If you are like me, no matter how many times you see a You Tube video on how blockchain works – you think you understand it. Then someone asks you to explain it and all you say is, “you know, it’s a distributed ledger system” like you know what the hell that means… but I digress.
Some recent articles in insurance trade mags noted that insurers need to be thinking about blockchain technology, as well as virtual currencies like bitcoin, and how to approach these areas of emerging risk as they become harder to ignore. As a quick reminder, blockchain is the technology used for verifying and recording virtual currency transactions through a shared database. And virtual currency, such as bitcoin, is an unregulated digital form of currency that can be used as a substitute for legally recognized currency and eliminates the so-called “middle-man,” which includes banks and clearing houses.
Because it has only recently become more prevalent, and the hazards of blockchain technology and virtual currencies are still being quantified, there is hesitation among insurers about whether these risks are insurable – which sounds like an opportunity for the captive insurance community. One emerging risk in particular, developer errors and omissions, represents potentially the most critical risk that threatens the survivability of a blockchain startup. Given the concerns regarding data and privacy risk, coupled with the SEC taking a closer look at digital currencies and blockchain technology, insurers have shied away from this space.
On the flip side of the coin, blockchain has the potential to become a useful tool in the transaction of insurance in the coming years.
One such trial, Allianz Risk Transfer (ART) partnered with Ernst & Young and digital agency Ginetta to create a blockchain prototype solution. Their prototype looks at three common process flows in the captive insurance cycle – annual policy renewals, premium payments and claims submission and settlement. It translates these processes into the distributed ledger environment decreasing the time from start to policy, policy to premium and claim to settlement.
Additional use cases focusing on first notice of loss, subrogation and parametric insurance are being developed as well. ART is one of several groups involved in the development of distributed ledger technology for the insurance and financial services industries, as the insurance world grapples with this emerging technology.
Correspondingly, a new law in Vermont takes advantage of the blockchain’s ability to confirm that information transferred to it is authentic by presuming that documents written to the blockchain are authentic for purposes of any legal proceeding in a Vermont court. Once again, Vermont law is poised and ready for changes that may soon come to the forefront in the financial services industry.
All this presents an interesting dynamic on the future of captive insurance. Captives are leaders in these types of shifts in the insurance world so I would not be surprised to see us catch this new wave and ride it to success!
Thank you and I look forward to hearing from you.