Smart contracts, blockchain and distributed ledger technologies – a legal overview for insurers

Article Synopsis :

Investments in blockchain and smart contracts have been gathering pace in the financial services and insurance industries, and this report, “Smart contracts, blockchain and distributed technologies”, from global law firm Clyde & Co., provides a high-level legal overview for insurers.

Blockchain-enabled Smart Policies fit a number of insurance use cases

Beginning with basic definitions of blockchain, distributed ledger technologies (DLTs), and smart contracts, the report explores various examples of how the technologies may be utilised in the insurance sector to produce ‘smart policies.’ For example:

• Digital tracing and identification of assets linked to the relevant insurance coverage (e.g., the Everledger records for diamonds)
• Parametric insurance policies where cover is triggered by external inputs such as weather data
• Back office claims functions in a subscription market
• In the marine and transportation sectors, verification of delivery and a running record of the status of goods (for example, remote humidity controls) and pricing linked to Forex rates
• Application to the energy insurance market, in particular renewables, with cover triggered by grid inputs and other production data
• The scope, when allied with the Internet of Things, to realign policies away from disaster response to risk management

Any area is ripe for development in which the availability of trusted data held on secure ledgers (thus bypassing intermediation) allows either fractional costs savings at the lower end of the spectrum or whole new product models at the extreme.

Those implementing Smart Policies will need to consider a number of key factors, each of which will turn on the nature of the transaction, from simplified ‘railed’ payment schemes to multi-tier, multi-party placements involving insurers, reinsurers and retrocessionaires potentially with linked financing support. Core considerations for five types of transactions are provided via infographic.

In addition to the usual regulatory and contractual matters, the report sees three areas in which legal advice will need to be allied with appropriate programming and technical support:

1. Creation of the Smart Policy, conceptually and in detail
2. Verification that the Smart Policy will work as intended and is legally compliant and enforceable (for one party and/or all parties)
3. Dispute resolution

The insurance market, with its acceptance of risk and traditional reliance on short form contracts (slip policies) which build upon underlying agreements and relationships, is in the author’s view ideally placed for smart contract adoption.

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