Article Synopsis :
This updated report first published a year ago now includes three new chapters on the potential impact of blockchain in emerging markets.
The one we are focusing on is the last, entitled Blockchain and Associated Legal Issues for Emerging Markets (chapter 9).
Blockchain has yet to be widely adopted by insurtech. This will be in part due to having bigger fish to fry in integrating its legacy business with new technology platforms. But there are also important risk management concerns that must be addressed by any organisation looking to adopt this new technology.
They are not insurmountable and have been faced at different times in the development of digital business, most recently with cloud computing. Organisations must be fully aware of the inherent risks and ensure they are effectively managed and mitigated as necessary.
Another obstacle is the fact that blockchain exists outside the traditional world that contracts and the regulatory structure that act upon them. It is therefore important to understand who has accountability and legal responsibility in what is essentially just another form of outsourcing.
The paper identifies three potential models to consider: private or permissioned models where a single party or group of parties take responsibility for operating the system; public blockchain systems, where a joint venture style of contractual framework apportions liability and accountability to each party; and a public system where an organisation takes on the liability and accountability of running the entire system.
The first is the easiest path and no different from the way in which existing outsourcing or cloud arrangements are managed today.
The second might adopt an end user license agreement that stipulates usage. The example of an open-ended fund is used, in which anyone may join but the legal structure and risk allocation are apparent from the start. This system would have to be used from the start of the project.
The last model might use an open source system with a core framework with the ability for organisations to make alterations according to their needs, grant permissions for those who need access and keep out those who do not.
Though not all companies require the same levels of protection as financial services businesses, a purely permission-less blockchain system without additional protections seems like a non-starter if risk management is to be effective.
Whichever model is adopted, regulators must be flexible towards the emerging technology. It must not get caught up with viewing it in the same way as it might treat more traditional, centralised platforms.
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Digital Insurer's CommentsThere must be a robust and trustworthy structure imposed if blockchain is to be an important part of the digital transformation of the insurance industry.
Using open source technology backed by industry standards will prevent the inherent risks of models operating a monopoly cartel or where there is a proliferation of individual providers with their own discrete code/processes.
This is certainly the model preferred by most consultants and must surely be the most sensible approach. That way, other programmes across government and even financial services, such as Open Banking, can be integrated.
For far too long, the industry has conceived brilliant new solutions by reinventing the wheel. Those wheels have then become millstones and this pattern must be broken once and for all if insurtech is to succeed.
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