Premium payments and captives: the benefits of cryptocurrency

“Blockchain sells”: this seems to be the case when you talk at events, study the daily press or believe keynote speakers. Blockchain technology has arrived at university lecterns and at pub tables. It is in vogue to be open to this topic and, at the same time, to express one’s opinion.

As is so often the case with much-discussed topics, some things get mixed up and half-truths are presented unfiltered. “Everything is better with Bluetooth”—this popular and equally striking thesis is presented by Sheldon Cooper from the TV series The Big Bang Theory. The situation with the blockchain today is similar. “Everything is better with blockchain” is the cry from the offices of the C-suite.

Is this really the case? The answer is ‘it depends’: things often get mixed up in the blockchain discussion. Is it about the cryptocurrency Bitcoin, which has attracted attention due to exorbitant price fluctuations and which is often mistakenly equated with blockchain technology?

Is it about cryptocurrencies and tokens in general? Or is it about the revolutionary possibilities that come hand-in-hand with blockchain technology on which cryptocurrencies, especially the money maker Bitcoin, are based?

Cryptocurrencies or virtual currencies are cryptographically encrypted digital units that can be used for payment. However, they cannot be seen as currencies under the traditional definition. This is because cryptocurrencies are not part of the state money order. This statement already brings us very close to the key question of the article: how important are cryptocurrencies already in payment transactions and what will things look like in the future?

The rapid price developments of various cryptocurrencies should not hide the fact that Bitcoin et al play a subordinate role in terms of general payment transactions. Of all virtual currencies, Bitcoin attracts the most attention. This is due to the novelty that goes along with it, as well as its striking price fluctuations (Figures 1 and 2). This makes everyone dream of rapid wealth, as seen in the Gold Rush, the dotcom bubble or, most recently, the real estate bubble. Is it now time for the cryptocurrency bubble?

By no means. The real idea behind this is that Bitcoin can be issued without banks and, according to its fundamental concept, can be used almost free of charge across currencies. It has total independence from the banking sector, which caused the last global economic crisis—and some previous ones. A respectable goal, but to what extent has it been achieved? Moderately.

In 2017, approximately 350,000 transactions were made around the globe with Bitcoin on a daily basis. In comparison: in Germany, 70 million conventional payment transactions, whether transfers, direct debits or card payments, were made—every day!

Although Bitcoin is the best-known cryptocurrency, it seems to be headed south. For speculators in particular, it is increasingly losing its appeal. Other cryptocurrencies are being traded more frequently and are beginning to catch investors’ eyes, as trading with them generates higher price gains. However, speculative recommendations are not the focus of this article.

Issuers and acceptance

Let us focus on the issuers of cryptocurrencies, and their acceptance. Apart from the Venezuelan government’s plan to establish a “petrocoin”, cryptocurrencies are based on the voluntary acceptance of private-sector players. As a result, there is no compulsion to accept the cryptocurrencies themselves—which in turn puts the trustworthiness in this system to the test. Cryptocurrencies are not legal tender; they are completely deregulated.

However, there are working groups that deal with the issue of official currencies as digital or virtual units. Central banks worldwide are discussing the advantages and challenges of this kind of development.

The Swedish Central Bank plays a pioneering role in this. Cash acceptance is declining everywhere in Sweden. The Central Bank is considering introducing digital money—e-krone—due to this trend. At European level, however, the introduction of a digital euro has not yet been discussed and is not considered necessary. Rather, incremental innovations such as instant payment—everyday payments in real time based on an app model—are being discussed. The aim is to increase the efficiency of European payment transactions.

According to current research, it is not the cryptocurrencies themselves, but rather the blockchain technology—on which everything is based—that is the most interesting element. For example, it gives distributed databases (peer-to-peer networks) the ability to execute payment flows, such as premiums or claims payments, without a traditional intermediary.

On this basis, processes with several participants can be coordinated more efficiently, and in a completely new way. Global insurance programmes, for example. Industry leaders such as AIG in cooperation with IBM are already giving some thought to this on a few projects. They began collaborative work on smart insurance policies as far back as 2017.

The core consideration was that units from various countries could simultaneously access the master cover and the sub-policies in order to generate transparency and boost efficiency.

Another collaboration that attracted attention was led by the Danish shipping giant Maersk. In cooperation with Ernst & Young and the data security firm Guardtime, they designed a blockchain-based marine insurance platform.

However, to describe the two projects as established would be too much of a good thing. Although the launch of the collaborations last year drew a great deal of media attention, things have gone quiet as to the current state of affairs since then.

The situation is similar with the B3i conglomerate, which has leading insurers behind it. The plans do not seem to go beyond a beta version at the moment, but due to the participants involved, it can be stated that the insurance industry is seriously interested in this new technology and the possibilities associated with it.

Insurers get involved

In April, one of the world’s largest insurers caused a stir. Allianz announced that it is testing the introduction of its own cryptocurrency in the form of an Allianz token. The intention is to increase efficiency while eliminating exchange rate risks in internal payment transactions.

Oliver Volk, a blockchain expert in Allianz’s reinsurance unit, confirmed that the token was in the works. Volk said in an interview with coindesk.com that an Allianz token would be “very helpful to get rid of FX constraints and other stuff we have to optimise, especially if you talk about certain currencies which we do not accept at our headquarters and have to reconvert”.

“It would make sense to rely less on the banking system, as this would result in numerous savings on commissions and could be used by Allianz all over the world,” he added.

In summary, the blockchain and cryptocurrencies are more than just a speculative bubble. Far removed from the overheated cryptocurrency exchanges, the major players in the insurance and reinsurance markets are developing approaches to work the new blockchain technology, and the associated digital currencies, into their business models in a meaningful and sustainable way.

It is certainly due to the size of the companies that there is still no sign of a holistic approach: an ecosystem based on blockchain technology that generates all the aspects of premium payment using tokens/cryptocurrencies, from coordinating the master cover through a smart contract to real-time premium regulation.

Tatjana Winter is head of research at BlockART Institute and a PhD student in the field of platform and ecosystem solutions in the risk and insurance industry. She can be contacted at:  winter@ryskex.com