Bitcoin, the Blockchain, and Insurance Disruption
By Ben Deda, VP of Marketing
You may have heard of the virtual currency called Bitcoin but its impact on the financial world, especially the insurance industry, may be new to you. Let's take a look at a few of the ways Bitcoin, but more importantly Blockchain, the technology Bitcoin is built on, has the ability to disrupt the insurance industry.
First things first, you need to have a basic understanding of what Bitcoin is.
At it's most basic description, Bitcoin is money that lives only on the internet. It is the next evolution of currency, establishing money that is entirely electronic. Each Bitcoin represents a value, or dollar amount, that can be exchanged for goods and/or services. The value of a bitcoin goes up or down depending on what people are willing to pay for them, just like the stock market. And why would someone be willing to pay a higher price for bitcoin? A few reasons: The currency is decentralized (money across borders), anonymous (one has the ability to make purchases without being traced), and there is a limited amount (learn more here). If you're looking for a more in-depth explanation of the value Bitcoin and the Blockchain, watch this 6 min video:
For those who REALLY want to dive deep about "the true value of Bitcoin," here's a 40 minute video from Stefan Molyneux titled "What you really need to know":
Blockchain applications Bitcoin is a fascinating experiment in digital currency and although it shows promise, there are still doubt as to whether or not it will ever become universally accepted. The really exciting possibilities that have emerged out of the technology used to create Bitcoin lie in the Blockchain. The Blockchain is a worldwide database of all of the transactions utilizing the Bitcoin currency. Bitcoinwiki descibes the blockchain as: "A blockchain is a transaction database shared by all nodes (any computer) participating in a system based on the Bitcoin protocol. A full copy of a currency's block chain contains every transaction ever executed in the currency. With this information, one can find out how much value belonged to each address (digital wallet) at any point in history." You can think of a "node" as a computer that is participating in the bitcoin protocol. We use HTTP as a protocol to access the "world wide web," people who want to access bitcoin use the protocol TCP. And why is this so fascinating? Because Blockchain creates a ledger that cannot be manipulated, and we can use the Blockchain for anything we want, not just Bitcoin. Essentially it is a decentralized "smart" contract. Using the Blockchain platform, one computer would show a transaction going out and another would see it coming in. A third party would verify that it was real and the whole thing would happen on the internet instantly
This technology is disruptive, meaning that its very existence will create a whole new market much like we saw with the advent of desktop computers, cellphones, and renewable energy. Except this market will focus on disrupting industries where there is value in the ability to track transactions that were once able to be manipulated. And the applications are endless.
This disruption will not bypass the insurance industry
Financial institutions are looking at this very highly encrypted technology to facilitate other now digitized transactions like stocks and loans.
How the Blockchain could change finance in less than 3 minutes:
Some economists predict that switching to Blockchain could save the banking industry twenty billion dollars annually. Even NASDAQ, the second largest financial exchange in the world, has made its first transactions using Blockchain technology.
Insurance companies are the big players of financial institutions with one side generating revenue from premium sales and the other investing in stocks and alternative investments. Since there is no hierarchy with Blockchain, using the technology would decentralize the insurance industry.
Check out this presentation on Decentralized Insurance by Elias Haase of B9 Lab:
Traditionally insurance businesses are highly centralized. An application is taken at a “front office” but the underwriting is performed in the “back office”. Even an aggressive insurance agent can only shop out an application to a dozen or so insurers. This centralized structure increases cost in the form of salaries and overhead and it places a large amount of pricing power in the hands of the carriers. Blockchain technology could decentralize the industry, allowing application and underwriting to be completed simultaneously. Instead of a few potential underwriters, an application could have thousands. This will lower transaction costs and risks, ultimately decreasing premiums and making insurance products available to a larger client demographic. Here are a few other ways the Blockchain could disrupt insurance:
- The blockchain could provide a global, secure and public record of personal health information. - Imagine there’s a notary present at each transaction. - Reduced fraud and improved risk management. - Digital identity verification (who is who?)
If you're looking to dive deep into the impact of blockchain technology on the insurance industry check out our interview with Magda Ramada, PHD and Senior Economist at Willis Towers Watson: 6 ways blockchain could disrupt the insurance industry.
Disruptive technology always ends with a hopeful question mark
Like any disruptive technology, how Blockchain will evolve in the insurance field is a matter of innovation and creativity. We are currently at the proof-of-concept phase.
One place that looks promising is Blockchain’s interaction with the Internet of Things (IoT), the network of devices connected via the internet. In much of the same way that auto insurance companies have plug-in devices to measure driving patterns, Bitcoin transactions can be linked to physical assets that are part of the Blockchain ledger transaction. IBM and Samsung recently launched a proof-of-concept system that would allow its devices to be registered in real time via local Blockchain communities. With electronic automobile devices and wearable technology, the insurance industry may see great opportunities on the Blockchain network. Disruptive technology always ends with a hopeful question mark.
How the insurance industry embraces the Blockchain platform is still dependent on an imaginative future, but we can be certain that it will embrace it somehow.