The insurance industry will be reshaped and reorganized due to blockchain

June 8, 2017

Blockchain technology contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision. In this world every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared.

An insurance use case in seven steps

The below example uses the real-world example of a blockchain application that connects customers and insurers for home insurance,.

  1. A customer types in the website address into her browser exactly as she would with any non-blockchain web application, and signs up to the platform by entering her email address, password and details of the property.

On sign-up, the customer is issued a public and private key, the latter of which is stored securely on her device or in her browser.

  1. At the point of sign-up, the customer can be required to agree to terms and conditions applicable to the platform. The terms would govern the consumer’s use of the platform and, potentially, the terms and conditions of any products or services procured through the platform.
  2. This data is encrypted and stored securely within a smart contact on the blockchain as part of the customer’s account, using her device’s private key. Unlike a traditional web application, where private customer information is stored centrally in one server by the platform owner, the blockchain shares a perfect, but encrypted, copy of the customer data across each node of the network, resulting in no single point of weakness vulnerable to an attack.
  3. The customer decides that she wants to receive an offer from an insurance company, and so requests a quote by permitting the insurers on the platform to access any personal information that may influence the quote.
  4. The offer is confirmed by the customer signing the transaction with her blockchain private key. This can be done via biometric authentication, such as TouchID on the iPhone, if the private key is stored on the device; or by verification through the customer’s browser.

At this point, the customer enters into a legally binding smart contract with the insurer that will self-execute and automatically release payment if verified proof is given that the house has been flooded. A direct debit of the agreed monthly amount is initiated by the smart contract.

  1. The data and images are stored on the blockchain directly by the device, signed by the device’s own hardware-secured private key. This time-stamped data, coupled with GPS location including height, provides immutable proof of the water detection event occurring at a certain time and date. The report is only accessible by the specific insurer that requires proof for the claim: no other insurer, customer or even the platform owner can access it.
  2. The payment may be initiated automatically, without any human interaction, where the platform integrates directly with necessary third party data sources to verify the existence and severity of the flood to be valid and checks this against details of the legally-binding smart contract.

The automatic payment initiation is an example of a self-executing smart contract. There is no legal barrier to such automatic execution provided that all contracting parties have agreed to the triggers and to be bound by them. This proviso highlights the need for clear contractual terms communicated via natural language.

If the smart contract has not been communicated in clear language, a dispute may well arise as to the nature of the contractual terms. A clear dispute resolution procedure should therefore be included in the natural language contract communicated and agreed between all relevant parties.

 

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