Introduction of Blockchain

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“Blockchain is more than just ICT innovation, but facilitates new types of economic organization and governance. Suggests two approaches to economics of blockchain: innovation-centred and governance-centred. Argues that the governance approach—based in new institutional economics and public choice economics—is most promising, because it models blockchain as a new technology for creating spontaneous organizations, ie new types of economies.”

Primavera De Fillippi, Academic, researcher, author and thought leader

Sometimes people consider bitcoin and blockchain as one but the bitcoins are digital crypto-currency and blockchain are the technology that enables digital currency from one individual to another. Blockchains solves the problem in money transfer. Today if a person wants to transfer his or her money to another person then it is done through a third trusted party which takes time and fees for the transferring money.

The blockchain was conceptualized by Satoshi Nakamoto in 2008 and implemented as a core component of bitcoin but now it is also used for other crypto-currency, online signature services and many other applications.

Blockchain is a peer to peer technology that protects the integrity of a digital piece of information. It is a form of distributed public ledger or database that maintains a list of blocks. Each block contains a hash(A hash algorithm turns an arbitrarily-large amount of data into a fixed-length hash) of previous block hence creates a chronological order. Every node gets a copy of the ledger and each time any transaction occurs it is broadcast over the blockchain network. Whenever any node connects with the network it gets automatically downloaded.

Blockchain has two main concepts:

  • Distributed Network

  • Shared Ledger

 

Distributed Network

  • A decentralized peer-to-peer architecture

  • Every node in decentralized system has a copy of the blockchain.

Shared Legder

  • Database shared across network.

  • It is open for public.

  • Secure as it is public.

There are also few problems with blockchain like storage and synchronization, everytime a new block appends into blockchain very quickly but on the other hand it also has various advantages like faster transaction, transparency, lower transaction cost and much more.

Image Source: Inside Bitcoins

Insurance needs to wake up to blockchains!

In an interesting discussion that we were having with our banking client, their insurance department kept bragging about the state of the art technology that they were building. Head of Insurance was eager enough to call it InsurTech enabled and very sophisticated. However, surprisingly when I mentioned IoT and Blockchain and how it could impact the sector, the person drew a blank ( Well, to be fair, he did mention that he had heard it before, but isn’t that what you see when you are in-front of several peers)

I was curios to see how the sector in general thinks and this report from PWC does confirm to the bias that i had.

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PWC Global Fintech Survey 2016

As you would see, Blockchain does find a mention even though it is a much much lower than what you would expect. Insurers, like banks, are intermediaries and, at first glance, there is great potential for insurers to use blockchain technology to streamline payments of premiums and claims.

Aso of today, Actuaries and underwriters are now heavily dependent on the data. This data can be brought to them from a lot of sensors now. For example in telematics, insurers are using data from sensors to price motor risk more accurately, reducing the premiums of young safe drivers, and this technology is spreading to other types of cover, such as home insurance.

Till date, Insurance sector, amongst other similar sectors is ridden by huge unaccountable losses in light of fraudulent claims.

As Deloitte mentioned,

In a typical motor insurance scam, for example, drivers deliberately stage or cause an accident or even pretend to have had an accident, and
claims are then made by the various criminals involved. These so-called ‘crash for cash’ scams cost the industry around £400 million a year. 4 Where claims are made against multiple policies held by different insurers, it becomes difficult to detect the fraud unless cross-industry data is shared.

We have been setting the stage a lot for blockchains but how does it help?

Now the way to get around this with blockchains is by building Smart Contracts. These contracts can manage claims in transparent and immutable manner. Both the contracts and claims would be the part of a blockchain. If there is one accident and the claim for that has already been raised then it cannot be claimed again because the chain would have a record of that. Again since this is a decentralised chain, nobody can just goto a central authority and make a change to the claim and re-trigger it. (Haven’t you heard of that friendly claims agent who tells you to file the claim and that he would take care of it or that friendly bank agent who assures that he has access to the main frames to fix your credit history?)

Smart contracts with IoT is a huge win for the insurance and the financial industry in general. With identity management being embedded in the smart contracts the situations for Crash for Cash would be long gone. Further this would be a blockchain which would be public (ideally) or private but shared within the insurance sector then all this information of a person who would jump from one insurance company to the next and not share all the information would be a distant past.

According to PWC,

Reinsurance expense ratios are typically 5%-10% of premiums. Our analysis of the potential for both more efficient data processing and reductions in claims leakage and fraud indicates that blockchain solutions could remove 15% to 25% of expenses, so delivering an industry-wide saving of $5-10 billion. And faster placement and settlement opens the way for a significant boost in client satisfaction and retention.

With blockchains, there would be a win in terms of processing, opportunities for new business lines and immense transparency which has been a thing of the past for now amongst insurance companies. With all companies sharing their information on the blockchain, it would be a different world in which legitimate insurance claims would help bring the cost of insurance down and add value to everyone.

If this sounds interesting then get in touch with us and we would show you how your company can win with blockchains.

Quick example of a block in a blockchain

Further to our earlier post, which describes the data structure of a block in the blockchain, here is a quick example of what does the block look like

 

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Relating it back to the post, it contains the

  1. Size, Version, Bits and Height in the chain as to where it belongs
  2. Number of transactions
  3. Merkle root
  4. Timestamp
  5. Link to the previous block
  6. Mining Difficulty
  7. Nonce
  8. And a list of all the transactions in the block.

Again, each transaction has the following format

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Again as per the details in the earlier post, amongst the technical information, it contains the size, mine time and the block that it is a part of , along with the details of the coinbase in input and output.