Smart contract technologies underpinned by blockchain technologies could have a transformative impact on the insurance market. There are, however, a number of factors that could impede the uptake of smart contracts. The performance of a smart contract is mediated by technological means. This means the release of payments and other actions are enabled by technology and rules-based operations. The smart contract is not reliant on a human third party or central operator.
Smart contracts are typically automatic and irrevocable. Once initiated, the outcomes for which a smart contract is encoded to perform cannot usually be stopped, unless an outcome depends on an unmet condition or specific rules have been provided to the contrary.
The security and transparency afforded by blockchain technologies have been widely commented on, and there are clear applications for them without any smart contract aspect in insurance placement, data sharing, know your customer, anti-money laundering and fraud prevention, the claims process and claims and general insurance record-keeping.
The modern conception of a smart contract typically depends on blockchain technologies. In simple terms, a blockchain is in effect a database that records each transaction in a “block”. Typically, each block contains a hash that is unique to, and references, the previous block in the “chain”. If any data in any block in the chain are later altered, this is immediately apparent to all participants of that blockchain, as that block’s hash (and that of any subsequent block) will no longer correspond to the later block’s record of that hash. The result is an indelible record.
Blockchain technologies are known as “distributed ledgers” as they operate on a distributed basis. That is to say, the record or ledger of all transactions is replicated in full on each participant’s computer. They are highly transparent, because each participant has a complete, traceable record of every transaction recorded on the blockchain.
Smart contracts operating within a blockchain operate on a distributed basis. The participants (which could be a party to, or have an interest in, the smart contract) have access to the block within which it is contained. The relevant block can be public (for all to view) or accessed on a “permissioned” basis (and so only open to limited participants with such permission).