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Deciphering crypto: What, how and why insurers have to take notice

(Re)thinking Insurance Podcast: Season 3 – Episode 2

February 15, 2023

In this episode, Magda Ramada discusses crypto assets and related technologies and why the insurance industry should embrace digital currency.
Insurance Consulting and Technology

In this episode of (Re)thinking Insurance, Ravi Sharma is joined by Magda Ramada to discuss crypto assets and related technologies. Magda explains key terms and explores how the insurance industry can play a part in this evolving ecosystem.

Consensus mechanisms is a fascinating area of how we regulate society and markets, and essentially what blockchain was able to do was to generate consensus mechanisms that are decentralized and don't need to be governed by a single entity or person.”

Magda Ramada | Senior Director, Insurance Consulting and Technology

Episode 2: Deciphering crypto: What, how and why insurers have to take notice

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About our host

Ravi Sharma

Associate Director, Insurance Consulting and Technology

Ravi is an Associate Director in the Insurance Consulting and Technology business. Based in Michigan, he has over 12 years of actuarial experience on both the carrier side and consulting side. His primary area of focus at WTW is Pricing, Product, Claims and Underwriting.


(Re)thinking Insurance - Episode 2: Deciphering crypto: What, how and why insurers have to take notice

MAGDA RAMADA: That should be the focus of next year. It should be about generating the appetite and the capacity and the market to deal with some of these new risks that are being generated in the blockchain and crypto space so that we can help that industry really deliver its value for society.

NARRATOR: You're listening to (Re)thinking Insurance, a podcast series from WTW, where we discuss the issues facing P&C, life, and composite insurers around the globe, as well as exploring the latest tools, techniques, and innovations that will help you rethink insurance.

RAVI SHARMA: Hello and welcome to Rethinking Insurance. I'm your host Ravi Sharma. On today's podcast, we'll be discussing crypto assets and related technologies with Magda Ramada, a senior director and InsurTech innovation leader. Welcome Magda.

MAGDA RAMADA: Hi, Ravi. Thanks for having me.

RAVI SHARMA: I'm happy to have you on the show. Now as many of you know, we like to learn a little bit about our guests before we jump into our main topic. So what's something that you like to do outside of work?

MAGDA RAMADA: Well, I spent a lot of time with my kids and my family. I like to run. I like to swim. I'm now getting better at yoga, and I invest in crypto assets.

RAVI SHARMA: Well, that all sounds super interesting, and that last bit there sounds pretty topical. So how did you get into crypto, blockchain, and insurance.

MAGDA RAMADA: So in 2009, I was at a concert and the artist wasn't able to perform, and during that concert, someone told me about this new type of money and I was an economist, and I should be interested in Bitcoin. It was very early on, and I remember-- he's a very good friend of mine, so I'm allowed to say this.

He's Argentinian, and I just thought, oh, these Argentinians with all their alternative sources of money and what not, and I completely dismissed him. So I didn't get into Bitcoin early enough and in 2013, I

was actually into micro insurance, and that's when I came across blockchain and decided to spend some time on it, published an article in 2014.

And my life changed because overnight, I was like an expert on insurance and blockchain because no one else was talking about it. And since then I've been in the blockchain rabbit hole.

RAVI SHARMA: So you mentioned blockchain, and I know you and I have discussed this a lot, but I think a lot of people have heard the word blockchain but don't really understand what it is. So did you take less than a minute here and try and define in layman's terms what you think blockchain is?

MAGDA RAMADA: Yes, and I used to do a lot of educational work on this and using LEGOs and children's examples to actually talk about blockchain. I think we're past that. Most people have kind of understood that it's a distributed ledger technology, which means essentially if you have a ledger, you have a registry, a registry of what transactions, transactions of what type, well, transactions around value and are on data and information.

Essentially, the blockchain is this huge registry of transactions that is able to record transactions where value changes hands without a third party having to orchestrate that.

And that means that strangers and people with conflicts of interest and people you wouldn't trust can do transactions of value, and therefore it's a tool for decentralization of some of the things we have centralized over time, as in financial services and interaction in networks that can be trustless. And I guess in a nutshell, that's what blockchain is. It is a tool that enables us to decentralize markets.

RAVI SHARMA: Excellent. It's something so simple. Just blocks of transactions that get added on to one another, but at the same time it's so revolutionary and impactful. It's really difficult to appreciate the magnitude of what the potential is here.

MAGDA RAMADA: It's all based on the idea that reaching consensus and networks of people, that's a fascinating area. Consensus mechanisms is a fascinating area of how we regulate society and markets, and essentially what blockchain was able to do was to generate consensus mechanisms that are decentralized and don't need to be governed by a single entity or person. That's what makes blockchain very different from other technologies.

RAVI SHARMA: How relevant and important do you think blockchain is and the technologies that rely upon it, and how imminent do you think their adoption is?

MAGDA RAMADA: Well, I feel blockchain is a technology that can interact with other technologies and should because although many of the use cases we have seen around blockchain have been around automation and data analytics, there's better technologies to do that, and blockchain should actually be able to interact and to be implemented in an ecosystem of technologies to actually change the way we do stuff, and evolve our business models.

So the convergence and the ability for us to combine blockchain with IoT, with AI to be building artificial general intelligence on distributed networks and on blockchains, all of that really needed some time. People needed to understand where blockchain was delivering things that were different so that it could be combined, and we're seeing some of that convergence today.

In terms of when this if this is imminent and the impact it will have on society, it's a tricky question. I've actually been thinking that we would be able to accelerate what's going on in the ecosystem and

change for almost 10 years now, and still a lot of these things aren't happening or getting out of the experimental space.

So I always like to say game changers is like this way of looking at innovation and understanding what innovation needs to be able to leave the niche and go beyond the niche it was created in or the experimental phase so that it can have an impact. And one of the things that you need to have there is the ability for society to understand the impact of that technology.

I feel transmitting the value of decentralization to society is not that easy. Most people on main street, they really don't understand or don't care about something being decentralized or centralized. What they care is about the functionality, their ability to use or to interact with a certain application.

So it's like Napster. I mean, Napster was decentralized but has it prevailed? No, obviously not, because you have Spotify and other players that have a lot more to offer from a functionality perspective. People move towards practicality.

Articulating the value of decentralization in the sense of data and decentralized applications is really difficult. And I feel we need to do a lot of work so that society can understand that, and that enables blockchain and crypto as an innovation to leave the niche.

RAVI SHARMA: Taking that lens that you have from society and main street's adoption of these technologies and then bring that into insurance, how does this change the focus of insurance? And looking at it through that insurance lens, does that change your societal answer?

MAGDA RAMADA: It does, so that's actually a very good question. So essentially insurance as an industry is an industry that has a clear social goal. It is a very social industry. It has always been about enabling risk taking, enabling other industries to grow, and transferring risk and neutralizing risk based on a principle of social solidarity.

So essentially, if we look at the industry in that context and we look at the status right now of the crypto and blockchain industry, I feel that insurance should be focusing on delivering risk transfer solutions and the ability for the blockchain ecosystem Web3 to thrive because there are solutions to neutralize and transfer the risk away that will enable the industry to focus on what it has to focus, which is delivering the solutions and the applications and the infrastructure.

So in the past, insurance was more about how can I use the blockchain? And we saw all of these use cases on synchronization and reconciliation of data. It was mostly about automation and efficiency that you can generate with our technologies, and you don't need blockchain for that.

Perhaps that state, the insurance industry has struggled to understand how they interact with blockchain as a technology and with crypto, and I feel today it's easier to see that this is a technology that can enable us to transfer risk in very different ways. That risk and capital could become more fungible through tokenization for instance, but it is also an industry that needs insurance to be enabled, and why shouldn't we?

To me, that should be the focus of next year. It should be about generating the appetite and the capacity in the market to deal with some of these new risks that are being generated in the blockchain and crypto space so that we can help that industry really deliver its value for society.

RAVI SHARMA: We ask questions about what role does insurance play in society? And it's enabling that financial investment in risky situations which might otherwise not be financially tenable. A power station in Miami, Florida, that could get taken out by a hurricane, but through insurance, you can make that a financially viable investment.

And then with the crypto asset space, I think you can start seeing the development of economic activity and opportunities in areas where we might not otherwise have had like mining Bitcoin on top of a volcano by utilizing the power of the steam that's generated off the volcano, or stabilizing the demand on the power grid of utilizing excess power when that's available, and converting that into an economic unit of storage.

So marrying insurance with crypto assets and the value that they can provide can really serve society, advance insurance, and keep us moving forward.

MAGDA RAMADA: I mean, some of our listeners may already have heard me say this, but there is a book called against the gods, which is essentially about that. It is about the way in which insurance has enabled the last 300 years of human advancement. So I am all about insurance as an enabler. So I think that's what we should focus in the next years.

RAVI SHARMA: Great. So a lot of our listeners have heard us throw around terms like blockchain and crypto, and a bunch of other jargon. But for the benefit of our listeners, could you take a moment and help clarify DeFi, crypto, where do these words fit in the overall nomenclature and hierarchy of this new jargon that's coming out, and how can we help stratify this so we can clearly understand what means what?

MAGDA RAMADA: So essentially, the way I look at this is you understand blockchain as almost like an infrastructure. It's the foundations. It's the pipes and the foundation of a building. Different blockchains will use different types of consensus mechanisms to work. And part of that is that you need to be able to incentivize these networks to work in a decentralized way.

And for that, originally, crypto assets were created, they were a storage of value, but they were also the type of value token that was used to make sure that these consensus mechanisms actually made sense, and generated the incentives for people to actually participate in this ecosystem.

On top of that, once you have the infrastructure, lots of things start to flourish, and you realize that you can actually start building applications and start building additional layers of economic value, and that's where you will see DeFi and other areas come in. So what is DeFi? It's Decentralized Finance. It's a short for Decentralized Finance.

And what are its goals? Well, it is trying to mimic the traditional financial world in the context of a decentralized infrastructure and world that is not as bound by jurisdictions, by regulation, and by many other things, and it is really trying to transfer value as in capital, and in risk in a very different way.

That's how they tie-in together. You have to think about this as different layers of a cake where you have a very foundational layer, and that will determine the type of applications you can do on those foundations and the type of new economic activity that you can develop on top of that.

We have started by mimicking things like the financial world in the case of DeFi, but as many new areas of economic activity that didn't exist and couldn't exist before, and Web3 is a testament to that and the idea of Web3.

But essentially, things like prediction markets, we had betting before we had ways of crowdsourcing information, but we never had a very efficient way of generating a market around people's predictions. So a lot of these words, they fit together if you look at this as an ecosystem or a building that has different layers, and that makes it easier to understand.

RAVI SHARMA: So I put you on the spot before with defining blockchain in layperson's terms, but I'm going to do it once again. Could you give us a quick one minute definition of how you would describe Web3 and metaverse?

MAGDA RAMADA: Yes, so I'm going to steal someone else's idea on this one definition based on my Twitter post I really like because I think it really enlightens and it's a good analogy. Thinking about Web1 as the first phase of the internet, where essentially you were a consumer of information, and it was more a read only type of interaction.

And then at some point, Web2 enabled read and write, and people would be able to also interact with the internet and generate value by actually generating part of that web.

What's Web3? Well, you add to the read and write, you add the own. Until now in the context of virtual world, essentially it's really difficult to own in a unique way. It's difficult to own something online, something virtual because it's pixels and it's bits and it's code, and it has always been prone to being copied. It's very difficult to show that you actually own a piece of something that's virtual.

Blockchain has enabled us to actually own things, and that ownership is incorruptible. And so based on that idea, the iteration or the next evolution of the internet and hence Web3 is a place where we can also own virtual assets and generate economies in that virtual world by ownership. So that's why blockchain is so much interrelated into that as our non-fungible tokens NFTs.

In terms of the metaverse, it's like an additional expression of that. The metaverse is supposed to be this immersive reality where the physical world and a virtual world interact, where you have something like a digital twin, where you have a piece of your world, and your ownership and everything else is in there.

So it's an extension of the physical world, and people can go in there and enter an art gallery. And they enter it in the metaverse, but it will ring in the physical world, and then you will be able to interact with someone that's actually in Rome while you're in China. So essentially, it's that intertwining of the physical and virtual world that Web3 will enable and that will change the way we interact with businesses and other people.

RAVI SHARMA: The next thing I want to talk about was where does this technology go from here? What do you see on the horizon?

MAGDA RAMADA: I see lots of things on the horizon. The question is always when is that horizon become a reality. But in the context of Web3 and metaverse, I usually joke about this when I'm on stage and they say things like if you ask people about blockchain and insurance and finance, they're all going to say, oh, it's a fad. It's not going anywhere.

But then we have all of these headlines about metaverse and Web3 we are going to change insurance and finance forever. So we change the narrative, but there's so much linked to each other. And essentially, the idea is that we will have a more fluid interaction between the physical and the virtual world.

You will be able to have virtual assets that are actually owned and that where ownership certificates and the way ownership is defined for those virtual assets is unique and enables us to have economies of virtual assets that we didn't have before.

That also means that those assets will have to interact with their physical counterpart, that we will have digital twins across a multitude of use cases, that prices in the real world and in the virtual world need to interact with each other and have a relationship.

There's a lot of things we will have to figure out in the context of Web3 and the metaverse and how those two types of economic activities interact with each other, but it's really fascinating to see how many very traditional companies are starting to think about it and to invest in it.

And we wouldn't have Web3 or the metaverse in a decentralized way, or at least in the way I conceive it without a technology like blockchain and without the inspiration of distributed ledgers because that's essentially what has enabled us to have an infrastructure that can work in that way.

RAVI SHARMA: That's the next iteration. But before we get there, we have this middle ground that I think you and I both kind of feel like we'll hit first of that tokenization of risk and decentralization enabling new economies. Can you take a few minutes just to concisely wrap up what we've been talking about today?

MAGDA RAMADA: In the same way I said for us, insurance in the next year should focus on enabling this ecosystem. There's other areas. The insurance industry has been thinking about in the context of digitization of its activities and digitization of its building blocks like contracts.

The idea that we can optimize the contract or that we can optimize an asset and have shared ownership over parts of an asset or a contract or a risk is essentially what's under the idea of tokenization of assets and risks. It is all about being able to have shared ownership and transferring that shared ownership in a very atomized and granular way.

So to me, the idea of tokenization is not new. We had physical tokens for a very long time, but now those tokens can become very atomized, and we can actually dissect and fragment risk in multiple ways so that we can transfer it in fundamentally new ways, and enable things like secondary and tertiary markets for risks.

So the process of tokenization of risk is a fascinating one because if you actually try to think about it in exaggerated fashion, tokenization could really lead to full risk and capital fungibility. At some point, if you're able to have fully computable risks that are tokenized would presupposes a lot of things, including having a common view of what that risk is and how you price it.

But so computability needs that as well, so we're working on that. But at the end of the day, if you tokenize risks in an atomized fashion, you will be able to generate a very different way of transferring those risks and markets that are built on those risks, instruments that are repackaging those risks in a very transparent way. So we don't want to repeat repackaging with risk like in the 2008 crisis.

So the idea is really how can we think of capital risk in a fundamentally new way? And how can tokenization decentralization help us in that? I'm always saying we've looked at quantum computing, we've looked at things that we know are not going to be a reality anytime soon, but they have inspired us to do things differently from how we build algorithms to how we use quantum mechanics and math in the way you understand prices and economics.

We could actually do that with blockchain as well. We can have blockchain inspired solutions, while the ecosystem develops, and I think we really should be focusing on that as an industry.

RAVI SHARMA: That sets us up well to kind of leave a nice teaser for our future episodes here. So while this episode is the first part in the series, and future episodes we'll be joined by some additional guests and talk about things like replacing existing things and developing new things, as you use that analogy with quantum computing.

But in addition to that, we'll also have an additional episode talking about computable contracts and smart contracts, in the context specifically of commercial insurance.

MAGDA RAMADA: [INAUDIBLE] topic lately. I'm looking forward to that.

RAVI SHARMA: Well, thank you so much for joining us today, and we look forward to seeing you next time.

MAGDA RAMADA: My pleasure. Thank you, Ravi, for having me. Cheers.

RAVI SHARMA: And thank you to all our listeners of (Re)thinking Insurance, and we look forward to having you tune in next time.

NARRATOR: Thank you for joining us for this WTW podcast featuring the latest perspectives on the intersection of people, capital, and risk. For more information, visit the insights section of [UPBEAT MUSIC]

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