Imagine an insurance policy which pays out on an insurable event without the need for involvement from a claims handler or even the policyholder lodging a claim. For today’s tech savvy consumer, hours spent on the phone to an agent or broker is a hangover from the analog age. Enter the smart contract.
A smart contract is any agreement which uses software to self-execute, either completely or in part. Where a term in a traditional legal contract is expressed by way of legal language, a smart contract is expressed as computer code i.e. if X, then Y. The simplest real-world parallel is the vending machine.
A vending machine represents a tool which, without human intervention, transfers ownership of a selected product (a can of soft drink) on receiving a defined input from any party (the set price of say, $2.50), subject to various stated conditions (e.g. no five cent coins). Because it is physically sealed, the vending machine controls the product and is able to self-execute the contract of sale.
Smart contracts and insurance
Even if you don’t use vending machines, chances are you’re already using smart contracts. They’re widely used in all sorts of industries, but especially in digital currency exchange. These contracts are so efficient it’s inevitable they’ll find their way into the insurance industry, potentially eliminating the need for brokers to act as intermediaries in insuring against particular pre-determined events.
- the conditions on which the policy is triggered;
- the details of amounts to be paid out; and
- accounts which claims are to be paid into.
The product works like this: a delayed flight is a matter of public record. This means it doesn’t need individual assessment by a claims handler as it can be verified by flight data sources. When a delayed flight – or other insurable event – occurs, it’s entered into the blockchain. This automatically triggers the smart insurance policy, and voila! Policyholders immediately receive their payout, eliminating the time and money involved in claims handling, as well as the insured’s waiting time. The key challenge for insurers is ensuring smart contracts are secure and overcoming issues related to the necessity of software updates in a blockchain system which is fundamentally designed to be immutable.
The mission isn’t impossible
In early 2016, Allianz Risk Transfer AG and Nephila Capital Limited announced that they successfully piloted the use of blockchain smart contract technology for transacting a natural catastrophe swap. A ‘cat swap’ involves transferring a set of risks (often natural disaster risks) from insurers to investors or other insurers utilising triggers with defined parameters. The test run demonstrated how using a blockchain smart contract simplified and sped up the transaction and settlement process, showing the potential of smart contracts for wider application throughout the insurance industry.
The general premise is as long as the conditions of the policy are clear and the conditions for paying them out are objective – as in the delayed flight scenario – insurance can be written in a smart contract. Of course, not all ‘insurable events’ are so clear-cut. But in the future, this type of data will come from social networks, which will feed data back to insurance providers, allowing them to test the accuracy of claimants’ statements. As with other paper processes we have long since replaced, the more work done by technology, the more efficient the industry will become.
For more on the sharing economy and what social networks could mean for the future of the insurance industry – check out our next blog post!