Smart insurance contracts – by Pinsent Masons and Applied Blockchain
Article Synopsis :
“Smart insurance Contracts” from Pinsent Masons and Applied Blockchain is a discussion paper on the application of blockchain, distributed ledger technologies, and smart contracts in the insurance sector.
The paper is organized in three parts:
- BLOCKCHAIN UP TO NOW:
- Next-generation blockchain platforms such as Ethereum and Hyperledger have emerged, moving far beyond the purely transactional ledgers of platforms such as Bitcoin.
- These next-gen platforms have a Turing complete programming language, which means applications can be built straight on to the blockchain, resulting in a global computer with a globally distributed database of information, where each member of the network has a perfect copy of the same information stored in a way that can never be retrospectively changed or tampered with – in other words, an immutable ledger.
- Many copies of the same information, stored by many different members of the network, but all using exactly the same data format and structure, delivers two benefits:
- Reconciliation: as everyone is ‘singing from the same hymn’ all the time there is no need for data reconciliation or even integration.
- Multi-party optimization: as all members of a blockchain network have a perfect copy of the same code and data, distributed applications operate and behave in exactly the same way for all members across the entire global network, permitting completely new and different types of applications not otherwise possible.
- SMART CONTRACTS IN FOCUS:
- The term ‘smart contract’ has no settled definition – it can mean one thing to a blockchain technologist and quite another to a lawyer.
- As all members of the network have exactly the same copy of the application and the data (stored within secure containers), smart contracts can be designed in a way to use logic to automate process workflows between different members of the same network that may not trust one another, want to share all their data, nor want to trust a centralised authority.
- Leveraging smart contracts and data privacy, members can create logical workflows to run distributed applications, while keeping their private information securely encrypted, resulting in a very secure system with no single point of failure vulnerable to a cyber security breach.
- APPLYING BLOCKCHAIN TO INSURANCE: Insurance industry consortia such as B3i are exploring the application of blockchain, distributed ledger technology and smart contracts. The reasons blockhain makes sense for insurance specifically include:
- Insurance is heavily reliant on documentation, data analysis and databases, and inefficient solutions are currently in use for recording and evidencing relationships in insurance contexts.
- Insurance involves many parties or actors and distributed networks make sense as all parties can interact on a single blockchain using standardised data sets and protocols.
- Insurance is heavily intermediated, adding cost and complexity. The removal of a ‘central authority’ record-keeper would radically reduce cost and complexity.
- Internet of Things (IoT) and telematics data lend themselves to storage/tracking and encryption on a blockchain.
- Customer onboarding issues remain a concern and insurers and authentication/verification can be radically streamlined with blockchain.
- Reducing fraud and other financial crime is a key aim of insurers and their regulators and blockchain promises immutable records and tracking.
To better visualise the potential value of blockchain technology in insurance the paper includes “an insurance use case in seven steps,” applying blockchain concepts to a real-world example – in this case, a user journey for a blockchain marketplace application that connects customers and insurers for home flood insurance. The specific value adds of blockchain are identified at each stage with an accompanying legal analysis.
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Digital Insurer's CommentsEthereum (discussed in the first section of this report) is an open source platform built on blockchain that has over $1 billion of value stored within its network, drawing attacks from the world’s most sophisticated hackers. Though anyone can gain access and begin making transactions, the platform’s core protocol has never been compromised. This is due to the consensus mechanism native to almost every blockchain, which requires an attacker to gain control over half of the members of the network simultaneously in order to perform a successful hack. Ethereum has over 6,000 members, or nodes, randomly distributed across the globe, making for a very difficult hack indeed.
Impossible? That’s the trillion-dollar question.
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