Heading down the rabbit hole with Blockchain
- Posted on March 7, 2016
I’ve seen some pretty cool stuff over the years in technology and financial services. Lately I’ve been going down the proverbial rabbit hole with blockchain and I have to confess I haven’t been this excited since I downloaded the source code for Mosaic, written by some guy named Marc at the University of Illinois. I’m not the only one who thinks something huge is on the way with blockchain. One of the more high profile financial service examples today is Blythe Masters' startup Digital Asset Holdings. The startup has raised over $60M and has formed partnerships with the who’s who of the investment community, financial institutions and technology consultants. Ms. Masters sees a huge opportunity applying the blockchain to reduce the cost and time to settle financial transactions, and given her background I wouldn’t bet against her.
So what is so interesting about the blockchain? In a word, trust. Or maybe more precisely, and somewhat ironically, how it addresses the issue of lack of trust. When you think about it, lack of trust really is a big business and consumes a lot of resources. Notary services, credit cards, auto registration, and mortgage brokers are simple examples, but carriers, brokers, MSAs, adjusters are also parties that require a lot of trust to work.
There is a growing notion of something called smart contracts that build upon the blockchain foundation. Smart contracts are highly relevant to insurers and could seriously change the way claims are handled. Think about postdating a check because you are going out of town but want to make sure your rent check gets to your landlord on time. You give the check to your landlord on the 15th, but date the check for the 30th when the rent is actually due. On the 30th, the contractual conditions of the check you wrote (e.g. don’t release funds before the 30th) become fulfilled and the funds become available to the landlord. In this case it is the bank that enforces the terms of the contract.
Now imagine a person purchasing auto coverage is given a virtual ‘postdated check’ to cover the cost of a future claim. Instead of becoming valid as of a certain date however, the funds are made available, upon certain conditions being met (car backs into a pole, policy in force, claim within limits, appears to be non-fraudulent, etc.). The terms of the contract are recorded in a structured way on the blockchain so there is no ambiguity between parties. The conditions for release of funds are monitored and automatically enforced by the carrier or even a 3rd party. Conditions can be placed on how the funds can be spent and by whom, so for example, funds for a fender-bender might only be released to certified repair shops.
If we push this idea forward just a little more, we can imagine very efficient, self-monitoring smart contracts for cyber insurance or connected assets. LOB portfolio performance and active risk profiles can be monitored through analytics and the efficiency of administering the entire policy lifecycle can be driven to new levels.
It was easy for me to dismiss blockchain and bitcoin early on as another interesting exercise by people who missed out on the 60’s ethos of power to the people or more recently wanted to take back wall street, but when you really look at how much social infrastructure has been built up over generations to do little more than attempt to centrally enforce trust, becoming so ubiquitous we hardly even notice it anymore, the prospect of a more efficient model of trust-by-consensus is truly world changing stuff.