IBC caught up with Gallagher Canada’s Mark Morency to find out what they really mean for the insurance industry.
IBC: How have insurers responded to blockchain and cryptocurrency clients?
Mark Morency: With any emerging technology, insurers struggle to underwrite it because of its limited track record. Some insurers are open to blockchain; however, there are only a select few that will consider cryptocurrency clients. Blockchain is the engine for cryptocurrency, along with other security applications, so not all blockchain companies are a cryptocurrency risk, but that’s not always clear for insurers. There is a large client base that specializes in specific blockchain applications, including aspects of cryptocurrency, so when working with insurers, we work hard to understand the client’s business and differentiate their value proposition. I’ve spent a lot of time speaking with insurers to establish the credibility of these clients.
IBC: Will blockchain or cryptocurrency affect the insurance industry?
MM: In any industry where identity management, trust between counterparties and fraud prevention are required, blockchain is a tool that can potentially resolve these issues. These are all characteristics that are important for insurance. For example, both claims and policy issuance can be significantly improved; if you look at the way proof of claim and forensic accounting occur after an event, it can be very time-consuming and expensive. Blockchain solutions can remove much of the reconciliation requirements, turning claims management into an almost instantaneous process. Likewise, insurance policies on a smart contract through a blockchain could revolutionize the way policy wording is developed, distributed and understood.
Cryptocurrency is a means of exchange that’s not necessarily being used on a large scale. If you look at North America, especially in the US, users of the currency and the SEC have treated it as an investment product, which is very different than how it is being treated in some other countries. It is better understood as a means of exchange or form of liquidity. Cryptocurrency can be thought of as internet-enabled cash. There’s a lot depending on regulation as to how cryptocurrency will find its place in the world. At this point, it is too early to say if it will have any meaningful role in insurance.
IBC: How will blockchain and other technologies impact financial institutions in the years to come?
MM: This is why financial services is such an exciting industry: The most interesting trends are both invention – that is, creation of new technologies – and innovation, or creating new ways of using technology. For example, payment systems within banking – right now, a small fraction of the world’s payments happen on cryptocurrencies. While it is a new phenomenon that banks and insurers should monitor and be aware of, it is not yet a big disruptor in the payment system. Payment technology is already very advanced on the front end for consumers but hasn’t changed much for many years on the back end – behind the scenes. The payment industry is going to be impacted by both technology invention and innovation.
A growing number of transactions occur, and will occur, on smart contracts, and a growing amount of activity will be recorded on a blockchain. These are innovative uses of technology, not new technologies. While we focus on these technologies, the largest trends are happening right under our noses.
The trend to watch is who controls the payment system. In March, FIS made a deal to buy Worldpay, which alone processes more transactions than the largest American banks. Merchant processing was a business dominated by banks until they sold these divisions over the past few decades. Increasingly, the merchant processor is not a bank, yet the merchant processor owns that merchant relationship, and the payment processor, which is essentially the plumbing for the payment system, controls the client relationship. With the growth of e-commerce and blockchain eventually allowing for trusted transactions without an intermediary, this leaves the payment processors in a powerful position to take the client relationship away. I believe the long-term play between FIS and Worldpay is about having a global standard for multinational corporations to deal with, which will have a significant impact on the financial services industry.
New innovations are also supplemented by new tech such as AI, intelligent voice recognition and emulation, Big Data, and eventually quantum computing. The speed and scalability issues that innovations such as blockchain face today are going to become irrelevant because of new inventions. How many hours within financial institutions are spent on reconciliation, answering calls or fraud detection? All of these activities can be better done by tech that exists today and is coming to financial institutions in the very near future.
As these technologies evolve, financial institution companies are implementing them, and directors and officers have to consider the impact on their brand and reputation. Providers of tech have to meet increasing amounts of scrutiny of their insurance policies when supplying financial institutions. Brokers and insurers have to also consider the advice we are providing and whether we are advising appropriately on cyber and D&O insurance.