You may have heard of the virtual currency called Bitcoin but its impact on the financial world, especially the insurance industry, may be new to you. Bitcoin is a fascinating experiment in digital currency and although it shows promise, there are still doubt as to whether or not it will ever become universally accepted. The really exciting possibilities that have emerged out of the technology used to create Bitcoin lie in the Blockchain.
The Blockchain is a worldwide database of all of the transactions utilizing the Bitcoin currency. Bitcoinwiki descibes the blockchain as:
A blockchain is a transaction database shared by all nodes (any computer) participating in a system based on the Bitcoin protocol. A full copy of a currency's block chain contains every transaction ever executed in the currency. With this information, one can find out how much value belonged to each address (digital wallet) at any point in history.And why is this so fascinating? Because Blockchain creates a ledger that cannot be manipulated, and we can use the Blockchain for anything we want, not just Bitcoin. Essentially it is a decentralized "smart" contract. Using the Blockchain platform, one computer would show a transaction going out and another would see it coming in. A third party would verify that it was real and the whole thing would happen on the internet instantly. Here is a visual of the process:
Traditionally insurance businesses are highly centralized. An application is taken at a “front office” but the underwriting is performed in the “back office”. Even an aggressive insurance agent can only shop out an application to a dozen or so insurers. This centralized structure increases cost in the form of salaries and overhead and it places a large amount of pricing power in the hands of the carriers. Blockchain technology could decentralize the industry, allowing application and underwriting to be completed simultaneously. Instead of a few potential underwriters, an application could have thousands. This will lower transaction costs and risks, ultimately decreasing premiums and making insurance products available to a larger client demographic.
How may this play out in insurance? One place that looks promising is Blockchain’s interaction with the Internet of Things (IoT), the network of devices connected via the internet. In much of the same way that auto insurance companies have plug-in devices to measure driving patterns, Bitcoin transactions can be linked to physical assets that are part of the Blockchain ledger transaction. With electronic automobile devices and wearable technology, the insurance industry may see great opportunities on the Blockchain network.
How the insurance industry embraces the Blockchain platform is still dependent on an imaginative future, but we can be certain that it will embrace it somehow.
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