Despite the increasing uncertainty with regards to the financial hit to industries, Russell Group have modelled the exposure for companies and countries. In the first of these articles, we take a look at the impact on shipping.
Corporate Risk Managers Beware: Blockchain is coming
20 March 2017 | Blog Post
For many, Blockchain is another buzzword doing the rounds on business publications. Yet, what is Blockchain? In a nutshell, Blockchain is a distributed database that maintains a continuously growing list of ordered records, called ‘blocks’.
The technology that underpins Blockchain, came out of Bitcoin. Bitcoin, is a digital currency with a market value of $18,633,132,341 with a circulation of 16,220,637. When innovators realised that the technology of bitcoin could be used for large-scale organisations, blockchain was born.
However, for a lengthy period, like computers in the 80s, Blockchain merely existed in the circles of technology enthusiasts and academics. Yet, now Blockchain is entering the mainstream.
The banking sector has woken to the massive potential of Blockchain. The technology offers three main benefits for the industry: peer-peer consumer lending, retail payment and the real-time sharing of data across organisations.
Yet, any introduction of new technology in a large market, usually triggers an ‘arms race’ of investment in research and development is triggered, reminiscent of Apple v IBM battle in the 80s.
The investment war for Blockchain began in 2016. HSBC and State Street tested a blockchain platform powered by IBM. While, Bank of America announced a partnership with Microsoft, to develop the Microsoft-Azure blockchain platform. Such is the widespread belief in the blockchain, that 66% of banks believe that they will have blockchain in commercial production and at scale in the next four years.
Whilst the winds of change are sweeping through the banking sector, the question is, will they hit the insurance industry?
Change in the right context is always welcome. Russell Group Limited have been talking about the importance of the industry to name and know your risks. It is only by understanding the entire scope of your risks, can corporate (re-)insurers provide adequate coverage. Unless underwriters wish to take up crystal ball gazing, then what is needed is a framework that enables the industry to know their risks.
The solution to this lies in adopting Blockchain as a framework for transactions. What the banking institutions have realised is that Blockchain allows full transparency as real-time data is shared instantly.
If applied in the right manner, Blockchain can be revolutionary for the industry. Imagine, if complete transparency was unlocked in the Lloyd’s market, where everyone can follow the transaction from the very moment a corporate risk manager submits their proposal via the broker to the insurer, reinsurer and retro reinsurance counterparty? As the transaction progresses, all regulators, compliance teams and underwriters need to do is to check at crucial points, such as when an (re-)insurance contract is fully subscribed. Furthermore, all of this is secured safely in the Blockchain’s encryption protocol.
Taking this a step further, if Blockchain is coupled with Artificial Intelligence (AI), then not only can all the transactions be totally electronic but so can many of the duties performed by the underwriter. The scale of the disruption for the industry will be significant.
Interestingly, this has echoes of the ‘Big Bang’ in the City during the 1980s. The shift from open outcry to electronic, screen-based trading made the middleman in the financial industry, the stockjobber who was the purchase and source of shares redundant. Consequently, a large-scale increase in market activity was generated due to efficient technology being used.
If you think Blockchain is only related to the financial and insurance sector, think again. There is a direct link between what the Financial industry believes to be hot and what society picks up. In 1980s, mobile phones were the preserve of Gordon Gekko, but now are used by hipsters in Shoreditch to African farmers using their devices to obtain micro-insurance that protect them from agricultural risks.
Simultaneously, the 2008 crisis revealed the financial world to be interconnected, as the sub-prime mortgage crisis in the USA triggered a massive confidence shock across the global economy.
Since the crisis, Facebook and Twitter have rewired how we interact, Uber are changing the way we travel. What’s next, a paperless economy?
It is clear, that with Blockchain, we are past the infatuation stage. The Blockchain is here to stay. Furthermore, the only way is up for blockchain as, like any technology, it becomes more and more easy to adapt, due to improvements in production.
The challenge for corporate risk managers is to have a framework that is flexible and able to respond to or even lead the coming disruptive change of Blockchain.