Blockchain provides a better mechanism for establishing and maintaining trust in insurance transactions.

As I noted in my first post in this series about blockchain and brokers, commercial insurance depends on processes that are centuries old. These processes emerged as a solution to the absence of mutual trust between the affected parties and a lack of end-to-end transaction transparency in insurance contracts.

They serve as proxies for trust, with commercial brokers creating trust, and bridging the gap between insurers, re-insurers and customers. Trust depends on the “handshake” model, supplemented by the regulatory framework. There is no consistent mechanism for embedding this trust into a transaction; what’s more, these processes bring with them high levels of friction, human error and cost.

Blockchain technology works on a consensus-driven approach that requires more than one party in a chain to verify the authenticity of a set of transactions (a block) before a new block can be added to the existing chain. It’s not necessary for participants in a transaction to have history, or even to have known one another, because blockchain offers a way to embed trust into the transaction.

Blockchain provides the means for transaction participants continuously to store, amend and share verified data in a transparent and immutable manner. Parties in a transaction work with, and have real-time visibility of a “golden source”. This single set of data negates the need for parties to manually manage and synchronize multiple ledgers in order to obtain an end-to-end view of a transaction.

The value of the blockchain is both in the tracking and the tamper-proof seal of approval that ensure that something is what it is purported to be. It provides a “certified delivery”, without the need for a prior relationship or trust.

The immutable nature of blockchain technology, however, can in some circumstances be a drawback. If mistakes or coding errors are recorded in smart contracts, for example, they would be perpetuated in further blockchain transactions. They couldn’t be undone.

Accenture has addressed this problem with the recent announcement of an editable blockchain that allows such errors to be fixed while still preserving the essential integrity of blockchain technology. Developed with Dr Giuseppe Ateniese of the Stevens Institute of Technology near New York, the blockchain editing capability will also allow financial institutions to comply with regulatory requirements such as the “right to be forgotten” and other data privacy rules. The blockchain innovation, due to be patented in the US and Europe, can indicate where an edit has been made to a block in the blockchain by leaving an inerasable “scar”.

Accenture’s editable blockchain has caused some controversy among blockchain purists who believe that the technology’s “immutability” should, in fact, be immutable. However, it’s important to note that this invention is designed for “permissioned” blockchain systems, which are managed by designated administrators under agreed governance rules. It’s not intended for “permissionless” systems such as the cryptocurrency facility that supports Bitcoin. Permanent, immutable blockchain records are vital in such open and decentralized systems where there is no single governing authority.

Blockchain has the potential to provide a secure, transparent and verifiable mechanism to execute transactions in a manner that replaces the traditional notion of utmost good faith with provable trust. But it also promises to bring vast operational efficiencies to the insurance value chain—an idea I’ll explore in the next post.

 

To learn more in the meantime, download this report: Using Blockchain To Get Ahead Of The Game .

One response:

  1. Accounting systems don’t erase their ledger entries. I’ve learned to be more open to ideas since learning about, and engaging with Blockchain about a year ago. My thought is let the boundaries be explored. Who knows? That said, I’m not so sure where this idea of a modifiable shared ledger would go, but again, I respect the idea and accept I may be overlooking something. I view “immutability” as a core tenet of any distributed shared ledger technology, likening it to core accounting principles that I reference when I’m speaking on Blockchain, explaining the concepts. That being, if there’s an entry posted to your accounting ledger, and you discover it’s a mistake, then you correct it with adjusting entries. You don’t erase it! Also, using my background of guiding my customers in building transactional systems, the XA-based 2Phase-Commit rollback works fine for applications requiring such, but at the time such applications were developed, may of those systems weren’t aiming to achieve immutability and provenance. Many applications written in the past 10 years or so use compensating transactions to undo prior transactions, but those compensating (correcting) transactions are logged along with the prior (original) transactions. In the end, I would rather consider “immutability” and “provenance” as core tenets of Blockchain, forcing descentralized application (dApp) designers to devise systems that assume mistakes will require correcting/adjusting/compensating transactions. They can certainly build fabulous dApps given such a rule.

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