Blockchain, Britcoin and what they mean for insurance
The Autumn edition of InsurTalk in London revolved around the topic of data as the currency of insurance transformation. And, speaking of data and currency, Bob Williams’ presentation couldn’t be more relevant.
Bob, who is the Vice President, FinTech, Digital Assets & Blockchain Advisory at Lockton, provided a great explanation of blockchain and Britcoin and how they affect the insurance market.
Bob started his presentation with a blockchain and data 101, then moved on to explain potential use cases and finished off with a case study happening right now that will impact the greater UK financial and Insurance markets – the Central Bank Digital Currency (CBDC), also known as Britcoin.
Before we take you through Bob’s presentation, a quick note to say that all the information contained in it and relayed here is general in nature and should not be viewed as advice.
Blockchain and digital assets – a definition
Bob began by defining digital assets as anything that is stored digitally, is uniquely identifiable, and serves organisations to realise value – for example a company’s website, or blockchain.
He described blockchain as a distributed database (also referred to in the finance world as a distributed ledger technology) that maintains a continuous growing list of records called blocks, held together by a series of cryptographic algorithms.
But what is a block? Bob explained:
‘Think of each block as being a new line in a ledger. That line or in this case that block, contains specific information stored as a hash. This hash contains a timestamp, the necessary transaction data and the previous hash. The only exception is the genesis block which, by being the first, cannot have a previous hash.’Bob Williamsthe Vice President, FinTech, Digital Assets & Blockchain Advisory at Lockton
What is a hash in blockchain? And what can be saved in the blockchain data package?
‘A hash can be thought of as a little pack of metadata that holds all the information that will be needed for that specific blockchain.’ said Bob. The data package varies depending on blockchain. For example, for digital currency, it would be something like where it’s from, where it’s going to, the amount transferred, the time it happened, etc., while for real estate, it would be the address of the property, the proportionality of the property being sold, etc.
Each hash is unique and works like a fingerprint. It relies on a special algorithm (e.g. Keccak-256 Model from the Ethereum blockchain) to make sure it is encrypted and secure. The slightest change to input, would completely change the output. This also means that it’s impossible to replicate it – every change means the whole blockchain updates all at once.
Why use blockchain?
Bob listed three main reasons for using blockchain:
- It’s distributed
This means that every member of a blockchain network has a copy of the file, there is no one location. Even if a node goes down, the blockchain survives and keeps going because a copy is always available. - It’s unanimous
This necessitates every member to see the data and agree to a change in the file. - It’s immutable
Because everyone needs to see it and to agree to it, blockchain becomes immutable and can’t go backwards. Changes can only be reverted by creating a new ledger. ‘This is like creating a reverse ledger in an old finance system, but on a mass scale’, explained Bob.
How is the blockchain being used?
Bob went on to provide some use cases of blockchain:
‘Number one, and most common use is the cryptocurrencies and the movement of money. Next is real estate, especially in the area of the ownership of properties and the tokenisation of housing. Further examples include supply chain, logistics, and finance, with everything from cross border control payments to having a single budget for multi-country firms. Also, insurance contracts. Projects are being developed right now to allow for all parts of the contract to be held together via smart contracts that link each part of the transaction together. Finally, there is also a push for ownership in sectors known to have issues with AML and management of where assets are owned and ultimately valued. Plus, many, many other examples.’Bob Williamsthe Vice President, FinTech, Digital Assets & Blockchain Advisory at Lockton
The Britcoin and what it means for UK Insurance sector
Bob started the second part of his presentation by explaining the different types of Central Bank Digital Currencies (CBDCs), also known as Britcoins.
He distinguished and defined the following three types of CBDCs:
- Fiat currency – a government-issued currency that has no backing from a physical commodity, e.g. like gold or silver
- Cryptocurrency – any form of currency that exists digitally and uses smart contracts to secure transactions.
- Stablecoin – a form of cryptocurrency that is pegged to something of stable value such as a Fiat currency
‘CBDC Is a government-issued stablecoin. It is pegged to a Fiat currency, so one of it is equal to one of the Fiat. It is run on a blockchain, secured using the mechanisms we have discussed, and ultimately is issued by and controlled by a central regulator. In the case of the UK that would be the Bank of England and His Majesty’s Treasury.’ explained Bob.Bob Williamsthe Vice President, FinTech, Digital Assets & Blockchain Advisory at Lockton
Why are governments interested in CBDCs?
To explain why CBDCs are getting the attention of national governments, Bob quoted the Bank of England:
‘The way people pay is changing. We aren’t using cash as much as we used to, and digital payments are becoming more and more common. On top of that, new forms of money are emerging and some of these could pose risks to financial stability.’Bob Williamsthe Vice President, FinTech, Digital Assets & Blockchain Advisory at Lockton
Bob said, there might be some unofficial reasons, too, for example to gather data on consumer habits, to facilitate traceability (e.g. for tax purposes), or to improve the speed and support of the payment infrastructure.
CBDCs – how will they work?
In his presentation, Bob distinguished two main uses of CBDCs: wholesale and retail.
Wholesale CBDCs would primarily be utilised by financial institutions such as banks. Their use would allow banks to make payments in a quicker and more automated manner with cross-border transactions becoming faster and more reliable.
Retail CBDCs on the other hand, would primarily be utilised by individuals. ‘People could use them essentially as digital cash, with the comfort of knowing that the currency is issued and backed by the country’s central bank.’ stated Bob.
CBDCs – what does this mean for the Insurance Sector?
‘Well… the impact could be huge and increase the ability for automation.’ stated Bob, adding some examples: ‘These are digital currencies, so it is possible for an insurance premium payment to be programmed to reconcile automatically against the right invoice, and then to be automatically distributed from the insurance broker account, so that 10% goes to one insurer, 20% to another, and 20% to another etc., all while the commission is automatically coming on its own to the broker’s account. So, client pays premium to an insurer (perhaps via a broker), funds flow into insurer account and up to the capital reserves as soon as the tail has ended. Instead of it going to a broker who sits on it for three months trying to allocate it, has a wrong reference code, and things get rejected or delayed. Much much quicker.’Bob Williamsthe Vice President, FinTech, Digital Assets & Blockchain Advisory at Lockton
Bob also provided a reverse example: ‘A client submits a claim, a loss adjuster comes in and reviews the claim, the claim is accepted, and as soon as they press it, it goes through the contract, to the capital reserve and straight into their current account, paid immediately. It’s also off the insurer’s balance sheet, they can wipe the liability and move forward, plus there is no tail and waiting for things to drip in.’ Other suggested ways it would help, pointed Bob, would be the creation of smart contracts that auto trigger specific payouts in specific events.
CBDCs – the challenges: it isn’t all sunshine and rainbows
‘I’ve sold a very bright future, but it’s not that simple.’ warned Bob. ‘There are some problems this change could generate. It would mean access to new interest, getting capital quite quickly and quite cheaply and so companies could build themselves up. This would in turn create competition and instability as different insurers have different speeds in which they adopt innovation. Depending on who their banking partners and targets would be, this could create instability, which would eventually lead to lowering prices. Would we then be able to afford investments and consolidations? And is it ultimately a good thing for our industry?’ concluded Bob.
Other challenges which Bob pointed out are implementation and regulation.
First, implementing change as far as technology is concerned is going to be an issue for many. There is a need to hire the right people, who can then codify those contracts and invoices.
Secondly, would we need to create another layer of regulation for the things we want to automate, since there will be fewer eyes on the process and fewer checks? Finally, Bob posed a question of whether the money that companies are going to save on these efficiencies would need to go towards potentially more expensive compliance experts.
The use of blockchain in Insurance – conclusion
While there are plenty of opportunities and innovative ways of using data and blockchain in the insurance industry, we mustn’t forget about the challenges and address them in a systemic way. ‘Coming back to what blockchain is all about. It’s a nice simple idea on how we could use data in a different way. At the end of the day, blockchain is a big ledger where we can store data efficiently. And I am actually quite optimistic, and I can see this happening for our industry, for example in paying each other in a more practical way.’ concluded Bob.
