Why insurers must start dealing with the digital euro now


Bitcoin's soaring fortunes are making headlines almost weekly. Basically, as a bitkom study shows, the financial sector is open to the use of cryptocurrency. Sixty-two percent of the banks and financial service providers surveyed consider cryptocurrency to be a secure alternative to our established monetary system.

While some see bitcoin as a perfect example of a cryptocurrency and the future of our money, experts warn that a speculative bubble is about to burst. Regardless of this discussion, however, insurers should already be looking at digital currencies in order to prepare for the future. Because the digital euro is coming.

It is debatable whether bitcoins are a new form of money, an independent asset class or a new way of storing value. The fact is that bitcoins are a cryptocurrency based on blockchain technology. Facebook has also been inspired by the success of bitcoin and has formed a consortium to develop its own digital currency, Diem (formerly Libra). A venture that has startled the banking world.

A currency in the hands of a US corporation with a huge reach? This is not an enticing future for credit institutions and central banks. And so, working groups were established quite quickly at the ECB and other institutions to deal with the digitization of our money. These plans and schemes are now so far advanced that insurance companies should start looking at them now.

The digital euro is coming
"We will have a digital euro," ECB chief Christine Lagarde announced back in January. However, what this Central Bank Digital Currency (CBDC) will look like in concrete terms is still not clear, as the ECB is currently in a consultation phase that will define the framework conditions of the "digital euro." China is already a bit further ahead in terms of introducing a digital yuan.

Whether and when it will be possible to pay with digital euros in stores for the first time has not yet been determined. The success of bitcoin and the current projects with CBDC show that a significant change in money and in the currency system is coming. And this is more than just a digital equivalent of the bills and coins that we all use in our everyday lives. Money is going digital, which means that insurers should also be concerned about this topic and should start thinking strategically.

Programmable currency – new opportunities in the insurance industry
The digitization of the euro is not so much about whether policyholders can use it to pay for their policies or use it to get reimbursed. After all, digitized money has long since existed in the form of bank deposits. The changes, including those for the insurance world, lie elsewhere. Because the digital euro will be "programmable." And this opens up completely new applications in terms of payment and treasury.

Digitization has already automated many ordering processes, for example, between suppliers and producers. Only the area of payment has remained separate from this. Payment takes place outside these systems because intermediaries, in this case banks, are needed to handle payments. The programmability of a digital currency creates the potential for significantly greater automation. Performance and consideration could thus be processed on the same platform, making such transactions much faster than before.

Programmability also opens up new possibilities for pay-per-use business models and offers greater security, because of the direct relationships between the provider and the customer.

Machine-2-Machine payments could gain significantly more momentum. A classic example are vehicles that communicate directly with the pump or charging station. International payments could also be processed faster and more cheaply.

One last example: particularly in the area of reinsurance, smart contracting, i.e., the automated processing of contracts based on blockchain, is seen as having a lot of potential. The programmable digital euro would add the dimension of payment to smart contracts.

This may sound like science fiction at first glance. However, the ECB has definitely set quite ambitious goals with regard to CBDC. Insurance companies are therefore well advised to examine their options today, to participate in the discussions on the digitization of the euro and to look into possible new business models. Before someone else does.

Would you like to learn more about the impact of megatrends, such as big data and artificial intelligence, on the insurance industry? Contact our expert, Karsten Schmitt, Head of Business Development.

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