There will be a short pause while we engage the recording. Hello, I'm Lillian Coulson, and I'm pleased to introduce today's webinar titled Understanding Blockchain Technology and Insurance Applications. Please be aware of the IMUA statement. I'm happy to introduce today's presenters. Nick Lamparelli is a 20-year professional in the insurance industry and is the co-founder and chief underwriting officer of Rethought Insurance, an MGA focused on applying technology to make exposures that are uninsured, insured. Nick is also a podcaster and a blogger. His weekly podcast, Profiles in Risk, can be found at insurancenerds.com. So that's I-N-S N-E-R-D-S dot com. Dennis Smith is an assistant vice president in the New York office of Guy Carpenter's Marine and Energy Practice, where he works on a wide array of treaty placements, including excess of loss, quota share, and structured aggregate protections. His knowledge of blockchain comes from reading, attending, presentations, and personal education. Dennis and Nick are both past IMUA webinar presenters, Dennis on reinsurance and Inland Marine, and Nick on how the insurance professional can use data and analytics to gain a competitive edge. Nick is also a past regional presenter for IMUA on predictive cap modeling. Welcome Nick and Dennis. The floor is all yours. Do you have your sound, Nick and Dennis? Sorry about that. I was really rolling until I realized it was on mute. Ah, that's all right. Just to everyone in the audience, I wanted to explain how, a brief disclaimer, Nick and I approached this presentation as a foundational intro. While we do touch upon some of the technical aspects of blockchain, it's a bit hard to cram that all into just an hour presentation. The main goal of this will be for everyone in the audience to have that aha moment, where you hopefully understand that blockchain is a real breakthrough and something that's relevant to everybody, no matter what industry you're in. And so with that said, we'll be going through the current state without blockchain, what blockchain does to change that, the types of blockchain, which is really important. A lot of times it's all lumped into just one category. And then Nick will take us through some use case examples and some potential in-lane marine applications further down the line. And again, we do want to make clear that all attendees are encouraged to type out questions, and we'll do our best to take pauses along the way. Webinars are a bit tougher without a live audience, but I hope we don't rush through it and everybody has a chance to follow along because each part of the presentation builds upon the part previous. So why blockchain? What problem does blockchain solve? In our current state, computers can't trust one another, and what this really means is that computers can't know whether one or another are a bad actor, and so they all have to be assigned to one trusted authority. That means that there's a central server that is seen as the verifying entity on any computer network. And as a result of this, our economy relies on trusted third parties that oversee this part of the data because they have to be responsible, such as banks, to intermediate the exchange of assets and information. This is a cumbersome process of validating. Another example would be notaries, which have to validate the transfer of titles, and this can only be done through a trusted third party because we cannot share data on a single platform that everyone can see. So here's just a brief diagram. Company A has their own data, Company B has their own data, and the trusted third party has to be in the middle in order to intermediate the exchange of payments or transferring titles. A company hosts its own data, and this leads to errors and duplication. In the insurance industry, this would be similar to a company having its own data, relaying to the broker what that data is, and then the broker relaying to an underwriter what that data is. They each have their own separate version of what that is. And then one last point here is that in our current state, because the data is on a central server, if there's an attack on that server, you can lose the data, or it's unable to work. So for instance, mayors got an attack on its IT systems, and that wreaked havoc on its supply chains and shipments because there was one focal point where the attack happened because there was a central server. Is everyone following along so far? Hopefully this becomes clear, but just as a reminder, anyone can type out questions at any point. So as we get into blockchain, the real problem with blockchain before is that for electronic payments, there was what was called the double spending problem. It is the idea that if you have electronic payments and there's no bank to mediate the transaction, you can use the same $100 in your account to falsely pay two people that same amount. And a bank intermediates that transaction to ensure that you're only paying that money once. You're not allowed to spend money that you don't have. Blockchain solves this problem because rather than you having your own account data and others receiving your money, there's only one ledger, the distributed ledger that everybody uses. And so there's only one single source of data, and all that data has to be reconciled. So in that case, if you pay $100 to someone else, it's now in their account. All the data has to reconcile in that way. You can't have data in two places at once. And this is why we call it the distributed ledger because the ledger is shared among all parties on the network. And in Bitcoin, this is very often referred to as digital cash because like cash, once you hand over a dollar, that's it, it's a physical asset, and it cannot be in two places at once. Whereas electronically, you'd see payments be pending for days because it needs to be verified that it's legitimate and that the money is actually there. And then on top of this, if you can understand the idea of synchronizing data and that everybody has a shared copy of the same data, this has really important implications for supply chains, which Nick will get into some use cases later. But if you think that all the data has to be synchronized, supply chains are really important because once goods are delivered, then they have to be delivered. They can't be both in transit and also they can't be delivered and also waiting to be delivered in the same place. So if company A says they're delivered and company B says they're delivered, then that's it. Everybody now knows where the goods are. They can't be in two places at once. And because it's always verifying the data between parties, the people in the blockchain can log on and immediately see where the supply chain is at any point in time. And then we're going to get into exactly why the blockchain enables people to share this data freely, whereas right now you wouldn't be able to share that data openly to all members of the blockchain. Just going to pause there because we just went through a lot. Is there any questions so far? And it's okay to ask questions now and we'll address them later, but if anybody has any questions, I don't want to rush through because each part is very important. So feel free to type them out. So this is just a review of it. We have the current state without the blockchain where everybody stores their own separate versions of their data, and there's a third party in the middle that's intermediating everything. And those third parties are so important, not when two companies trust each other, but when people aren't sure who they can trust. Because a third party is able to reconcile the data, it's able to ensure that the money is actually there, someone's paying. It serves its own reputation that verifies that we've vetted this person and this account and we are paying the money on their behalf. But it obviously takes a lot of time, and it means that that bank or that intermediary is storing all of this personal data on their own server. And it also means that the use of third party incurs additional costs. It slows the process down because there's a lot of verifying that goes into that. And especially when these transactions are international, it can take days or even weeks in some cases. And one of the most prevalent use cases of Bitcoin so far right now is remittance payments because when people are spending $100 and trying to send it back to, say, the Philippines, they may incur fixed fees of $20 on that $100, which is prohibitively expensive. And by using digital currency on blockchain, you can send that through instantly and not have to pay all those fees to go through third parties in the traditional sense. We have a good question. Who are trusted third parties and what qualifies them as such? Trusted third parties, the most basic example you'd hear is a bank, JP Morgan, for example. And they're trusted third parties because they both host your account data and stand in between you and who you're transferring money with in this case. What they do is that while I know I may not be able to trust a company in, say, there's some company in Europe and I want to do a transaction with them, but I can't just take their word that they have the money. I don't need to go through a bank who's going to intermediate that transaction and let me know. And with blockchain, because all the data is on the same platform, I don't need to trust that company to have the money. The blockchain already verifies that they do because it allows the payment to go through only if they do have the money. And that's really the key takeaway. That's what all this conversation about trust comes down to. It is not trusting other actors. It is trusting the code that the code will only carry out transactions that are valid. Hey, Dennis, this is Nick. I want to reiterate for the trusted third party on the insurance side, that could be an inspector, that could be an appraiser, that could be a site engineer, a third-party site engineer, who both sides pay to basically make a decision about value or some other thing. While that has worked for quite some time, if you look at Dennis's diagram, the issue is that in a lot of cases the trusted third party could become the focal point of some kind of other attack. So the trusted third party being central to that exposes both sides to a lot of risk. And the best example of that would be Equifax, who is a trusted third party when it comes to credit scoring. They store a lot of information, and yet they were hacked. So there's a lot of risk. And having the third party, as Dennis mentioned, can really slow down transactions, and it does not necessarily mean that everything flows as smoothly or as accurately as it should. That's all. And this really gets back to the original point, is that in our world today we've become so accustomed to this, most people don't really see this as a problem because there's been no solution before. And that's why some people do get very excited about blockchain, because they feel that there's suddenly a solution for a problem that we had just been kind of getting on with before. Just to answer a few other questions here, yes, all audience members will receive a PDF copy of this PowerPoint afterwards, just in case anyone was wondering or trying to copy down too many notes. And there's another question about the anonymous system of Bitcoin. We're going to get into that in a little bit. There's pros and cons to every technology, but especially Bitcoin, which divides many people, and we cover that in a few slides. We have another question about OFAC vetting done with blockchain, and, again, we will get into that in a bit. There's very much a regulatory gray area with most of these technologies because they're so different and because there's some major issues with the way that they work compared to our existing legal framework. Certain blockchains, there's a good question here, blockchain replacing the third party and you still need to pay a significant amount of money to transact on the blockchain. Again, we'll get into public blockchains very shortly. The short answer is there may be some small fees, but they are infinitesimally smaller than the existing fees that you pay through banks, especially, as we said before, for remittance payments. And then cryptocurrency uses a financial guarantee. We have one more question here. And the short answer is there's many things cryptocurrency can do, but it's very difficult to – Nick made a good analogy of – it's basically like trying to describe the Internet. So there's many different things it can do, and so we're just going to try to get through the basics today but very much encouraging everybody to read into all the different variations of blockchain that are out there that are doing all of these many different things. And there are more in the pipeline that plan to do different use cases that haven't been addressed yet. There are a couple of questions out there, but we're just going to move on for now, and I will get back to some of these questions at the end of the presentation, if that's all right. Hopefully, some of them will be a bit more resolved by then. So the proposed state with the blockchain, and this is now the same diagram, but now you have the trusted computational protocol in the middle, which allows companies to directly share data with each other, and they all have a copy of the same data. Now we'll get into private ones in a bit, but this is just for the instance of an open blockchain platform where everybody can share the same data. So they each have one single shared version of the data. That means that they can't have conflicting accounts, because they all have to have the same version. So there's no reconciling, figuring out errors. Everybody has the exact same copy, and they need to agree on that copy. The blockchain protocol enforces a consensus, and the way it does this is that you cannot process transactions unless you build on top of the existing history of transactions. So if people debate, say, for example, the majority of the network says that two plus two equals four, but one person is saying it equals five, that's fine, and what would happen is there'd be two versions of a blockchain, but very quickly, the one that says equals five would be abandoned, because they need to all agree on a single blockchain. They can't agree on two different files. So if someone says it equals five, that's all well and good, but that's going to be abandoned. The only way that would not be abandoned is if over half the network was insisting that it equals five. And that's where we get at the consensus and the way that blockchain works is that it enforces everybody coming to an agreement as a majority, and then it goes from there and continues to build on its history. The way this works and the encryption algorithms that it uses allows all of this to be updated to minutes, so the shared ledger reflects the current state at all times. And then in addition to that, there was a question before about where is this data stored and is it vulnerable, and the short answer is it's really stored everywhere. Everybody has their own copy, so if part of the network's attacked and a computer goes down, they can easily, once they get back up to speed, can just take a shared copy of the blockchain from the others that have been storing the same copy that entire time. So in that sense, that's why we call it distributed, because there's no singular point of attack where it's stored. It's stored everywhere at once. So how blockchain works. We're going to touch upon briefly the technical underpinnings of it, but do encourage some reading links in the back and in the appendix, as not all blockchain works the same. They operate under very similar principles, but this is just on a very basic level how certain blockchains typically work. It's rooted in cryptography, and this came from a very small group of people that were very interested in encryption algorithms and how those work. They use encryption or hash algorithms that develop computationally difficult problems, and what that means is that it takes a certain amount of computing power to solve a cryptography puzzle in, say, 10 minutes. And these algorithms were developed by the NSA, and because they can't be reverse engineered, it means that you have to use a certain amount of computing power to solve them. And that leads us to proof of work. If it takes a certain amount of work to solve the puzzle, then by solving the puzzle, you verify that you've put in that amount of work. And what that means is that you can't fake that you've put in more work than you actually have. It means that one bad actor, some computer trying to hijack the network, would need to have more computing power than the entire rest of the network to overcome it. And that's going to be a crucial point, because that means you don't really need to trust every person on the network. You just have to trust that a bad actor cannot have over half of the computing power of the rest of the network. And most people find that much more trustworthy and know that they just have to trust the protocol rather than each individual actor themselves. And that's going to be the really key point as to why blockchain is such a breakthrough, is that you're not trusting other actors. You're just trusting the protocol to enforce agreement. Once this proof of work is established, the nodes will verify certain blocks, agree that they're truthful, and add them to the chain. And with the example that we previously went through, if somebody tries to insist that it's a different answer, they can do that. But their answer will be quickly abandoned, because there has to be a singular blockchain that all the nodes agree on. So when computers validate that block, they are agreeing that that information is truthful. So in this case, it's the same thing, but now company A has their copy of the blockchain, company B has their copy of the blockchain. And that is the same information at all times. So if company A say they have $100 and they pay company B, then that's immediately reflected with B, and they can't be pretending to have that money when they don't have it. We get to a few questions about Bitcoin in a second, but with the idea that Bitcoin, for instance, there are anonymous addresses. So even if you don't know who has the address, you can see how much money is in that anonymous account. And you can see that money transfer from one account to another. And again, just to reiterate, this presentation is an introduction, but everyone is very highly encouraged if you're interested further to read some of the additional links we've included in the appendix, which goes more in depth to the actual technical underpinnings of the technology. So with that said, we're now going to get into types of blockchain. We've given a bit of a basic overview, but I think that the types of blockchain will hopefully ground the conversation a bit more. So we've reviewed what blockchain is, but then the real thing that people have trouble distinguishing between is that there's public blockchain, which operates very differently, and private blockchain, which is more of a shared database and is a little bit easier to get your head around. So public blockchain means that anybody with a computer can access the blockchain, which allows greater freedom to everyone. So I could open my laptop now and download the Bitcoin blockchain and see every transaction that's ever been made on Bitcoin. The issue with having access to everybody means that in many cases there's scalability issues due to large number of transactions, and this is the major problem that most public blockchains are currently encountering. The information is available to all members, so it's a more open platform. However, the rules are very difficult to change because there's nobody leading these public blockchains, or even if there is leadership, it's hard to get everybody to agree upon it because it's so open source, and so sometimes it can be hard to make tough decisions. And then the last thing is that because anyone can participate, the security lies more in the size of the network so that it can't be overcome by rogue actors rather than restricted access. Another question here is, if blockchain ensures one common ledger, what is the significance of each individual copy? Is that a point of access? Yes, that's exactly it. So in order to have a copy of the blockchain, you need to be logged in to, I guess logged in is the wrong word. You need to be part of the system. What this is typically labeled as is a node, and that is most often somebody who's actually in the network, helping to validate transactions, and because of that, they're able to have their own copy of the blockchain, which is constantly updated as the blockchain is updated. So while we say it's an individual copy, it's really the same copy that everybody has. You just have access. I guess the strange thing, it's your own copy because it's not stored anywhere. It's stored on each person's computer separately, if that makes sense. And then we're going to get into, this is a really good question, does the distributed ledger include sensitive information that can be accessed by hackers? Yes, it does, and that's one of the major, with a lot of the public blockchains, they're very anonymous, which we'll get into momentarily, and with a lot of the private blockchains, they're restricted because they need to protect their information in a way that, rather than, you either need to make it public, and it's anonymous, or it's private, and the access is restricted to be protected. So in the private, anyone participating in the blockchain must be approved by a central authority or a member. You'll see this, if a company has its own private blockchain, it's not going to allow any computer to just join, it's going to have to approve each computer beforehand. Because those networks are smaller, and not everybody can just join, they are able to process transactions much quicker. They're able to validate information, it's just a much more scalable model as a result. Information on these can also be selectively restricted, so you may have an internal blockchain, the accounting firms are very keen on blockchain because it's seen as a way that they can be shown the information they need to see, and nothing more. And then rules can easily be changed or rewritten, because with a private blockchain, there's a central, there's somebody who's actually in charge of the direction, if there needs to be a change to it, they don't need agreement from everyone in the network, because they're responsible for the rules of the network. And lastly, all participants are known, so there's a reduced chance of attack on the network, as opposed to a public blockchain, which understands that there can be an attack at any time, and needs the size to prevent that. Ryan Murphy, that's a really good question. That I would relegate. There's a question, how do you see the transition from proof-of-work to proof-of-stake affecting private blockchain? And I'd say that's public blockchain, I would say that's outside the scope of this presentation, but really interesting, and there's a lot written out there about it. We will get into how all this applies to the insurance industry, I promise. We will get there shortly. Once we get through some of these basic slides, we're going to go on to the use case examples and the insurance industry in particular. So just to get through this real quick, we have the public, as we said, this is permissionless this is Bitcoin, and this is anyone in the world can access it. There's no third party whatsoever. There's no scaling though, they're having a lot of difficulty scaling it. However, what's interesting about Bitcoin is nobody knows who created it, and that's kind of the point. You don't need to trust who created it, because the code is open and everybody can see how it works. So there's nobody to trust in order to do that. It's anonymous though, which governments don't quite like. In the U.S. that's a problem, because of course you don't want hackers getting Bitcoin, but in other countries that feel their government is taking their money, they appreciate having Bitcoin so that they can be anonymous in that way. But because of this, it operates in a very gray area from a regulatory perspective. The other major public blockchain you'll hear about is Ethereum. It has what are called smart contracts, and the most basic example of a smart contract is a vending machine where you satisfy certain conditions of putting money in and pressing a button, and then once those conditions are filled, it takes action by dispensing a candy bar. So the potential would be parametric insurance. One of the presentations I saw had flight delay insurance, and these guys had created a program that automatically quoted business based on flight patterns. You could pay this smart contract, it would take your money, it would then quote you different rates, and if the flight was delayed, say a half hour or an hour, it would automatically pay out. And so they said they had absolutely, they did not have to do anything for this to happen. Once they set up the program, it did it all itself. It would pay out claims based on the money it received, and it would check with information freely available online whether flights were delayed. Just a bit on the private side, Corda is not actually a blockchain, which they freely acknowledge, but it's the same concept of distributed database. They have an interesting approach because they are trying to work within the existing legal framework, and so they include legal documents attached to different parts of their distributed ledger. And they are trying to burst into the scene by addressing the problems of privacy that public blockchains cannot. You also would have heard a lot about IBM. They've done key examples to test out use cases with AIG, with Walmart supply chains and with Maersk shipping. There are other initiatives as well with Microsoft, especially the big four accounting firms who are readily pushing their consultancy services into the blockchain sector to help companies establish use cases and try to get this whole, try to take advantage of blockchain. Now, this would be the number one article I would suggest anyone read. Harvard Business Review referred to blockchain as a foundational technology. We included the link towards the end of this presentation and it really, it makes the comparison to the internet but also underscores why it's so difficult to get blockchain to realize its potential. A real big part of this, right, is that if an industry is going to work on a single blockchain, they all have to agree which one they're going to use. In order to make sure that people aren't wasting their time by pursuing the wrong one, there are industry consortia that are trying to coordinate their efforts as to what blockchain they're going to use, what they're going to build upon, and how they're all going to coordinate their efforts so that we're all using blockchain in a way that's productive. So the key examples we have here are B3i, which you may have heard of by now. And that is among the insurance industry, blockchain and the insurance industry initiative. It's very much saying that it's a group of companies, brokers and insurers that are saying we are going to collaborate and we are going to try to find solutions together. If everybody found their own different blockchain, that wouldn't help anyone because then we wouldn't be able to use one industry blockchain to share information. So they're exploring a shared blockchain that everybody in the insurance industry can use. Similarly, there's Enterprise Ethereum Alliance. This isn't only insurance, it also includes some of the major banks, financial institutions, and Forbes 500 companies. But the same idea, they're saying that we are going to commit as a group, as all of these companies, to work on the Ethereum blockchain network and find solutions that way because we see this as the best platform for all of us to work together. And that's what we're trying to do. We see this as the best platform to build our own blockchain technologies on top of. Really good question. Will blockchains be organized around a company, an industry, or is it a single huge database? Again, these are the kind of questions that are sometimes hard to address, similar to the analogy of the internet. Blockchain technology can be organized in many different ways and it can be used for many different purposes. There will likely be supply chain databases that are separate. There may very well be internal company processes, which are in separate blockchains. And then there will very well be public blockchains that run many different smart contracts and achieve different means. And that really is a good question to underscore exactly what's happening in the space. Right now, there's so many different blockchains out there all proposing themselves as the next big thing. It's why you see a lot of conversation about bubbles. As you know, they can't all pan out. But there's so many use cases out there and so many different applications. So many different blockchain protocols are trying to be that next big thing. And so they all insist that this is the one that's gonna catch on, this is why it's different. And it'll be very interesting to see how that all plays out. There will not be, likely, one blockchain that goes over everything, but there'll be many different ones for many different use cases. Really good question. I'm gonna hand it off to Nick now. I hope that all that talk sunk in. Again, we're looking for an aha moment from people to really say that, okay, I get that this is really something new. And hopefully some of these use cases bring it to you. Nick, here you go. Thanks, Dennis. That was great. My aha moment is making sure I unclick my mute button. So, hi, everyone. I wanted, we thought it would be very useful. Generally, when I hear presentations about blockchain or I discuss it, it almost always centers around Bitcoin. And that was a big frustration of mine when I was learning about the technology. It took me about a year to really understand the implications of it because I couldn't get my thought process outside of Bitcoin. What does a cryptocurrency have to do with insurance? But I still remember that time I had my aha moment and I realized, okay, this is it. This is the big game changer that the industry has been desperately needing for a while. And while the technology is new, there are actually use cases in example today that are solving problems. They'll start out as small potential use cases, but you'll see in a couple of these, the technology and the size of the problem that is trying to be resolved is quite massive. And so, while I thought this might be like a five-year technology, there are already so many resources being plowed into blockchain that I actually think within five years, a lot of the major pieces will be in place. And it's likely that everyone listening to this call will be interacting with some form of blockchain on a day-to-day basis. So, the first use case is the one that happens to be the most mature is fraud and the diamond market. Diamonds have all kinds of problems, predominantly because the buyer of the diamond is ignorant. And I will be the first one to raise my hand. I've purchased diamonds and I don't know anything about them. So, it's very easy to get swindled. It's very easy to have fraud and other issues pop up. One of them is switching, which is quite honestly, as I was researching this, happens quite a bit. You bring a diamond in to get repaired or reset and you walk out with a different diamond. Most buyers would have no idea that that actually happens. Then there are problems with misrepresentation. You're looking for, you read an article, you know you need to get a certain cut or a certain color or a certain clarity and the seller tells you it is that, but it's not. This is probably my biggest problem is I think it'd be pretty easy for me to fall for a fake. They all look the same to me. I'm sure that happens to a lot of buyers. And then, you know, flawed stones, again, things that have been damaged and then repaired, but without having a gemologist there, we would never know. And then the paperwork that's around it. Even if you have what you think you have, there's the element of fraud where people can go in and change the paperwork. And so, there's one particular company that is a couple of years old now and this is probably the most mature of the use cases and that company is Everledger. You can see from the logo, it is diamond shaped, so that's their first product. Everledger is a company out in the UK who is directly solving this problem. Everledger has categorized, they are now upwards of two million diamonds and they are solving this problem at the industrial stage. So, as diamonds are cut and processed and ready to go out to market, they're capturing, they're working with the vendors or the manufacturers and catching the diamond at that moment. And what they're doing is that they're using their own internal scanning and algorithms. So, they're essentially scanning the diamond and creating a digital fingerprint of the diamond. I don't remember the exact number, but I guess upwards of 24 to 30 different characteristics of the diamond that they can capture. And using their algorithms, they create this fingerprint and then plow it onto a blockchain. As Dennis was accurately describing, it's not just like a Bitcoin blockchain. It has public aspects to the blockchain where outside stakeholders can view information, which you'll see in the next slide is gonna be extremely valuable. And then there's private aspects of it, such as who owns the diamond? Where is it being transported? So, let me give you an example. Everledger processes the diamond. The diamond ends up at a Tiffany's store in New York City and you as the buyer for a Christmas gift walk into Tiffany's. You can go ahead at some point, I don't think this technology is set now, but this is likely where we're going with this. You can use the technology in your pocket, your smartphone, use the smartphone to look at the diamond through the display case and with apps and other technologies that are in there, you can verify all kinds of information about this. So, what I'm hoping, I'm hoping for some of you I can get an aha moment now, and where the insurance application is for this. So, one thing, diamonds that are stolen, diamonds that are, quote unquote, misplaced can be flagged. If they're in the blockchain, if they've been captured at some point and they've been lost or stolen, your phone will read the blockchain and there'll be some kind of notification that that has happened. So, the stakeholders are more than just the diamond manufacturers. The stakeholders go beyond just the retailers. The stakeholders go beyond just the buyers. There are global legal representation here, regulators. There are a lot of different stakeholders here. And as we were preparing for this presentation and talking to, and Eileen was going over, she said, oh, it's kind of like Wikipedia. And that's a really good example of this. There are a lot of stakeholders, all contributing information to the blockchain. It's not just Everledger. Everledger just kind of coordinating the platform, but there are outside third parties that are contributing to it. And the more parties that contribute to that particular blockchain, the more accurate the blockchain becomes. It doesn't necessarily mean the blockchain is completely 100% accurate and certain, but the more actors that participate in it, they're all adding to the information. So the elements of trying to commit fraud or do other nefarious acts become more difficult because as Dennis said, in order for you to do that, you need to take over not one blockchain. You need to take over everybody's blockchain or a majority of the blockchain in order to rewrite it. And so this blockchain is actually an audit ledger. It's keeping track of the diamond, wherever it goes, who's buying it, what the transactions were, whether it's been lost or stolen, there's a record of it. And a stakeholder that may have sold the diamond years and years ago, and I'm thinking 10 years into the future now. So someone that was once a stakeholder will still have a copy of that blockchain. That information on that blockchain will still be valid. It's not necessarily that they're still following the activities of the diamond that they just sold. It's just that they were an actor and they had a stake in that diamond and their presence in the blockchain adds validity to the entire blockchain. And so I'm hoping you can see that there's an aha moment here where if we can do this for diamonds, what else can we do it for? Well, Everledger is moving beyond just diamonds. So their goal is to capture the entire diamond market, not just the ones that roll off the assembly line or the manufacturing plant, but everything that's in existence. But soon they already have plans and I think they're already building the technology to go into fine line. So the technology will be a little bit different. The platform and what is the information that's stored and the characteristics of the line will be a little bit different than what they're doing for diamonds, but it's the same technology. It's identifying what is this, where did it come from, who owns it, where is it going? And just keeping track of that. So it's like trying to define blockchain is really difficult like trying to define the internet, but it's going in a lot of different directions and it's holding a lot of different information. If you're doing diamonds, why not do the other gems? That was my first thought. So they are getting into other precious gems. Probably be a very similar technology to what they're doing with diamonds. And then fine arts. And fine arts has its own little caveat, its own little caveat, which is how do you track the fine art? What kind of technology do you apply to it? Because adding a radio frequency device or affixing something to the art can potentially destroy the value of the art. So they're already working on technology that can try to solve that problem. I'm sorry, are you muted there Dennis? Yes I am. It's a good question. I first heard of this in relation to conflict diamonds. I seem to remember that any change to the blockchain is completely traceable. Did I get that right? Nick, at least from my point of view, I would think that the key part is that once the diamond is verified as part of the blockchain, it can't, that information follows and it can't be unverified. That's right. Somebody can't suddenly change the verification of a diamond on their own. They would have to have that verified by everybody else in the chain in order for that change to take effect. Yeah, exactly. I think I'm gonna get into that when I go into the hypothetical example at the end, but think of a, for example, a vehicle that you're trying to insure and there's some kind of blockchain element to it. You can say that it's a Ferrari and you might be able to fool someone for some time, but at some point some other actor is going to come in and say, that is not a Ferrari. And you'll have additional actors that will be in that blockchain that will say, yes, we have verified that it is not a Ferrari. What's interesting is that to me, I believe falsifiable information remains in the blockchain. So there's actually an element in here that if you try to commit fraud, if someone tries to commit fraud, that's on a permanent record. That's on a permanent blockchain. The stakeholders can come in and by consensus overrule the information on the blockchain, but that information is there. So there's really a lot of potential here to reduce fraud in so many different ways because there's so many stakeholders. And like Wikipedia, they're all in their selfish motive. They're all contributing something to the altruism of the blockchain. They're all helping secure the information that's on there because not one stakeholder has the ability to overrule the accuracy of what's going on on that blockchain. Yeah, I think that Ferrari example really gets at the trouble we have sometimes describing the private and public nature. And it's the idea that I don't need to know whose Ferrari it is. I just need to know that it is a Ferrari. And the longer the blockchain goes on, the more people have verified that, that it is a Ferrari. If that goes on for a couple times, then suddenly the dealership says it's a Ferrari, the owner says it's a Ferrari, but then the insurance company says that's not a Ferrari, then it starts raising red flags. So the more people that are on the blockchain, the more people are verifying that the information is correct. Correct. Similar to Wikipedia. You can go into Wikipedia and you can change an entry to any way that you want to change it. But there are so many participants in the Wikipedia platform that it doesn't take long before someone sees that and then overrules it. And they have their own algorithms as well in terms of who's allowed to make changes and how they make changes and things like that. Blockchain will be very similar in that regard. One thing that we haven't brought up is that this is all digital. So insurance has drowned in paperwork forever. This is all digital. This allows for complete digitization. And as I said, if you can do it with diamonds, you can do it with fine arts, you can do it with gems, you can do it with wine. What else can you do it with? Well, how about agricultural supply chains? So this is actually happening now. So there are roughly 5 billion chickens that are raised in China every single year. And as you would expect, much of it ends up in the U.S. So companies like Kentucky Fried Chicken or McDonald's are big purchasers of chickens that arise from China. And so there have been scandals. There have been scandals with chicken sales. There have been scandals with drywall that comes from China. How do you know what you're buying is what is being sold to you? And so it's a huge problem because we're talking billions of dollars and unit sizes that are in the tens of billions. So ZhongAn is a Chinese insurance company. It's not a tech company, although they're a very tech-ish insurance company, but they're looking to solve this particular problem. And so what they're doing is every chick that's hatched, they will be tracked. So there will be some kind of technological device affixed to every single bird that is hatched in China. And in its lifespan, it will be geotagged, so place of birth, time, date stamp, weight, other characteristics will all be recorded on the blockchain. And over time, there will be time stampings of all the feedings, what they've been fed. There'll be health checkups, so every bird will be weighed and measured. There will be transportation records, and there'll be sales records, all to get to from that very simple blockchain where there's very little to no information to a much more complex one where lots of stakeholders have now touched or participated in these transactions. Remember, ZhongAn has no stake in the chicken itself. They're the insurance company. They're just creating the underlying platform. So they're a stakeholder and likely to be part of the insurance ecosystem when it comes to the delivery of these chickens. There are the farmers, and this will not be just one farmer, but it's China. So we're probably talking about thousands, if not tens of thousands, of poultry farmers throughout the country. There are the technological companies that will be affixing the tags, doing the weight and measurements. There'll be other stakeholders that will come in and do the feeding, cargo companies that will be transporting these birds, and then all of the sales and accounting transactions. So just in the supply chain, we're talking about 5 billion birds with multiple stakeholders. By the time we get to the very end and a certain amount of delivery occurs, there's all kinds of verification that's already occurring in the blockchain by the other stakeholders. It is Wikipedia for agricultural supply chain. And so still, I think clever, nefarious folks could figure out a way to commit some kind of fraud or other activity, but it's likely that as this goes, the supply chain, the blockchain, becomes actually more robust. It actually becomes anti-fragile. The more stakeholders that come in, the stronger the chain gets. It still doesn't mean that it's 100% accurate, but to commit fraud or to sell tainted meat becomes extremely difficult, not to mention that this is all digitized. And so at every moment, we can use computerized technology to speed the transaction through. So this is actually happening today. The one other thing I wanted to add in regards to that, there was a question from just a bit ago about why people are incentivized. If two people disagree on something that's happening, why does the rest of the network care? And that's because it's a shared ledger, and in order to update it, it has to be an agreement. You can't have two parties saying different things. That's like the two plus two equals four or two plus two equals five. The blockchain network as a whole has to decide what information it's going to move on with. So its goal is to verify the information is as truthful as possible so that it can continue updating itself and adding to the ledger. And like Nick has been highlighting so well, there's the added part of that, that if you're lying on the blockchain, it's going to be documented if it's untruthful, and it will be there in the blockchain that you have said something that you knew to be false. Correct. Thanks, Dennis. So use case number three has just hit the news. Merck has been making noise about blockchain. So here we have really going beyond agricultural supply chain, we have industrial supply chain. We have one of the largest cargo shippers in the world dealing with some of the big time accounting and tech firms to essentially take a system that's run by paperwork and Excel spreadsheets and completely digitize it. So this particular blockchain has been quiet. So we don't know, and Zong An as well, we don't know what the contributions are between the public part of the blockchain and the private part of the blockchain are. There are trade-offs, as Dennis had mentioned, to both. But imagine, for instance, the chips on your phone become part of the fingerprint of the phone. Because if Merck can do this, and they can go backwards to the manufacturer as they ship items to the ports to then be delivered all over to the world, and we can keep track of every single chip that's ever been made, that means that every piece of your phone has a unique fingerprint. Every piece of your phone can be tracked, and the phone itself has to be unique. So the chip on it will have a time stamp to the second, as will the glass case, as will the buttons. They'll all have unique fingerprints, and put together, the phone itself or your computer or any other device will become its own fingerprint. So even an automobile will have tires that will have their own blockchain, and we can actually keep track of where those tires came from, when they were made. And the insurance implications, I'll get to that in my hypothetical at the end. The insurance implications are huge because now, not only can we track the product, but we can track the liability of the product. We can track the liability of the manufacturer of the product. We can track all of that using just querying a blockchain, which is like querying a database. So I want to get into a hypothetical inland marine application. This is not necessarily occurring today. This is how I imagined it could occur. This was my aha moment. So let's take a builder's risk hypothetical example. So let's say we were rebuilding the Eiffel Tower. As Eileen pointed out to me, when we were preparing, there's no such thing as a simple builder's risk. So let's call this a simple builder's risk, where we have one project. That's it. We just have to finish that one project. Think of all of the stakeholders that are required to get this project complete. You have contractors, the general contractor, the subcontractors. There are all kinds of soil testing, ground testing, all kinds of surveying that has to be done for that. So that's another set of stakeholders. We got a lot of insurance paperwork. The insurers are definitely, this is the IMUA, if we were rebuilding the Eiffel Tower, it's likely that folks that are on this phone call would be participating in the insurance aspects of it. We have surety. We have, of course, workers' compensation. There's the general liability of the contractors and everyone else that's participating in it. And then we have the product liability of all of the materials that are being sent. Not only that, we have the municipality has to sign off. Is it meeting building codes? The town council or the city council has to approve it. Then there's the financing. Who's paying for it? Not one actor here has the full stake, but they all are contributing to the project itself. So like Wikipedia, they all have a say. They all have something that they can contribute. And there's no particular reason why any of them would want to be nefarious in their action towards it. But you have so many other stakeholders that can assist in the overruling of poor information. So as the tower starts to get built, there's additional things going on. We have to invite other third parties to come in and hot test the equipment. Is the elevator working? Does the furnace work? Is the air conditioning system working? The HVAC system? Things are being tested. And then there are going to be claims that arise. This is a complicated project. There's very likely to be some kind of claim. And all of that has to be handled all the way through completion. And so as of today, Dennis accurately started with, well, what's the problem? Well, take this builder's risk problem. There's so many different actors and stakeholders that are participating in this. There's so much paperwork being transferred back and forth. No one really has the complete information. And when things do go wrong, there are lawsuits. Things can get really messy. There are giant manila folders and binders that need to be boxed and shipped to attorneys' offices. And so with the blockchain, we can figure out quickly without having to ship manila folders, well, what's the insurance that's on this completed structure? And sorry for the arrows, I tried to fix that, couldn't quite get that right. We know who the general contractors were. We know who the, what their builder's risk policy was at the time during the construction. We know who the, we know every subcontractor that went in there. We didn't need to collect the certificates of insurance. The blockchain itself has some kind of date and timestamp from the actual insurance company that is participating or writing the coverage for the subcontractors. And even all the way down to the steel distributors, we know, we know what insurance has, is participating in this. So this is how I envision, this is how I'm thinking of, you know, homes in Florida where the contractor put the wrong roof screws in. This is my thinking is that over time, fraud greatly gets reduced because it'll be much easier to catch the bad actors. It's much easier to process the information. It's much easier for the insurance industry itself to clean everything up. This will all be a digitized line of databases. And so this is my hypothetical for where builder's risk is going. And this is just one of those examples where I probably can't even name all the other ways that a blockchain could potentially help or solve not only this problem, but other problems like it. And it's likely that we haven't even scratched the surface. So as this technology matures, it's likely that we're going to see all kinds of really interesting use cases that arise from the technology that is blockchain. So that brings us to the end of the presentation. As Dennis was mentioning, trying to learn about blockchain is trying to learn about the Internet if you've never seen it before. It's really complicated. But once you get that aha moment, you can start to apply the examples to it. It took me about a year before I felt comfortable even discussing it. And I'm not a technologist, but looking at where this is going, what's going on now and where this is going, it is, to me, this is as close to an inevitability in the insure tech area as I have ever seen. Yeah, Nick, I really loved your last example. I know it took us a little while to get to the actual insurance implications of it. But what's so difficult about explaining blockchain sometimes is that while it does feel pretty inevitable, it's inherently theoretical right now. And it's going to take a long time to get there. This is not going to happen overnight. These systems are going to have to be built out and people are going to have to get used to using them. And like the internet, it's not going to happen in two, three years. It's probably going to happen over the next 10, 20. My bet is five. That's true. I was trying to be conservative. The only other thing we'd add is that there's some recommended reading. There's a bit from Harvard Business Review. There's an eight-page paper that was the original Bitcoin paper as printed or as posted online in 2008. And then there's a brief bit about the Maersk cyber attack. Nick, do you just want to answer this one question about... Yeah. Yeah. So there are some additional questions that we can try to go through. Someone asked the question, is the benefit of the transaction history of a diamond not lost the minute a non-Everledger dealer is used? That is true. That is true. So as Dennis was explaining, there needs to be some consortium. So I think the idea with the technology platform is it becomes like Facebook in that as the network of dealers grows in the platform itself, the platform becomes more valuable. And now it doesn't make economical sense to diverge off to a different platform if everyone else is using that one. And you see it time and again, and this happens in the insurance space as well. I deal with cat models on a day-to-day basis, and at some point or another, someone's going to ask for results in one of the two major platforms. And so while I may want to use a third or some other platform, the industry kind of settles into a groove, and I think that will happen in the diamond market as well. And Everledger has such a big lead that it's likely going to be very simple for them to just keep expanding it and getting more dealers signed up. Oh, so fees, as Dennis mentioned as well, there will be fees. It's likely to be pennies or fractions of a penny for transactions. I think the technologists that are designing these platforms realize that the potential is in the volume, and so we're probably dealing with some of these transactions that might be transactions in the billions or trillions. And so transaction costs in the pennies will likely produce quite a good return on investment for them, and I think that's probably what they're shooting for. So what we're looking at is, you know, right now it costs me, you know, $100, $150, $250, for example, to send an inspector out to a property. If it costs me a few pennies for transactions to occur on a blockchain for me to get the same information, it's quite economical to do it that way. So I think most of the participants and the stakeholders in the blockchain recognize that it's worth the pennies or fractions of the pennies per transaction in order to remove the molasses that is the paperwork that, you know, and just the slowness, the inefficiencies, it's worth it to pay those small fees. There's another question here about whether blockchain has more applications for claims than the underwriting side. Nick's example went through into the claims process, but we hope that it could be understandable that all of that same information that was readily available to inspect a claim for the builder's risk policy would be all the same information that you'd want as an underwriter to vet the risk and make sure all the data is accurate. And especially on the marine side or for any mobile equipment that's moving around, it would be best if you know the specs of all of those and where they are at any given time and who's using them. And all that information is readily available to all actors rather than the only bits of information that you're able to get from, say, the broker or the broker from the insurer. Yeah. Yeah. I would throw in the example in the cat modeling area. You have exposure information that's transferred from the property owner to the broker to the carrier to the reinsurance broker to the reinsurer to the retrocession market. And as you mentioned, Dennis, everyone has their own copy of it. And at every stage, someone is collecting that information and trying to do some kind of verification. So, they're scrubbing, cleaning, verifying, modeling, and then sending the results up the chain to the next participant in the insurance stack. But think of all of the wasted work that's going on. We're all duplicating effort there. There's really one...there's only one source of information. And so, if we can eliminate that chain of activity with the blockchain where the participants themselves have all done some little bit of work to verify the information that's on there, we don't have to do that anymore. So, now, there can be a lot more trust between it because of everything we described here, because there's so many stakeholders that are participating in the different transactions. We know that that wood frame structure is a wood frame structure because it's been verified several times over the past years in the blockchain. It becomes a standalone that everyone understands that that's a wood frame structure. So, that's an additional value that's provided there on the underwriting side. So, then, if someone asked if there was like a disagreement, that's really critical. I gave the example of Ferrari. And what if there's disagreement? What if, you know, in the blockchain, there's a conflict? Well, as the blockchain matures, there are so many stakeholders that are participating in it. So, while I don't think it's been written in stone yet on how conflicts will absolutely get handled, a lot of it is similar to Wikipedia. The stakeholders themselves will resolve it. They will figure out different ways just in their normal course of business, which might even mean sending a trusted third party to the source to verify the information. That can be done as well. While we talked about eliminating some of the trusted third parties, there's still going to be some value for trusted third parties to participate because inevitably, there will be conflict. We can't escape it. This blockchain does not eliminate all conflicts. It eliminates a lot of conflicts. It increases a lot of trust. Right. And the key part I'd add about conflict is that in the case of the Ferrari, if the buyer says it's a Ferrari and the dealer says it's not a Ferrari, that's all well and good. But if they both want to enter that into the blockchain, that creates two separate versions of data because that data can't conflict. It's either one or the other. And in order for other members of the blockchain to continue to transact and build their own data, they have to pick which one to build upon. They can't build upon both. One is going to be abandoned as false information and one is going to be accepted as the blockchain. So everybody in the network is incentivized to verify that data so that they can build upon it and keep moving. If there's going to be a conflict, it has to be worked out, it has to be verified, whether it be by the insurer, who in that case would be a third party, and say, yes, it is a Ferrari, I see that it's a Ferrari, and I verify this. But in some way, they're forced to reach agreement because they can't continue to build upon the blockchain until they decide which blockchain they're using. Yeah. We take it for granted how many stakeholders are present in even small transactions, like registering a car. So while the buyer can say it's a Ferrari, the dealer can say it's something else. So there can be a conflict there, but it will get resolved because there is an insurance company involved, there's a lender involved, there's the Department of Motor Vehicles involved. There are a lot of activities by other stakeholders that are involved. And if the Maersk example works well, then it's likely that the car itself will have its own, aside from the VIN, the car itself will have its own unique blockchain. The car will be a blockchain itself, and within that blockchain will have a fingerprint of every piece of that vehicle where it came from. And so it'll be easily recognizable via the blockchain what this vehicle is. We wouldn't necessarily have to even send a third party to it because the vehicle itself is a walking or driving or rolling blockchain. So I think we've taken it for granted how our transactions have been done over time, and this greatly simplifies this. This enhances the transaction because it gets all of the participants in it to stand up and to sort of document what their stake is in it. And by contributing that information, that information is extremely valuable to the authenticity and the providence of the asset that we're talking about. Thank you, Nick and Dennis. Did you want to briefly mention the last couple of slides? I know. Yeah, I just wanted to say that there's the last couple of questions that I'm sorry we can't really get to, but they do all get into different applications. And just to underscore again, a lot of this is theoretical, so a lot of the more specific questions may be in the works or may be problems that are being tackled, but it's kind of hard to say one way or the other yet because, right, we're just talking about something that's theoretical and being tested, not something that actually exists just yet. The only thing that I would add about the additional slides in the appendix, there's a few about the way that technology works for Bitcoin specifically, how it uses encryption algorithms and how it uses those for proof of work. I'd really encourage anyone that's very interested in all this information to continue reading. There's a lot out there. There's a lot freely available. It's a bit of a rabbit hole because it's such a huge topic with so many different aspects, but we really hope that this is more of a starting foundation because no matter what you do, it will probably become relevant in some way or another, like Nick said, over the next five years. Thank you, Nick and Dennis, for a really detailed and informative presentation. Thank you also to our attendees for your participation and your interesting questions. After today's presentation, we'll send a survey link to you to ask for feedback so that we can use that feedback to create future professional development programs, and we'll also include a PDF of the presentation.

blockchain technology

insurance applications

Lillian Coulson

encryption algorithms

distributed ledgers

trust issues

Everledger

revolutionizing industries

industry consortiums

secure transactions

efficient