This article was originally published in Canadian Underwriter.
There is a substantial business opportunity for insurers willing to learn about and underwrite nascent blockchain technology, says an account executive at The Axis Insurance Group in B.C.
“There is a business coming along, it’s going to get bigger, and more companies are going to be using the blockchain technology somewhere along the path of their business models,” Clive Bird told Canadian Underwriter, when asked what he would tell underwriters interested in blockchain technology. “Blockchain is not going to go away, so learn how to underwrite these risks.”
Blockchain technology is a continuously growing list of records, called blocks, that are linked and secured using cryptography. As noted on Wikipedia, each block typically contains a hash pointer as a link to a previous block, a timestamp and transaction data. By design, blockchains are inherently resistant to modification of the data.
“Blockchain is not going to go away, so learn how to underwrite these risks.” -Clive Bird, Account Executive, Axis Insurance Group
Using blockchain technology, the Harvard Business Review notes, “we can imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision. In this world every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared. Intermediaries like lawyers, brokers, and bankers might no longer be necessary.”
While this may sound like heaven to some, insurers have been reluctant to underwrite blockchain, because there are still many unknowns about it. As Bird notes in a forthcoming paper to be published in Canadian Underwriter, insurers are reluctant to bring capacity to bear on underwriting the new technology for a variety of reasons:
- Blockchain’s lack of a mature infrastructure
- Lack of scalability
- The potential for fraud through collusion, especially at the doorways to the blockchain
- Unanswered questions around regulation and legality
Blockchain was initially developed as the accounting method for the virtual currency, bitcoin. Often conflated with the currency, insurers are leery of getting into the blockchain game because of negative news headlines appearing about bitcoin. RT News recently reported, for example, that “the cryptocurrency mining exchange NiceHash announced hackers stole an unknown amount of money from users. One bitcoin wallet gained more than $64 million within a matter of minutes.”
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Bird says underwriters will read these kinds of stories and conclude that bitcoin is all just a lot of smoke and mirrors. “Well, it ‘s not,” he said. “There’s an incredible industry being built up around the blockchain. Whether the bitcoin goes to nothing or not, the blockchain technology is going to be around and it’s going to be a game-changer. I think that’s what underwriters have to get their heads around. They’ve got to start learning it, because it’s not just bitcoin.”
Another hurdle to releasing capacity for underwriting blockchain is that the business models of insurance and blockchain appear at odds. Bird notes in his paper that insurers typically rely on actuarial data, historic loss, statistics, understanding of legal precedents and damage awards to sustain profitable risk assessments. But Blockchain, on the other hand, is pushing boundaries and creating new opportunities where none have previously existed.
“Blockchain technology is going to be around and it’s going to be a game-changer. I think that’s what underwriters have to get their heads around. They’ve got to start learning it, because it’s not just bitcoin.”
“A lot of underwriters will say, ‘We’ll take a wait and see approach,’” said Bird, who works with insurance markets to place coverage for his blockchain clients.
“These underwriters may say, ‘We might miss out on a little bit of premium, but we’ll buy in when there are more players in the game, when it [blockchain] is more established, and there is more certainty. Then we will be competitive and try to carve out our market share. So, I suppose some people might think there’s not a lot to lose [by not underwriting blockchain now].
“But other people are being opportunistic and saying, ‘Hey, there’s some premium to be had here and it’s not necessarily bad business if we can understand it.’”
