Following up on the investment Xceedance made last November in ChainThat, a UK-based blockchain specialist, we sat down with Arun Balakrishnan, CEO of Xceedance, and Dave Edwards, CEO of ChainThat to talk about the future of blockchain in insurance. This is part two of the conversation. Part 1 is here.
Question: We’re starting to hear talk about the good news/bad news of smart contracts. The good news is they’re immutable, so they can’t be tampered with. The bad news is they’re immutable, so they can’t be changed. What do you make of that?
David: We already have public blockchains and private blockchains. Trust can’t be assumed in public blockchains; consequently, precautions like network immutability are necessary. Private blockchains are, to use Arun’s term, more democratic (see part 1 of this Q&A); that is, the parties in private blockchains have established degrees of trust that permit them more flexibility for the member parties. And the blockchain frameworks preserve the histories of any changes made to the contracts. I should also make it clear that while smart contracts are immutable and cannot be changed, re/insurers and brokers can always update any transaction if a mistake is made. So, what is truly immutable is audit history.
Arun: Whether public or private, governance is an issue. Even in public blockchain networks — in which there are no legal precedents or frameworks at present— they’ll have to be developed to make those public networks viable, let alone desirable.
Question: Is it idle speculation to wonder the extent of frictional cost blockchain might take out of the insurance industry? Take something as simple as re-keying, for example.
David: A recent study and report by ChainThat and R3 on accounting and settlement reveal indictive savings of between 10-25 percent. Other published studies have estimated 30 percent savings in operational expenses. I think the consensus across the industry is the potential to save billions of dollars each year.
Arun: The hope is, of course, that such reductions in frictional costs and overhead will be reflected in commensurate reductions in product pricing across the industry. We’ll see.
Question: Will blockchain cause any kind of consolidation in the industry; that is, will it weed out any present or prospective players?
David: For the foreseeable future, the impacts of blockchain will be a matter of degree. Almost certainly, blockchain will create more opportunity for strategic activities — such as risk selection, loss mitigation, and customer service — by reducing manual, back-office work in processing and document reconciliation of all kinds. In markets and organizations with primarily legacy and centralized systems, it will probably be hard to adapt and create competitive advantage unless there is a rapid commitment to modernize technology at a variety of levels. Emerging markets, which typically have much less legacy infrastructure constraints and more agile in technology adoption, may well be able to leverage blockchain to chip away at the market share of established players.
Arun: Data consistency will be influenced positively, as well. Maybe the cost of coordination is the best way to look at it. The high cost of coordinating the attendant parties — plus the cost of reconciling disparate data sources and formats — can be dramatically reduced, if not eliminated.
Question: When do you think blockchain will take off, and make profound changes in the industry?
Arun: On one hand, the rate at which new technologies are adopted is accelerating. On the other hand, the challenge of getting large organizations to work together isn’t going away. So, my guess is we’ll see real benefits coming out of some of the smaller consortiums in the next two or three years. Then we’ll see the tipping point at which everybody wants to get on board.
David: I think that’s right. Plus, the fact is we’re all still learning. And I think the educational process is one of the most exciting implications of any new technology. Once it becomes old hat, we’ll all go back to being bored again.
Question: And yet, it’s not just about technology, is it?
Arun: It’s not. It’s also about trying to understand and anticipate the changes it will precipitate. As we look beyond the technology, it’s a remarkably big picture with innumerable implications to observe and sort through. That’s where the real uncertainty lies. And the potential opportunities for insurance operations.
David: It’s also where the fun is. We started looking into blockchain about five years ago. It emerged meaningfully about two years ago. And with the media, analysts, and other influencers having taken up the charge, we’ve seen a kind of awakening in the insurance industry in the past six months. As we said earlier, the large-scale adoption of blockchain is simply inevitable. The re/insurers and brokers that adopt it first will be considered leaders in the very near future.