Blockchain in the Insurance Industry Series: Part I
Although it is being touted as one of the most important innovations since creation of the Internet, most people only know blockchain as the technology supporting Bitcoin and other cryptocurrencies. However, there are a myriad of potential uses of blockchain technology in the insurance industry. To fully appreciate the full potential of blockchain in the insurance industry a basic understanding of the technology is helpful.
Blockchain is a type of distributed ledger technology (or decentralized database) that maintains records of digital transactions. Rather than having a central administrator like a traditional database (such as a bank), a distributed ledger includes a network of replicated databases, synchronized via the Internet and visible to anyone within the network. This network is essentially a chain of computers that must all approve a transaction before it can be verified and recorded. This transaction data is recorded in files called “blocks,” which are similar to a page of a ledger or record book. The validated block of transactions is then timestamped and added to a chain in a linear, chronological order. New blocks of validated transactions are linked to older blocks, making a chain of blocks that show every transaction made in the history of that blockchain. The entire chain is continually updated so that every ledger in the network is the same, giving each member the ability to verify the transaction at any given time.
For an example of a blockchain transaction, imagine A wants to send money to B. This transaction between A and B is represented online as a “block,” which is broadcast to every party in the network. The parties in the network confirm that the transaction is valid and the money moves directly from A to B. The block for this transaction is then added to the blockchain and the transfer of money from A to B is made part of an indelible and transparent record of transaction.
Three notable benefits of blockchain technology include: (1) decentralization; (2) transparency; and (3) immutability. Decentralization is a fundamental benefit of blockchain technology where there is no need for an intermediary or a “middle man” to validate transaction. Rather, blockchain operates in a peer-to-peer framework. Further, transactions using blockchain are transparent in that all parties to the transaction can see what is on the blockchain in real time. This function helps build trust amongst the parties to the transaction. Additionally, data written on the blockchain is immutable and any confirmed transactions on the blockchain cannot be changed.
In this blog series, we will explore (1) how the insurance industry can leverage the benefits of blockchain technology, (2) how the insurance industry is currently using blockchain technology, and (3) what is being done to develop and implement other uses of the technology in a consistent and compatible way across the industry.