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Smart Contracts To Shape The Future Of The Finance And Insurance Industries

12月 18, 2017

In a previous article Blockchain Basics we scratched the surface of blockchain technology and what the future might hold for the Human Resources and Staffing Industry. For those who read it and are still wondering, “What is going to cut 3rd party organizations out of certain industries?” This article is for you.

The financial and insurance industries are scrambling for one very big blockchain reason.

SMART CONTRACTS

Before we go further, a little more background should be laid out regarding the difference between centralized and decentralized systems.

Centralized System – Think of these as the current business model for many industries. There is a system in place that many users put trust in, for example, we insure our homes and cars, trusting that insurance companies will reimburse us for damages that these assets sustain. These centralized organizations charge users to interact with them, and in the case of many third-party intermediaries, both businesses and customers are responsible for paying to utilize these services; like an auto repair company and car owner going through an insurance-based repair. Needless to say, the financial and insurance industries are profoundly reliant upon these revenue streams.

Decentralized Model – Blockchain-based platforms remove intermediaries and create peer-to-peer relationships that don’t rely on an entity like in a centralized system. Blockchain platforms turn each user into a data storage unit that acts as a fail-safe against single-point failure as well as an observation point to prevent misuse and fraud. Each user participates within the system and can deal directly with any other node with minimal latency and cost. Confused? Perhaps read this to clarify [Make “this to clarify” link to Blockchain article].

This is where Smart Contracts come in.

It’s important to understand that Smart Contracts are no more than very specific instructions that are encoded into a blockchain platform, thus becoming part of the system. These instructions are designed to calculate conditions and then execute a function (or functions) automatically when preset conditions are met.

Smart Contracts operate very much in an ‘if this, then that’ manner but have a great deal of flexibility to include many types of conditions, including input from multiple users, and can execute multiple actions simultaneously upon conditions being met.

Smart Contracts are stored in chronological order in the blockchain and can be accessed and audited in perpetuity by anyone on the platform. This is where the anti-fraud component comes in. If any attempts are made to fraudulently change a contract or transaction, the other users can detect and flag the issue.

What kinds of financial and insurance services could blockchain and smart contracts reshape?

In the next several years we can expect to see sweeping changes to real estate & property titles, mortgages, mortgage securities, loyalty and reward programs, structured finance, and international credit to list a few. Insurance companies are following suit and look to capitalize on blockchain identification and wallets to better underwrite assets.

Wait… Blockchain IDs and Wallets?

In order for entities, including those in the financial and insurance industries, to move into blockchain platforms, digital user identifications are being created within the systems. These digital identities exist very much like your current one in that it is an amalgamation of your sensitive personal information. It could include your driver’s license, birth certificate, social security number, banking information, car titles, home deeds, stock portfolios, lines of credit, insurance policies, etc. Anything that could be used to execute transactions or act as a condition for completing a Smart Contract is a possibility for inclusion in these wallets.

What about ID theft and fraud?

There are many layers to protect the multitude of sensitive identifiers within blockchain-based platforms. Devices and data can be encrypted, account numbers can be made anonymous, and these can all be further secured with multi-factor authentication keys that can be infinitely complex to ward off even the largest supercomputers.

If that wasn’t enough, because the blockchain platforms are open-source and each node stores parts of the network data, unauthorized transactions or fraudulently modified contracts can be recognized and halted. In short, assets and identities can be kept extremely safe and private from others if so desired.

The benefits of decreased fraud

If the risk of being cut out by blockchain-based platforms wasn’t enough for the financial and insurance industries, the decrease of fraud is certainly another reason for them to invest in blockchain technology. In 2016, more than $16 Billion was lost to consumer fraud1 with estimates of more than $80 Billion in insurance fraud that same year.2Blockchain could drastically reduce these financial impacts in the future depending on industry adoption.

Digital identifications and wallets can be protected and still made available for review by banks and insurance companies. This will allow for huge strides in fraud prevention. For example, if you’d like to get a new line of credit, perhaps even international credit, a bank can access your digital wallet to review your assets without the worry of it being stolen. Very rapidly an accurate line of credit, no more than what you actually qualify for, can be established with smart contracts set in place to hold titles or other collateral in lieu of default or other agreed upon terms.

Perhaps you need a new home insurance policy. Your deed can be easily reviewed in your digital wallet, an accurate policy assigned, and via the use of smart contracts, payments of claims would only release upon conditions such as titles being held, premium payments being up-to-date, and adjuster signatures being added, etc.

Moreover, consumers stand to gain from the reduction of their premiums. With the shrinking financial impacts of fraud and the increase in accurate asset valuation, insurance and financial institutions can charge less for policies and accounts. What is yet to be understood, however, is how the impact of the loss of other revenue streams due to blockchain will contribute to premium costs or interest rates.

In Summation

Will blockchain replace financial or insurance institutions? Not a chance, but they are preparing for the impending disruption to their revenue streams and many institutions have started working on blockchain projects. The R3  and the Linux-Hyperledger Project are two examples of how multinational organizations have created consortiums to bridge the gap between current industry standards and future blockchain-based standards. These organizations have made massive commitments to acquiring world-class talent and it is going to pay off.

How can your company prepare?

At Comrise, we can help organizations jumpstart staffing strategies to get your company on the right footing. The leap into blockchain will be necessary for many industries and those left behind will be due to a lack of critical staffing foresight.

Visit our website to learn more about our services including our enhanced search technology, RightView.

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