Blockchain and Insurance 4.0 – Insurance Institute of South Africa

Background

At the start of July 2024, I had the opportunity to share my thoughts on blockchain technology and its potential impact in the short-term insurance vertical with South African Insurance companies (e.g. Alexander Forbes, Sanlam…) during a webinar organised by the Insurance Institute of South Africa (IISA). In this post, I summarise the talk, which was geared primarily for a business audience.

A Primer on Blockchain Technology

Blockchain technology is one of the building blocks of the “much acclaimed” fourth industrial revolution (“4IR”). If you know anything about me, I cringe at how the term 4IR is loosely thrown around, even in scenarios where it is just but simply vague (do you agree?). However, be that as it may, the 4IR is characterised by parallel development and interplay of independent technologies, each with world changing potential. These include cloud technology, blockchain, internet of things (telematics), artificial intelligence and machine learning, augmented reality, virtual reality, 3D printing etc. I like to stratify these across connectivity, data, and computational power; analytics and intelligence; human-machine interaction and advanced engineering. An over simplification is that the hardware and connectivity is becoming more advanced and accessible (the cost is decreasing), the time to market for new technology and products (hardware or software) is accelerating rapidly. For instance, ChatGPT took a week to get to a million users, where household applications such as Facebook or Instagram took months. Coming back to blockchain technology, it is one of the 4IR technologies and there is an expectation that this technology will become embedded in data exchanges and transactions in the near future.

So what exactly is blockchain technology? It is a shared, tamper-proof ledger (think database) that allows exchange of value and data between transacting parties.

Illustration of blocks (of data) chained together, hence the term blockchain. (Source: Author).

Where then does blockchain – an emerging technology, meet insurance – an age-old and slow turning elephant? Although blockchain technology is largely associated with payments and financial innovation/chicanery, it provides a single source of truth across the multiple stakeholders in a value chain and unlocks automation via smart contracts, and efficiency gains from reduced intermediaries, which in the insurance value chain, contributes to Insurance 4.0 – digitally transformed insurance.

Insurance Value Chain

A good place to start with mapping the application of blockchain technology to insurance is by looking at a type-agnostic insurance value chain and its core activities which include sales, underwriting, contract administration, customer service, claims management, and risk management. This is shown below.

Insurance-specific value chain based on Porter (1985) and Rahlfs (2007).

Further, the table below shows the primary activities of the insurance value chain, juxtaposed with corresponding 4IR technologies. It is worth noting that although the technology of interest is blockchain, these 4IR technologies go hand in hand, and can be applied to the value chain.

Primary insurance activities and 4IR potential. (Source: Author).

An example of blockchain in insurance

A promising application of blockchain technology in insurance is that of parametric insurance (also referred to as index insurance). A parametric type of insurance that pays out based on an index being triggered (via a strike event) instead of the traditional loss assessment triggered by a policy holder’s claim. An example of a weather index platform is Bima, a blockchain-enabled weather index platform for smallholder farmers in emerging markets.

Sensor data graphs and readings fed into Bima – a parametric index insurance prototype. (Source: Tatenda Muvhu).

This was developed by Tatenda Muvhu for his MPhil in Financial Technology thesis at the University of Cape Town. Bima utilises the Algorand blockchain and demonstrates (i) digitisation of an insurance policy management on chain; (ii) use of sensors to collect weather data (i.e. an oracle) and publish to blockchain; and (iii) automation of insurance payouts via blockchain. The insurance value-chain primary activities ticked by Bima include underwriting, contract administration and claims management.

Summary

Using 4IR technologies, and blockchain in particular, we can achieve the following in insurance

• Reduced information asymmetry.

• Improved customer segmentation and risk pooling.

• Increased efficiency.

• Increased trust & transparency.

To sum it up, insurance (in this case, short-term), the elephant in the room can turn faster, with the use of 4IR technologies – and more specifically, with blockchain providing a foundational and trusted single source of data and automation layer.

Apex XRPL Developer Summit Amsterdam 2023

The 2023 edition of the annual Apex XRPL Developer Summit hosted by Ripple and the XRPL Foundation took place on 7th & 8th September in Amsterdam. The summit brought together developers, innovators, businesses, and investors for an inspiring two days, to exchange ideas on all things  blockchain technology and the XRP Ledger.

Offline Payments, Stablecoins and retail-CBDC

Last year, at Apex 2022, I spoke about how we (Mandla Money) are building low-tech digital asset wallets for financial inclusion and universal access leveraging the XRPL. This year at Apex 2023, I had the opportunity to give a talk on the more practical and operational considerations of administering an offline wallet that supports XRPL native and issued assets, and utilises capabilities of the ledger such as the decentralised exchange (DEX). In my talk, I discussed what desiderata for offline payments (the Mandla Wallet is an SMS wallet and I really should refer to this as semi-offline payments before I upset central bankers and economists), our approach to administering stablecoins (and by extension retail CBDC) in an “offline” setting and setting transaction limits for users based on their know-your-customer (KYC) level. I ended the talk with a demo of the corresponding features, and interoperability between the Mandla Wallet and other wallets in the XRPL ecosystem (I used Xumm wallet to illustrate this).

Here is a video of the talk.

Conference Highlights

The other highlights from the conference included:

  • Announcement of upcoming XRPL features:
    • Decentralised identity on XRPL (XLS-40d) – native support for world wide web consortium (W3C) decentralised identifiers (DIDs) on XRP Ledger. Decentralised identity (also known as self-sovereign identity) specifies a lifetime portable digital identity that does not depend on any centralised authority and fulfills requirements such as persistence, global resolvability, cryptographic verifiability, and decentralisation. This will allow XRPL account holder to  create, and manage their decentralised identifiers while having complete control over the private keys and contents of the identity object.
    • Automated market maker (AMM) on XRPL (XLS-30d) – An automated market maker (AMM) is a protocol for a decentralised exchange (DEX) that prices assets through an algorithm, rather than using an order book like a traditional exchange. Currently, the XRPL DEX provides liquidity exclusively by manual market making and order books. Introducing a native AMM will allow users to trade at a certain exchange rate on a DEX without having to find a counterparty e.g. instead of having to find a neighbour who is willing to trade USD for ZAR, or go to the airport currency exchange counter, the AMM allows one to exchange tokens freely.
  • A presentation on efforts and initiatives to grow and support the XRPL community including XRPL foundation, XRPL accelerator, XRPL grants and XRPL commons.
  • A breakout session on payments in emerging markets (e.g. Brazil).

All in all, I find Apex to be a great opportunity to network with the XRPL community and this year was no different – perhaps a little more special given the tailwind the community is currently riding given the glimpses of regulatory clarity around the XRP asset that is starting to emerge!

Teaching Blockchain at the FabLab Solidaire

Hands-on Blockchain Skills Development in Madagascar

Over the course of 5th June – 16th June 2023, I had the opportunity to teach a Financial Technology and Blockchain postgraduate course to a group of students enrolled in the newly launched Master of Mathematics and Theoretical Computer Science degree at the University of Antananarivo, the leading academic institution in Madagascar. The opportunity to teach the course was a result of a collaboration between the University of Antananarivo, the University of Cape Town’s Financial Innovation Hub and the Algorand Foundation.

The cohort of 20 students comprised a mix of working professionals and students with backgrounds in mathematics, economics, statistics and engineering. During the course, the students learnt about financial systems, innovation and disruption, blockchain fundamentals and a hands on deep dive into the Algorand blockchain – including the Algorand Python SDK and smart contracts (using PyTeal). Reflecting on the teaching experience, I appreciated that in this digital age, development of blockchain skills at tertiary level is absolutely necessary (and is the bare minimum), especially if Africa is going to realise its potential and produce locally grown solutions to provide employment and economic agency. It was an incredible privilege to be part of this initiative, and to be involved in hands-on skills development and knowledge transfer in Madagascar.

CBDC in Africa Symposium Invite 2022

Central Bank Digital Currencies in Africa Symposium 2022

Last month, I attended the Central Bank Digital Currencies (CBDCs) in Africa Symposium at the University of Cape Town (UCT) Graduate School of Business (GSB). The event, which was put together by the Algorand-UCT Financial Innovation Hub, comprised of a diverse audience which included central bankers, policy makers, financial technology (FinTech) professionals and academics. The panel discussion had two sessions, the first discussed CBDC projects being carried out by African central banks (notably the Central Bank of Nigeria and the South African Reserve Bank), and the second took a broader view on not just CBDCs but ongoing payments innovation.

What are CBDCs?
CBDCs are an especially hot topic at present, particularly amongst central bankers and the fintech community across the globe. Central Banks are harnessing the technology used in crypto assets to develop CBDCs. But what are CBDCs? CBDCs are a new and digital form of sovereign currency on an alternative and more efficient payment rail – a rail that is typically based on distributed ledger technology (DLT) e.g. blockchain – and not available in cash form. Essentially, CBDCs are akin to traditional fiat currency (footnote – fiat currency is government-issued currency that is not backed by a commodity such as gold.), albeit on a different payment rail. The promise of CBDCs is reduced frictions in financial services and payments e.g. cheaper and faster payments (especially since there is no need for multiple intermediaries between the source of a transaction and its destination – as is currently the case), as well as increased interoperability and programmability (which unlocks innovation) within financial services.

Central Banks and their digital currencies
Nigeria, South Africa and Ghana are some of the African countries that gone beyond research and launched CBDC pilots in one form or another. Nigeria, which is arguably leading the charge, launched the e-Naira project. South Africa launched the project Khoka pilot and recently participated in project Dunbar. Ghana launched the e-Cedi project. Other countries such as Namibia, Zambia and Zimbabwe have hinted at exploring the use of digital currencies, and are presumably in research stage – see the BCG CBDC tracker.

A recurring theme from the discussants was the cautious approach adopted by central banks as CBDCs are unchartered territories that will require amendments to policy and legislation, which they would want to get right. Another topic of discussion was privacy preservation – the need by citizens to maintain a level of transactional privacy (restrict a state’s oversight into an individual’s transactions) – something afforded by cash. The consensus here seems to be affording privacy for small value transactions and providing quasi-privacy or the ability to inspect – on-demand – large value transactions for regulatory purposes.

The first session ended with a thought-provoking question – whether proceeding slowly and cautiously by central banks is of more negative consequence than moving fast and being wrong – food for thought.

Q&A with the panel of central bankers
Q&A with the panel of central bankers

CBDCs and ongoing payments innovation
The second panel discussion zoomed out from CBDCs and considered more general and ongoing payments innovation. Interoperability between payment mechanisms and systems was highlighted as low hanging fruit with potential upside. For example, in the case of South Africa, a number of FinTech payments startups allow scanning of QR codes for payments but are not necessarily interoperable (e.g. Zapper and SnapScan), which would be a plus for merchants and a boost for commerce. Similar to QR Code payment apps, a comment was asked about why loyalty points are operated behind closed silos instead of being opened up and becoming tradeable across different providers and merchants (e.g. FNB eBucks, Standard Bank uCount, Pick n Pay smart shopper points etc). The rapid payments program (RPP) by BankServ Africa was highlighted as an innovation enabling interoperability initiative. The RPP is an interoperable payments platform that will bring together banks and non-bank FinTechs as service providers, and offer easy to use payment options for South African’s.

As in the first session, the theme of regulation reared its head again – with the sentiment being that although regulation moves slower than innovation, it is necessary. But of course overregulation can kill innovation altogether – there is a risk of throwing out the baby with the bath water!

One of the panellist’s took a necessary step back and put across a cornerstone notion that the problem we are trying to solve with CBDCs and payments innovation is not necessarily a problem of a broken past (i.e. present day financial infrastructure is relatively robust and functional) but more of what can we do for the future (from a technology, people and policy perspective) to improve from where we are. Ultimately, the focus should not be the payment rail but what it enables.

Lastly, one of the open questions arising from this session was whether CBDCs and current payments innovation will make a huge dent in solving the problem of financial inclusion – another piece of food for thought.

UCT FinTech grad students and James Wallis (VP of Central Bank Engagements & CBDCs at Ripple)
UCT FinTech grad students and James Wallis (VP of Central Bank Engagements & CBDCs at Ripple)

Summing up the conference, we are experiencing a fundamental shift in payments innovation and infrastructure, but fundamental shifts can be hard to recognise. The benefits of using blockchain as a payment rail are hard to ignore – faster transaction speeds, lower costs and programmability – all of which increase efficiency and participation and unlock innovation. CBDCs promise to be the next evolution of money, and not only central banks but fintech players need to be adaptive, agile and anticipatory.

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