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The rise of smart contracts and blockchain has been a cause for concern among many brokers and insurers. The prospect of increased automation has naturally raised fears about long-term job stability and changing roles for intermediaries in the workplace.
However, University of Adelaide law lecturer Dr Mark Giancaspro has stated that the idea of policies being created and paid with far less human intervention was “scary only because it’s different” and “…an opportunity to up-skill.”
Originally proposed in 1994, a smart contract is a “computerised transaction protocol that executes the terms of a contract,” according to original developer Nick Szabo. In modern terms, this means that software automates much of the contract formation process. Details are then stored on the blockchain to secure the integrity of the contract, and payouts are made in digital currency.
Ahead of the Australian Insurance Law Association’s (AILA) annual conference in October, Giancaspro has pointed to a number of benefits that could be reaped by increasing the use of smart contracts.
Increased efficiency due to automation is the most obvious standout for insurers. With computers processing the nitty-gritty details, it’s possible to deliver faster policies, leading to a higher turnover and reaching more customers more effectively.
However, smart contracts also present an opportunity for transaction costs to be reduced; as blockchain users process transactions themselves, there is no requirement for a central authority to oversee the process.
“Once you cut out the middleman, with fewer human hands in the process, there’s a reduction in costs,” says Giancaspro.
If used correctly, both these factors have the capability to drastically improve consumer satisfaction, and accordingly enhance the wider reputation of the insurance industry.
Giancaspro concedes that the process is not yet foolproof; liability issues still remain, particularly around technological failure. If, for example, a computer was to fail during part of the process, it is as yet unclear as to whether the computer could actually be considered an agent of the insurer and render the insurer itself liable.
Additionally, in the case of a conventional contract, any errors can typically be corrected with relative ease. However, the nature of smart contracts means that they are much more difficult to alter after the client has accepted the terms.
“The insurance industry is built on risk allocation so, if you get that wrong, the industry could be undermined,” says Giancaspro.
Giancaspro suggests that the use of smart contracts will become far more widespread over the coming decade. While the technology to utilise smart contracts is already readily available, he has noted that there will likely need to be a “large-scale cultural shift” before they are adopted on a larger scale.
A number of high profile insurers have already begun to make use of smart contracts, including AXA with its flight-delay product, Fizzy.
Additionally, in October 2016, AEGON, Allianz and Zurich, and reinsurers Munich Re and Swiss Re established the Blockchain Insurance Industry Initiative (B3i). B3i is a prototype market which utilises blockchain technology in reinsurance contracts. As of October 2017, B3i has 15 members from across the globe.
