Decentralization, KYC and AML, Smart Contracts.
In essence, a blockchain is a digital ledger. One of the properties of blockchain technology is that once a record becomes a part of the ledger, it is impossible to edit or erase it. This is critically important for the insurance industry where for the claims to go through smoothly all the involved parties need to agree on what and when happened.
Decentralization of blockchains and its importance for insurance companies
Decentralization means a blockchain network does not have a central server with a copy of the blockchain. Multiple computers can have copies of the ledger and all the copies are equal. A computer on a blockchain network that has a full copy of the network’s blockchain is called a node. For example, you can see a map and stats about all the nodes that are online on the Bitcoin blockchain as you are reading this article by going to https://bitnodes.earn.com/
On the Bitcoin network and other financial networks decentralization is important because it allows any party to have a full copy of all the transactions that have occurred on the Bitcoin network since it went live in 2009.
In the insurance industry, a blockchain for insurance companies could contain data about events, people, and claims. For example, blockchain for insurance companies providing flight insurance could contain data about all the flights that the company insures. Every person that has a policy could also have a profile on a blockchain network with a full history of claims and policy modifications.
How blockchain could solve KYC and AML issues
Today, insurance companies spend a tremendous amount of resources, time and money on KYC and AML verifications.
KYC stands for Know Your Customer. It is a set of verification steps that a company needs to perform in order to make sure that a customer is the one he or she is claiming to me. For example, when you open a bank account and submit information such as a driver license, social security number, and a utility bill as a part of the application process, you are participating in the KYC verification.
AML is short for anti-money laundering and works in a way similar to KYC. The difference between KYC and AML is that while KYC is identity verification, AML is verification of where the money has come from.
Currently, most of the information required for successful completion of KYC and AML processes is located in disjoined databases owned by various organizations and government agencies.
With blockchain, participants of the KYC and AML processes could use the distributed ledgers to avoid unnecessary steps and to share certain information about customers. The data could contain information from trusted sources such as the government and banks. The process of data updates could be automated, which would save all the involved parties a lot of money. For example, when a person updates his or her address with a department of motor vehicles, the agency could automatically update a record on the blockchain. In one of its reports, Goldman Sachs suggested that using blockchain technology to streamline the implementation of KYC and AML could save companies over $2 billion a year.
The importance of smart contracts for insurance blockchains
Financial blockchain networks such as Bitcoin are a hot topic in the news today because they enable users to send funds to each other directly, without needing a bank or a government currency.
With Bitcoin, Satoshi Nakamoto was able to solve the problem that nobody else before him was able to solve, which is: with digital money, how do you prevent the digital money from being sent to multiple parties at the same time just like a user can attach the same file to multiple outgoing emails and send the email to multiple parties at the same time.
The Bitcoin network has solved this problem with a combination of tools, including proof of work as consensus algorithm, mining, having the parameter of difficulty on the network, using cryptography hashes, and more.
Money is something all people use, which is why the cryptocurrencies and new money have been getting so much interest. With this being said, even reporting about Bitcoin is often incorrect. For example, many people think that Bitcoin network is fully anonymous, which is simply not true. While the network does not store information about identities, it is not anonymous. It stores information about all the Bitcoin addresses and Bitcoin transactions on a public ledger that anyone can access, meaning that if you (or the government, or the law enforcement authorities) know at least some information such as a Bitcoin address, approximate date and time of a transaction, the amount of funds in a transaction, and so on, you can relatively easily find the transaction on the blockchain.
Another issue that many of the media outlets do not report is that Bitcoin and cryptocurrencies are only one application of blockchain technology. Bitcoin blockchain stores financial information about transactions, but blockchains can do much more.
For example, the Ethereum network, launched in 2015, can run contracts on the network, which is the functionality that is much more important for the insurance industry that Bitcoin’s financial capabilities. Bitcoin is a way to send money and Ethereum is a way not just to send money, but also to execute contracts without having to involve third parties.