Last week, renowned economist Nouriel Roubini published an excellent short article on blockchain technologies titled “The Big Blockchain Lie”. I highly recommend you read it.
Roubini describes blockchain as “the most overhyped – and least useful – technology in human history”, and “nothing more than a glorified spreadsheet”.
I have long thought this is right.
I am by no means a technologist. Far from it in fact.
And I have hesitated from making a high conviction call on something that is outside of my circle of competency.
But ultimately I come back to the thought that if blockchain is the answer for (re)insurance, I am not sure I know what the question is.
So here are my questions.
First, what problem does blockchain solve in (re)insurance that could not be solved with existing computerised database technologies?
It’s easy to make a case that blockchain would be an improvement on the existing archaic and Luddite systems still used across much of the market. But this is such a low bar.
Is there a problem it fixes that could not already be fixed at a much lower cost, with lower execution risk, and with off-the-shelf technologies?
Second, who within (re)insurance benefits from the increased transparency that comes from a completely open source distributed ledger system? Who has an incentive to use it?
Here is Roubini: “As for blockchain itself, there is no institution under the sun – bank, corporation, non-governmental organization, or government agency – that would put its balance sheet or register of transactions, trades, and interactions with clients and suppliers on public decentralized peer-to-peer permissionless ledgers,” he wrote.
“There is no good reason why such proprietary and highly valuable information should be recorded publicly,” he added.
I think this is right.
In (re)insurance, content is king. I can understand why huge segments of the market would find the idea of a distributed ledger system as a form of utopia.
Essentially, it would solve an access to business problem and weaken the power of intermediaries, though perhaps at the cost of creating a perfectly competitive market place with zero market asymmetries.
That’s good for some businesses with little franchise value, those far from the customer, who produce little in the way of risk management, struggle with distribution, and provide little more value than putting up their capital.
But those who own the content – the insured and/or the intermediaries – have zero incentive to allow this transformation of industry structure. This is their proprietary information that they can leverage to drive a better bargain or capture a maximum share of the economics.
The customers and the brokers benefit from the near monopsony power of distribution versus a fragmented carrier market.
Why would they give that away?
Ultimately, if anything like blockchain appears in (re)insurance, I expect it will be essentially centralized distribution ledger technologies, controlled by a few powerful intermediaries. This would likely enhance their stranglehold on the market.
Finally, what are the benefits of a “trustless” and “permissionless” system, and do they outweigh the opportunity cost of what would be lost by replacing the existing trust-based system?
One of the great virtues of (re)insurance as a product has been that carriers have historically been willing and able to honour the spirit of contracts rather than simply the letter of them – something that tends to matter most at times of existential stress.
If you have any doubts about this, look to the current flexibility from reinsurers on how limits can be applied by cedants from various wildfire losses in California.
A trust based system takes a lifetime value view of customers, not simply a transactional one.
For sure, I might be missing something. And if you think I am, I’d love to hear from you.
But ultimately, I can’t help but think that when it comes to the Next Big Thing in technology, in (re)insurance the old aphorism that “a fool and his money are easily parted” holds true.