New research explores the future of blockchain and its impact on the insurance industry

Blockchain has been the buzzword in the Fintech community for some time – a lot of the attention is now focused on how blockchain technology can be used to enable 'smart contracts'. While there is great potential for smart contracts to make inroads into insurance, many legal questions remain.

Next generation blockchain platforms allow applications or computer programs to be built on the blockchain in exactly the same way as web applications are built on the internet today.  This allows the blockchain to store and execute smart contracts.

Tim Roughton, Partner at Pinsent Masons, says:

"The concept of a ‘smart contract’ is an intriguing one for lawyers – at one end of the spectrum the discussion is about artificial intelligence replacing all of the aspects of drafting, whilst at the other, it could be used simply as a means of executing payment obligations and actions conditional on payment. But that said, smart contracts can offer real benefits to the insurance industry including simplification, automation, increased standardisation and electronic execution."

The term smart contract has no settled definition and there are many and varied potential use cases. Consortia such as B3i are now forming in the insurance sector to explore opportunities for the application of blockchain and distributed ledger technology.  There are a number of features of the insurance sector that align to the features of blockchain:

• Insurance is heavily reliant on documentation, data analysis and databases - inefficient solutions are currently being used for recording and evidencing the relationship between parties in insurance contexts
• Insurance involves many parties/actors - distributed networks could make sense in this context
• Insurance is a heavily intermediated industry; intermediaries add cost and complexity - the removal of ‘central authority’ record keeper intermediaries has the potential to reduce cost (e.g. fees) and complexity (e.g. multiple reconciliations)
• Internet of Things (IoT) data and telematics data lend themselves to storage/tracking and encryption on a blockchain
• Customer onboarding issues remain a concern for insurers - authentication/verification through the blockchain can provide a way forward
• Reducing fraud is a key concern for insurers – the blockchain promises immutable records and tracking

Peter Bidewell, Chief Marketing Officer at Applied Blockchain, says:

"Smart contracts are so powerful because of their flexibility. They can encrypt and store data securely, restrict access to that data to only the desired parties and then be programmed to utilise the data within a self-executing logical workflow of operations between parties. Smart contracts translate business process into computational process, greatly improving operational efficiency."

Pinsent Masons and Applied Blockchain have co-authored the research to examine in more detail the potential applications for blockchain in the insurance sector.  To better visualise the added value of blockchain, the paper looks at a real-world example in the insurance sector, explaining the user journey for a blockchain marketplace application that connects customers and insurers for home insurance. 

To download a full copy of the paper, visit: https://www.pinsentmasons.com/PDF/2017/Financial-Services/FinTech_Smart_Insurance_Contracts_Flyer.pdf