Michael Mainelli, chairman of the Z/Yen think-tank, believes blockchain is currently better suited to the insurance sector than the banking arena. Banks have stampeded too early into wrong-headed use cases and proofs of concepts focused on payments. "It's about much, much more than payments. It's about wholesale market data sharing," said Mainelli.
He said banks have joined consortiums like R3 "so at annual general meetings, when some shareholder at the bank wants to hear about blockchains, the directors can say that they are 'participating in the largest banking blockchain consortium on the planet'. It's about safety in numbers.
"Unfortunately I think this is preventing them from rolling up their sleeves and looking at a lot of back office processes and data sharing problems, which is probably where the larger and more immediate benefits really are."
Mainelli and Z/Yen have been constructing database solutions for the financial services industry for decades, and mutual distributed ledger (aka blockchain) technology since 1995. He pointed out that blockchain-like encrypted systems are well suited to a "complicated game" of data sharing between insurers, reinsurers and brokers.
He said: "We have insurance and reinsurance clients who are sharing data with each other but don't want to reveal certain types of data. They are playing a complicated game where, during the course of every month, they have to notify each other how much they think they owe, so that they can work out their balance sheet obligations."
Mainelli pointed out one current application where insurers need to conceal facts about particular exposures they might have, yet need to share the bottom line figures without significant competitive risk. He said the amount one client owes another can change from an original estimate and this can be updated and verified along each step of the way, but this process of reconciliation need not reveal how this was calculated.
"If I showed you how I reached a certain calculation, there is an opportunity to that information against me. You could see my problem, or where I've got issues, say Florida housing, for example. So they do a spreadsheet calculation and write the data, the spreadsheet and the result out to a blockchain; but they only share the resulting number at this time. The blockchain is proof in case of a future dispute."
Mainelli's said that in a lot of senses this can be enhanced by a blockchain. "They were doing this before using escrow accounts and lawyers but that was expensive. On a blockchain no single party owns the data; the data is held in common."
Data which is encrypted can easily be shared on a need-to-know basis. Banks too are extremely tetchy about data of any kind being shared, evidenced by the proposed design of the R3 distributed ledger, Corda.
By way of example, Mainelli points to a three-party blockchain user group. Vrumi, which is like Airbnb for workspace rentals, does shared economy deals with two parties, then has a broker and an underwriter to provide "gap" policy cover for home & contents insurance. This means up to five parties need to share data – Vrumi, Safeshare the broker, a Lloyd's underwriter, the homeowner and the worspace renter.
"You could set that up as specialist broking system which would be quite expensive," he said. "A blockchain allows them to give each other signing authority yet anybody can look at the ledger at any time and see every transaction that's live and where it stands, and who has altered it and looked at it.
"So in the first case it's a complicated reveal that would have been done via escrow; in the second case what it's done is just eliminated the complexity of a messaging system."
Z/Yen already provides two working blockchains: a reinsurance chain with about 800 transactions a month; and a broking one with about 600 transactions per month. He added that a clinical trials application routinely has up to 60,000 transactions a day and handles it quite inexpensively, for millionths of a penny per transaction. "Nobody is paying us $2 per transaction or so, unlike cryptocurrencies, or we'd be rolling in over $100K a day to run it."