tech advances

Blockchain’s Benefit for Insurers

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New research from Sapiens focuses on the potential for ‘digital accounting’ for insurance industry players. Reprinted with permission. Read the entire report here.

March 29, 2017 — Bitcoin has changed the money transfer process, but it’s likely that the technology behind the currency, blockchain, will have the greater impact.

Blockchain is basically a data structure that enables the creation of a digital ledger of transactions and the ability to share them among a distributed network of computers. This new technology offers many business advantages, including simple and fast transactions, full transparency and security, constant accessibility, reduced cost and a single point of truth. Despite the inevitable and initial hurdles, blockchain possesses great potential for insurers.

In fact, a few insurers have already formed a group “aiming to explore the potential of distributed ledger technologies to better serve clients through faster, more convenient and secure services,” according to Munich Re. Insurers who successfully harness blockchain technology can reap tremendous benefits from smart contracts, the Internet of Things (IoT), improved fraud detection and enhanced underwriting. This white paper aims to provide a brief but clear overview of this nascent technology, as well as to help insurers understand how they can utilize blockchain to improve their business.

From Bitcoin to Blockchain

Most people have probably heard the term “bitcoin.” It’s a digital currency created in 2009 that is based on a set of algorithms and protocols. This cryptographic (code-based) payment mechanism is exchanged for goods and services and can be stored in online “digital wallets.”

By enabling citizens around the world to exchange digital money without the intervention of banks or governments, this decentralized, non-hierarchical application has begun to disrupt financial and trade markets. Unfortunately, the lack of regulation means that many black market money exchanges – illegal drugs, web extortion, prostitution, etc. – are conducted via bitcoin. Bitcoin’s “miners” solve math problems to approve transactions. What motivates them? They are awarded with bitcoins in transaction fees. Bitcoin’s value (based on supply and demand, and trading) has fluctuated throughout the years.

From 2009- 2012, the infancy of the currency, the value of bitcoin was very low: between a penny to $13. In 2013, the value rose 5-10 percent every day until it reached a high of $1,108.80. It’s worth eventually fell to $600, rebounded to $1,000, and then dropped again to the $500 range. Between 2014-2015, the value bounced between $200-$700. By the beginning of 2017, the bitcoin’s worth again rose above $1,000.1

Defining and Explaining Blockchain

Blockchain is a data structure that enables the creation of a digital ledger of transactions and the ability to share them among a distributed network of computers. Using cryptography, blockchain enables network participants to make changes to the ledger securely, in the absence of a central authority (blockchain is decentralized).

Leading analyst firm Novarica explains the four distinguishing properties of blockchain:3

  • Distributed: databases are usually hosted centrally (a “top-down” structure). Blockchains are hosted on networks and administered by the participants.
  • Permission-less: all users are treated equally, with full read and write access.
  • Immutable: old records cannot be reversed. A blockchain implementation provides no way to correct errors or redact private information sent by accident to the wrong recipient.
  • Trusted: blockchains are based on mathematics, not relationships. Because scripts are open to all for review, these contracts themselves are trustless.

How It Works

“Digital records are lumped together into ‘blocks’ then bound together cryptographically and chronologically into a ‘chain’ using complex mathematical algorithms. This encryption process, known as ‘hashing’ is carried out by lots of different computers,” according to a BBC news article on how blockchain technology may change how we do business.

Once the data is hashed, it cannot be converted back into the original data (and each block receives a unique digital signature, which is also used as the block’s unique identifier). When there is a need to change information in the chain – for example, a money transfer from A to B, as depicted in the image below – an automatic broadcast is sent to every member of the database.

Approval requires majority agreement. If someone wants to attack or hack the chain, s/he would have to obtain access to the majority of copies (millions) in the database simultaneously to be successful. Perhaps an analogy can better explain how blockchains are structured and how individual blocks relate to each other. “With books, predictable page numbers make it easy to know the order of the pages…With blockchains, each block references the previous block, not by ‘block number’, but by the block’s fingerprint, which is cleverer than a page number because the fingerprint itself is determined by the contents of the block.”5

Read the entire report here.