The Difficulty With Blockchain

Yesterday I was at the OnRamp conference in Chicago.  The guys at Gener8tor put it on and they do a good job.  OnRamp is about insurance and fin tech. One of the panels that they had was on blockchain.  If you read this blog regularly, you know that I think blockchain has a lot of potential.  It’s highly disruptive in many ways.

But, I believe it will take longer than I thought to make the impact I think it can have.

One problem is the issues that Jaime Burke talks about in this post, 99% of Blockchain Startups are Bullshit. It’s a long read but worth it if you are interested in blockchain.  I remember in the late 1990’s when a lot of people thought that major corporations would dissolve the bulk of their sales forces and put products on a B2B type exchange.  It never panned out because no company wants to be in a commodity business.

There are pieces of the insurance business that are pure commodities.  On the surface, all consumer auto, life, and home insurance look pretty commoditized, don’t they?  What’s the real difference between Geico, Allstate and State Farm?

In the panel discussion that I listened pretty intently to, insurance companies are just waking up to the promise of blockchain.  They always knew it was out there but they never really grasped what it was.  Microsoft and IBM have made it extremely easy for companies to experiment with blockchain.

There is something else that occurred to me as I was listening to insurance executives talk about blockchain.  It has to do with the real root of what blockchain is.  Blockchain is decentralized.  That means command and control aren’t inside the insurance company.  It’s also decentralized and the community has the command and control.

Decentralization is one of the most powerful concepts underlying blockchain.  But, are companies willing to give up command and control for the power that blockchain promises?

That decision will depend on traditional microeconomics.  Cost/opportunity cost, marginal revenue, marginal cost and all the other concepts you learn about in Microecon 101 will drive implementation and adoption.  We can talk about all the promises of blockchain, but when it comes down to brass tacks, the traditional drivers that have always driven business will drive blockchain.

Regulation is a big issue.  Remember, insurance regulation is also highly fragmented.  It’s not just the federal government but all 50 states have their own regulators.  Some states like Illinois are being very proactive when it comes to having friendly regulation.  In London, regulators created a regulatory sandbox.  Innovators put applications into play and they all watch how they interact with the market.  Regulators don’t do anything until they see the actual harm.

One area of insurance where development might be faster is in re-insurance.  Having a smart re-insurance contract posted on a blockchain could be really beneficial to insurance companies.  The speed at which those contracts execute versus the traditional means of settling catastrophic claims means better capital efficiency for companies.  The economics might weigh in favor of a blockchain solution.

Another area that might be ripe for blockchain solutions is health insurance.  One of the features of blockchain is it takes complex processes and can distil them down so they are simplified.  Two of the choke points in health insurance are the back office and subrogation of claims.  Blockchain could make that really efficient.

Again, the problem is command and control.  Allocating these functions to a blockchain will create powerful network effects.  Companies will have to work together.  Companies will need to collaborate to implement enterprise level blockchains.  Innovation will also occur in a decentralized manner.  The ecosystem will get larger.  New uncredentialed players will enter, but because blockchain is also about trust, it won’t matter.  Corporate insurance executives might be uncomfortable with it though.

Do insurance companies see all their internal command and control functions as a competitive advantage?  If they do, it will be very hard to embrace blockchain.

Right now, we can categorize two groups of companies when it comes to blockchain.  Some are wait and see, and some are being very aggressive.  The aggressive companies have a sense of urgency.  They are doing lots of internal experiments.  Embracing and implementing blockchain takes a top-notch tech team.  It’s been tough for insurance companies to recruit top tech employees.  It’s also a fundamentally different way to look at the business due to the change in network and distribution.  Giving up control to the community is radical.

However, because the insurance industry is fragmented with layers of distribution and a lot of independence, companies that aggressively pursue blockchain could be the ultimate winners.  Fixed costs and losses are the major drivers of COGS in insurance.  The sooner companies can figure out how blockchain drives those costs a lot lower and increases margin, the sooner that blockchain will show up and be embraced.

I just think it’s going to take longer than other advocates think.