Articles - Blockchain – Has it really any value for L&P?


There is a new kid on the block that everyone is talking about, but opinion is sharply divided. Blockchain is the exciting new technology that is forecast to simplify contracts, shorten transaction times and generally make the whole area of financial servicing so highly automated that charges will tend towards zero – delivering better margins to providers and lower costs for customers.

 By Tom Murray, Head of Product Strategy, Exaxe.

  Alternatively, it is seen as the latest in a line of silver bullets from the technology industry that promises the world but turns out to be an expensive distraction from core business for any organization lured into its bright headlights. It just depends upon the expert you happen to fall into conversation with.

 The truth in the case of blockchain lies somewhere in-between. The initial hype around the blockchain concept came from libertarians, who were enthralled by the fact that transactions are taking place in a truly decentralized environment with no central authority. A decentralized web of computers processes the transactions. Those computers agree on which transactions are legitimate. The record of their agreement is the "blockchain," and it is stored on each of their computers, ensuring that no individual can alter the transaction record, thus removing any cause for dispute.

 Yet the financial services sector is a conservative world and the concept of transactions being completely decentralized is a big leap for us. Thus the technology was looked on with trepidation until the inevitable happened; a parallel approach was created, which proposed using blockchain but in the equivalent of gated communities, where every participant was known – a trust-based blockchain which is jointly owned by all those using it, i.e. those operating in that particular market. Having eliminated the most frightening downside to the technology, the question is whether it is of any significant value to the communities involved.

 In essence, blockchain is a very straightforward technology – a distributed ledger, which enables both parties to a transaction to view and confirm a transaction before it is essentially sealed cryptographically and is unable to be altered by any party or even by consensus. Therefore it provides an immutable record of the transaction that is instantly verifiable by the parties to that transaction and any other interested parties that have a right to access it.

 It is easy to see its application in the narrow and dynamic world of securities where the need to understand the current owner of a particular share is to establish a right to sell it. Given the fast moving pace of that market, a distributed ledger where all those who have access can have confidence in knowing who the current owner of the share is and whether they have the right to sell it is clearly of significant value. It is less obvious where the value in blockchain lies for the life and pensions sector.

 The key to getting value out of blockchain is to identify key business areas where multiple records are being kept of the same transaction and using it in those areas to eliminate the potential for discrepancies and to increase the overall speed.

 It is my belief that blockchain will ultimately transform the life and pension sector but initially the gains will be relatively low. Most life and pension companies have multiple legacy systems, which they struggle to keep in sync. The use of blockchain to provide a single record of transactions accessible by multiple internal systems could remove discrepancies between those systems and improve accuracy. Similarly, the sharing of ledgers between trusted participants could speed up transactions between multiple parties to transactions, e.g. where there are reassurers involved in the contract.

 It is only later, when there is far wider adoption of blockchain that the true value will be training in the adoption. For instance when health-care providers start storing medical records directly on a blockchain, one can foresee scenarios where applicants for protection give underwriters permission to directly access those records, allowing them to assess risk with far greater accuracy and at much higher speed than the current process. Or when national insurance payments are blockchained, working out a client’s state pension entitlement will be simple for financial advisers and lead to better long-term financial planning for those clients.

 But these scenarios lie comfortably in the future. For the present, life and pension providers are better off ignoring the extreme hype and seeing blockchain technology solutions as a good step forward in introducing internal efficiencies or efficiencies in their interactions with trusted stakeholders. This will position them well to benefit as more and more companies and government agencies adopt blockchain, whether on private blockchains or in the purist distributed version. But ignoring blockchain is dangerous. It’s so useful, it is definitely here to stay.
  

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