their daily travel and housing choices. At the same time, blockchain may stretch the concept of time, giving people a sense of eternity. Because no one can leave their blockchain data, transaction records cannot be changed or deleted.

Suppose that some people could now create their own risk pooling systems. These could be immediate micro-insurance or micro-mutuals, a mutual economy take on insurance. Indian families could offer each other mutual health insurance, which would include a joint mutual arrangement, an unrelated UK village health scheme, and a standard international reinsurance product. The reinsurance product was developed specifically for these family plans by a global reinsurance company. What if insurers no longer had to set up funds for risk? For example, it would be easier to get a pool of payouts that could be adjusted to reflect rising and falling risk levels. Unemployment insurance could be combined with education loans and lifetime agreements, so that young people could get financial support for their education and insurance support for unemployment, while at the same time, part of their wages and salaries were used to cover the risks of others when they were working.

Mutualism: People’s perceptions of risk are likely to be impacted by technological change and applications, such as blockchain. Today, the dominant business model in the insurance industry is that of a central organization with sufficient funding, contracting with individuals. Blockchain applications could change the way insurers provide mutuality. If successful at scale, this could, over time, introduce new market participants and disintermediate traditional insurers through automation of certain insurance products, which may be built around well-known or everyday risks. Through peer-to-peer mutual insurance platforms based on blockchain, blockchain technology could allow people to manage their risks more directly, perhaps with only partial funding. Recalling the collaborative economy example (e.g. Uber, Airbnb), if applied to insurance, the role of insurers in this case gradually shifts to professional advice and mutual pool mechanism management rather than direct absorption of risk. This technology could also support inclusive finance and new models of interaction between individuals and insurance providers, ultimately helping to improve customer satisfaction, loyalty, trust, transparency and reliability.

Predicting the adoption of new technologies is risky, but forward-looking reporting is necessary. Most insurance companies are not ready to experiment with blockchain technology. They find Bitcoin or cryptocurrencies difficult to understand. Non-insurance organizations are more likely to create insurance or insurance-related applications first. Blockchain applications in insurance are likely to start with digital identity systems and personal data management.

Third-party identity products seem to be maturing. There are several projects that offer open identity products, such as OpenID Connect, the Estonian government's identity service for non-residents, and the Gov.uk verification mechanism, which to some extent indicate the direction of development. Applications in collecting, evaluating and managing data, and cross-regional access to connected devices in the Internet of Things call for better identity technology and more advanced data analysis. More radically, cool products based on smart contracts are most likely to be applied to new areas of insurance (such as mutual economic insurance products) or to address new risks arising from the application of blockchain technology (such as digital asset protection), rather than replacing existing products. Ultimately, as experience accumulates and confidence in blockchain increases, traditional insurance business models will be replaced.

At this stage, there are three areas that deserve the attention of mainstream insurance companies:

First, they could try to build a private blockchain, not connected to Bitcoin or any other blockchain, as a starting point for discussions with customers and regulators about how the future will develop.

Second, they need to explore how private blockchains operate and charge fees, and they can experiment with different protocols and economic institutions.

Third, they should critically examine not only their existing IT architecture, but also their existing and future products to see where blockchain technology or related applications can be used to improve product and risk management. The core system of every life insurance company is a large, central transaction account at the core. At the very least, blockchain is worth evaluating technically as a possible alternative to today's centralized database model.

Blockchain technology is still in its early stages of development, with many possibilities and countless unknowns. Private interest in commercial applications is developing rapidly. Although several governments encourage blockchain trials, most government departments prefer to wait and see and let the public experiment with blockchain. Blockchain technology may not be complicated for cryptography experts and computer scientists, but it is still a bit difficult to understand for non-professionals. Awareness is increasing rapidly, but public education is still necessary. Countless startups are working to reduce the technical complexity of blockchain, which will help it quickly become popular. Blockchain technology is not a complete solution, but part of the future of the insurance industry.

Original text: http://www.longfinance.net/publications.html?id=903
By Michael Mainelli & Chiara von Gunten
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Source (translation): Babbitt Information (http://www.8btc.com/chain-of-a-lifetime)