Is cryptocurrency going to mean anything for my insurance?

Q:

I've heard that cryptocurrency might change the way insurance companies do business. What does that mean for me and other insurance consumers?

A:

The buzz about Bitcoin and other cryptocurrencies has been dominating news cycles at the end of 2017. There have been a lot of pronouncements about how it will revolutionize the way we do business, including within the insurance industry (learn about Insurance Industry Careers: What They Are and How to Get Them). But despite all the talk, it's been hard for many people to even understand what cryptocurrencies are and how they work.

So, let's start with a definition. Cryptocurrencies can roughly be defined as "a digital or virtual currency that uses cryptography for security." The result is a form of currency that is more difficult to counterfeit than traditional bank notes.

The key feature of cryptocurrencies is that all transactions involving them are stored on an online ledger called a blockchain which is copied across all computers running the cryptocurrency's software. Relying on dispersed devices effectively makes it a completely decentralized currency.

Exciting stuff to be sure, but where does insurance come in? It's relevant in two ways. The adoption of cryptocurrencies will change the products we offer and the way operations are managed on the back end.

New Products

Since cryptocurrencies have made it easier for criminals to receive and transfer money, hacking and ransomware have become more prominent. Insurers have been working to respond to this by rapidly developing cyber security insurance policies and standards (find out Why You Might Need Cyber Insurance – Even if You Run a Small Business).

Since this new form of currency is becoming more widespread, some commercial crime insurance policies now include cryptocurrency coverage. In 2014, Great American Insurance Company added an endorsement to protect businesses against the theft of Bitcoin as part of their crime insurance coverage and other insurers are sure to follow suit.

New Technologies

But perhaps the most profound impact of cryptocurrencies and blockchain technology is on the back end operations of insurance companies. One of the major benefits of the technology that underpins many cryptocurrencies is the ability to execute smart contracts (contracts that self-execute, are self-enforcing, and completely transparent and traceable).

This rule-based automation can make entirely new insurance products possible and has the potential to streamline operations and cut out a lot of the paperwork and admin time required to administer a policy. For the consumer, that will mean cheaper insurance as well as microinsurance coverage for things that are normally too small to insure cost-effectively under current manual processes, such as coverage that lasts less than a day (learn more in 5 Ways New Technology Will Change the Way You Buy Insurance).

While a long way off, blockchain can also decentralize insurance, wresting control away from insurance companies. With the advancement of smart contracts and decentralized ledgers, anyone can write a smart insurance policy, find a third party willing to take on the financial risk and the smart contract would automatically take care of premiums, payouts, lapses, and expiries.

Cryptocurrencies, then, are more than just a new kind of currency to rival the U.S. dollar, the euro, or the Japanese yen. Instead, it's an entirely new way of securing and backing currency. While consumers might not notice much of a difference between paying with Bitcoin or using traditional currency, they should start to see cheaper and more expansive insurance coverage as insurance companies start relying more and more on this secure form of currency.

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Written by Jacques Wong
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Jacques grew up around the insurance industry and began actively participating in 2013. Since then, he has gotten a Level 2 license, won an Insurance Council of BC award in 2015 for academic excellence in the insurance licensing courses and educates insurance professionals through PNC Learning.   Full Bio