Blockchain

Blockchain is a digitalized, public ledger of transactions. It allows for data to be exchanged between users without use of a “middle man” as is typical with a traditional banking website or application. Instead, transactions are validated by the users themselves. The system relies on a peer-to-peer (P2P) network: rather than storing information in a single digital location, the data is hosted by the computers of every participant, simultaneously. This allows users to witness new transactions made by anyone in the blockchain in real-time, an aspect of blockchain that makes it a Distributed Ledger Technology (DLT).

From a security standpoint, the advantage of such a decentralized database is that one would need to override an entire network of computers (as opposed to one central server) to illegally alter a single piece of information. Further, each “block” is an immutable, time-stamped record of a transaction. The block’s computer code references all transactions made prior to it and will in turn reference all future transactions. To successfully tamper with the data of one transaction, one would have to change the state of every “block” in the “chain” -- in other words, the entire ledger. User accounts are also protected with encryption, which provides a higher level of security than a traditional username/password log-on system.

Background

While blockchain technology is most notably used by Bitcoin, a popular cryptocurrency, the system is not limited to monetary exchanges. In fact, it can record any type of transaction -- whether that be the exchange of text, pictures, medical records, or legal documentation -- and thus can be applied to a variety of industries.

Reinsurance industry executives are experimenting with the possible applications of blockchain. Generally, when an insurance policy is initiated, a loss is recorded on a broker’s, an insurance company’s, a reinsurance company’s, and a bank’s individual systems. While these activities are inherently interconnected, they are handled separately and manually, making them less efficient and prone to human error. Blockchain technology presents the opportunity for the (re)insurance industry to circumvent this entire process and work from the same, single ledger simultaneously. Additionally, with the right standards in place, blockchain could help to identify fraud by providing unprecedented ease of access to consumer information, like police or medical records. While overall transaction records are available for all users to view, certain transaction parts and sensitive user information are encrypted. For instance, a user’s passport would be encrypted and invisible to other users, but the proof that it is valid would be shared.

The use of smart contracts, another feature of blockchain, also could potentially save the industry time and resources. Smart contracts are a self-activating computer protocol that execute transactions based on a pre-determined set of conditions approved by all parties involved. For example, a farmer with event weather insurance would receive a certain amount automatically from her insurer in the event of a drought, given that the weather conditions are confirmed in the blockchain by a pre-determined reliable online datasource.

Injuries and Damages

The level of privacy associated with decentralized transactions makes blockchain a potential target for malware and illegal activity that would be difficult for authorities to monitor. For example, while the high level of privacy is what allows Bitcoin to be resistant to cyber-attacks, it also allows Bitcoin to be used for illegal purposes. Other blockchains could follow suit.

The legal status of blockchain varies internationally, which creates one of blockchain’s major impracticalities. For instance, the E.U.’s “right to be forgotten” laws legally require the complete erasure of information in the event that an individual no longer wishes for her data to be handled by an outside source. This request would not be possible with blockchain because it is immutable by nature. A potential solution could be to store user information on a website and then merely use blockchain as a timestamp confirming the information exists and is legitimate, but not letting the information reside in the blockchain itself. However, this would not offer the same level of protection for the information in question. The implications of this law on the use of blockchain remains to be seen.

Legislation and Regulation

In the U.S., individual states are increasingly attempting to regulate the use of the network. The following laws have been passed or have been under consideration: (1) to make the use of cryptocurrencies to launder money a felony; (2) to exempt digital currencies from certain money transmission regulations; (3) to recognize contracts secured through blockchain as legally binding; (4) to recognize blockchain data as authentic in court; (5) to research how to use blockchain in the tourism industry; (6) to examine blockchain applications for use in state government; and (7) to exempt the use of blockchain from taxes.

Liability and Insurance

Significant information on liability and insurance has yet to develop.

Litigation

Significant litigation has yet to develop.

Future Outlook

Blockchain offers new ways of exchanging information and interacting, and this innovation will likely call for the modification of current legal frameworks. The creators of blockchain envision that the technology will drastically increase corporate transparency by making traditionally private transactions public.

At its best, blockchain technology can be used to establish trust, ensure authenticity, protect assets, and diminish fraud. Currently, tens of billions of dollars are lost to insurance fraud annually, and the majority of fraudulent claims remain undetected. The jewelry industry is an example of how blockchain is already being used to fight fraud. Everledger is a digital diamond registry reliant on blockchain technology. Everledger forms a digital fingerprint for diamonds from over 40 data points on each stone. Diamonds over 0.16 carats are also inscribed with a serial number. This serves to reduce theft, because while a diamond could be reshaped to change its digital fingerprint, this action would greatly reduce its value. The technology offers the opportunity for retailers to examine the diamonds of sellers on their platforms, and consumers could also use the database to verify the authenticity and legality of their potential purchases.

Blockchain is an exciting technology with enormous potential for insurers.

In the News

2018

• Walmart to salad growers: If you want to sell, you have to blockchain - GEOFFREY MOHAN, LA Times (09/25/2018)
  Produce companies that want to sell lettuce and salads at Walmart and Sam’s Clubs will have to learn the skills of cryptocurrency traders, the giant retailer announced Monday. . . . By the end of January, 2020, Walmart will require California-based produce companies such as Dole, Taylor Farms and Fresh Express to join a blockchain-based supply chain that the mega-retailer has been experimenting with for nearly two years to enable Walmart to trace the source of food-borne illness.
• Will privacy be a stumbling block for blockchain? - Karen Epper Hoffman, SC Media (05/01/2018)
  Best known as the infrastructure underlying the wildly popular Bitcoin cryptocurrency, blockchain technology has really come into its own in the past year or so—being viewed, trialed and utilized as a means of better executing and sharing corporate documents, managing identity and authentication, even running an emerging social media network. Proponents say the beauty and attraction of blockchain is two-fold: it creates a decentralized or “shared” ledger of transactions and activities, and it is (thus far) immutable. . . . While most organizations have historically created centralized applications and systems, blockchain by contrast “is a protocol of trust,” says Nick Spanos, CEO and founder of Zap.org, and founder of Bitcoin Center NYC and Blockchain Technologies Corp. . . . “It's counterproductive when organizations rely on human trust instead of the mathematically-proven trust protocol of blockchain,” Spanos says. “All security compromises have occurred with flawed, centralized systems interfacing with but not actually built on the trust protocol -- like exchanges.”
• This $1 million house is the first to be sold on the blockchain in the U.S. - JACOB PASSY, MARKETWATCH (03/04/2018)
  Green Bay Packers fans have a chance to live just steps away from Lambeau Field — but it will cost them $1 million in cryptocurrency. . . . A so-called “Packer House” — it’s one of six homes that are actually connected to the parking lot at the National Football League team’s home stadium — the three-bedroom property is being sold on the blockchain, which is a first in the U.S., according to global property marketplace Propy. The home is currently owned by former Facebook executive and Green Bay native Chris Murphy. . . . “He is a crypto enthusiast and he wants to use the funds to back bitcoin initiatives,” said Natalia Karayaneva, chief executive of Propy. . . . The roughly 1,000-square-foot property’s $1 million price tag is steep though, even with its location taken into account. Real estate website Zillow estimated its value to be just over $256,000, and its value was assessed at $264,000 in 2016 for tax purposes.
• Lombard Odier the investor behind blockchain cat bond trade - ARTEMIS (01/08/2018)
  Asset manager Lombard Odier was one of the investors that participated in the first blockchain based secondary trade of catastrophe bond notes, as the firm’s ILS investment team purchased a chunk of the near $15 million Dom Re IC Limited 2017 private cat bond. . . . The Insurance-Linked Strategies (ILS) team at Lombard Odier Investment Managers, the asset management arm of the Lombard Odier Group, said that its purchase of catastrophe bond notes using a blockchain platform is believed to be among the first secondary market transactions completed using a blockchain.
  The Lombard Odier ILS team purchased the cat bond securities for the LO Insurance Linked Opportunities Fund through a delivery-versus-payment (DVP) settlement from Solidum Partners AG, the Swiss based catastrophe bond and ILS investment fund manager.

2017

• Allianz Pioneers Blockchain Prototype for the Captive Insurance Market - Business Wire (11/07/2017)
  Allianz Global Corporate & Specialty (AGCS) has successfully trialed blockchain technology for a global ‘captive’ insurance program including cash transfer between countries. . . . AGCS’s Allianz Risk Transfer (ART) line of business has teamed up with EY (Ernst & Young) as blockchain advisory service provider and digital agency Ginetta to successfully create a blockchain prototype solution for the existing captive insurance program of a long-standing ART customer with global reach. In connection with this prototype, ART also joined forces with Citi Treasury and Trade Solutions, which provided the payment processing services related to Allianz’s blockchain prototype. The results prove that blockchain technology can greatly improve the efficiency of corporate insurance transactions internationally.
• Worldwide: Blockchain technology promises efficiencies across the life-cycle of reinsurance contracts - Edward Rushton, HFW (10/26/2017)
  Having begun market beta-testing of its reinsurance blockchain prototype at the Monte Carlo Rendezvous last month, the Blockchain Industry Initiative, B3i, has grown the number of participants in its innovative project by a further 23 companies. The rapid deployment and expansion of this project may herald adoption by the industry of this groundbreaking technology sooner that most would have expected, especially in view of the calibre and diversity of the members. . . .Including the new participants, the members of B3i now comprise Achmea, Aegon, Ageas, AIA, AIG, Allianz, Aon, Chubb, Covéa, Everest Re, Generali, Gen Re, Guy Carpenter & Marsh, Hannover Re, JLT Re, Leadway Assurance, Liberty Mutual Insurance, LocalTapiola, Mapfre Re, Munich Re, Navigators, PartnerRe, QBE Re, RGA, SAHAM Assurance, Sava Re, SCOR, Sompo Japan Nipponkoa Insurance, Swiss Re, Takaful Emarat, TigerRisk, Tokio Marine Holdings, Trust Re, UnipolSai, Willis Re, XL Catlin and Zurich Insurance Group.
• Smart contracts are promising, but there’s still much to learn - Clyde & Co LLP, Lexology (10/24/2017)
  The global insurance industry is exploring the use of so-called smart contracts, and for good reasons. This digital innovation, which uses distributed ledger technology, also known as blockchain, offers potentially revolutionary advantages in transacting insurance. . . . Blockchain technology and smart contracts offer the potential to create and maintain living policy documents that are securely stored on multiple, decentralized ledgers, making them impossible to misplace or alter without permission, and at the same time convenient to amend and share among multiple parties. Depending on how smart contracts are structured, they can automatically execute payments when certain parameters are met. That is a particularly interesting innovation in the realm of insurance claims tied to specific metrics, such as weather events. Even though blockchain technology supports publicly visible transactions, such as those using Bitcoin, it is possible to create encrypted, permissioned access on distributed ledgers. . . . Despite the potential benefits for insurers and reinsurers, there are still many unanswered questions about using smart contracts. For starters, data privacy laws in the United States and European Union are stringent, such as the General Data Protection Regulation (GDPR). Accordingly, one challenge for insurers is to ensure that any smart contracts involving individuals are compliant with privacy regulations
• Blockchain's new client: Connected cars - Naoshige Shimizu, Nikkei Asian Review (09/29/2017)
  Blockchain technology is quickly leaping from bitcoin into automobiles. Just as it took the financial industry by storm owing to its cheap but secure data protection, blockchain has begun attracting interest from the auto industry, which will be handling large amounts of data as it moves into connected and autonomous vehicles. . . . "Hundreds of billions of miles of human driving data may be needed to develop safe and reliable autonomous vehicles," Chris Ballinger, Toyota Research Institute's director of mobility services and chief financial officer, said in May. "Blockchains may enable pooling data from vehicle owners, fleet managers and manufacturers to shorten the time for reaching this goal," he explained.
• Insurance on a Blockchain- As Simple as Pokeman Go? - Müge Cöteli, Swiss Re, Open Minds (09/12/2017)
  Most of the 10 million people who play Pokémon Go each day don't understand how it works, but still they play it. Why? Because it's fun and easy to play – there is no lead-in time. It's also a new way of visiting a place- usually your own neighbourhood or city. What if we simplified insurance in the same way and made it just another app on your phone? . . . Blockchain technology is a decentralized, peer-to-peer network. It's a virtual database and acts as a modern time machine, permanently and immutably recording all transactions happening on it over time. The use of cryptography ensures that participants to the network and transactions happening on it remain private. It runs on a consensus mechanism that is decentralized - transactions are validated by participants and not by a central authority as is usually the case in finance. Moreover, blockchain enables smart contracts, which self-execute when pre-defined quantifiable, verifiable and external data or parameters are triggered (eg paramteric insurance triggers for ILS).
• Brave New World: 1st Reinsurance Product Heads to the Blockchain - LS Howard, Insurance Journal (06/09/2017)
  There has been a lot of press – and perhaps hype – about blockchain and its potential to revolutionize the industry’s processes and ultimately improve the customer experience.
• Walmart Wants to Track Delivery Drones With Blockchain Tech - Stan Higgins, CoinDesk (05/30/2017)
  

  Retail giant Walmart is seeking to patent a system that uses blockchain technology to track packages delivered by unmanned drones. . . . The US Patent and Trademark Office (USPTO) published the application, innocuously titled "Unmanned Aerial Delivery to Secure Location", on 25th May, and while that title may not give away much of Walmart's plans, the application itself reveals further details. . . .As outlined, the retailer is looking at blockchain tech as a way to track shipments that involve flying drones.

• How Blockchain Identity Trust Is Fostering New Applications in Healthcare - Michael Scott , Bitcoin Magazine (05/19/2017)
  Can identity trust be integrated with blockchain technology? The answer to that question appears to be yes, according to a recently completed proof-of-concept study conducted by Peer Ledger, a Canadian blockchain company; SAFE-BioPharma Association, the organization managing the global SAFE-BioPharma digital identity management standard; and Synchronoss, a leading provider of standards-based digital identities. . . . This development is believed to have significant implications for the use of distributed electronic ledgers (i.e., blockchains) for medical, pharmaceutical and other health system applications.
• Irish Banks to Test New Blockchain-Based Interbank Payment System - Alex Lielacher, Bitcoin Magazine (05/16/2017)
  Irish lenders Allied Irish Banks, Ulster Bank and Permanent TSB have teamed up with global consultancy Deloitte to work on a pilot program that will leverage blockchain technology to increase the speed and security for the country’s domestic interbank payments. . . . The collaborative project carries the name Project GreenPay and will use technology developed by Ulster Bank’s parent company, Royal Bank of Scotland (RBS). . . . The payments platform being trialed is called Emerald. RBS’s Emerald platform, which was built on top of the Ethereum blockchain, has already been tested in the Dublin-based startup hub Dogpatch Labs, where participating banks have been conducting dummy payments among themselves to test the blockchain-based system for performance, stability and accuracy. The platform is able to acknowledge payments in less than 10 seconds while processing large transaction volumes.
• The blockchain insurance industry initiative B3i is including 23 new members for its market testing programme - Intelligent Insurer (02/10/2017)
  The move follows the launch of a working market testing prototype at the Monte Carlo RVS conference on September 10, 2017. . . .The B3i is a collaboration of insurers and reinsurers formed to explore the potential of using distributed ledger technologies within the industry for the benefit of all stakeholders in the value chain.

Additional Items