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Could blockchain technology disrupt the insurance industry?

Smart contracts are ones which are translated into code.

Insurance companies have been in existence since the 1600s, with the first concept of modern insurance emerging within the property market, triggered mainly through fires which had destroyed thousands of houses – yet various compliance challenges within the insurance industries are still largely felt till this day.

Claim and settlement processes is probably one of the main challenges, with claims filed by insurers required to go through an arduous form-filling process – the purchase of insurance policies also entails a similar procedure, most of which will be processed on paper format which means that policy purchases and policy claims and settlements are prone to human error.

This in turn requires human supervision to ensure elimination of errors, all well and good unless time and money was not incremented to these services, at the expense of the customer.

Enter blockchain technology, a means for recording all the required information in a cryptographically secured, shared record-keeping database, which allows non-trusted intermediaries, with potential conflict of interest to collaborate together and agree on the validity of a transaction without the need of having parties involved to oversee the process.

The potential solution which blockchain may offer is in elimination of having the insured party place trust in the insurance company in paying out claims. Customers often find themselves in a weaker position as they may not always be fully knowledgeable on the policies at hand and often feel frustrated with the payout process.

One of the ways in which blockchain technology can be used to disrupt the insurance industry is through the implementation of immutable smart contracts used to automatically settle claims and effect payments and/or refunds to the insured party upon the happening of certain events. Smart contracts are essentially ones which are translated into code, which code self-enforces the contract agreed upon between the parties, and once embedded is irrevocable.

A practical example which can be applied to smart contracts is within the travel insurance sector. Flight delays or flight cancellation are unfortunately a reality which burden passengers with loss of time and costs – the process to initiate a claim for payment or compensation for flight delays or cancellation can at times take months to settle. More so if a number of intermediaries or airline operators are involved in the process, booking flights through one agency and having a connecting flight booked with another airline creates an even more complicated process for settlement of claims. The efficiency associated with smart contracts is that there is the potential to eliminate such delays in the process for requesting a claim with an insurance company and having that claim vetted and settlement finally paid. The benefit being improved speed and decrease in administrative costs through a self-executing smart contract.

Understanding whether there are conditions under which blockchain may provide a beneficial solution to a business model is crucial

Blockchain technology start-up Etherisc has developed a decentralised insurance protocol which built a specific insurance product for flight delays, flight diversions or flight cancellations and operates on a public blockchain. The protocol records flight delays instantly and almost automatically effects payouts via electronic fiat transfer to passengers upon landing, subject to a qualifying event taking place – a process which is unquestionably efficient, quick and painless for the insurance company and the insured. The insurance products would be powered by smart contracts, which is capable of verifying claims through independent data sources.

The implementation of this type of blockchain protocol eliminates the need for endless paper work, e-mails, calls and correspondence between the insured and the insurance company and allows for policies to be checked by the insurer in real time. One challenge which blockchain technology has yet to overcome is the slight delay in processing time when faced with a larger volume of transactions.

Another application within the insurance industry which has the potential of benefitting from the adoption of blockchain technology and smart contracts is within the motor insurance sector.  The Hong Kong Federation of Insurers and Crypto BLK, a start-up company based in HK, have joined forces to launch a blockchain driven motor insurance platform which utilises blockchain technology to provide efficiency to the verification of motor insurance claims and the processing of documents, overcoming issues of fake documentation while adding authenticity verification, traceability and audit trails for motor insurance policies.

The underlying blockchain technology provides real-time authentication of motor insurance claims and policies as well as policyholder verification and audit trails, adding security and efficiency in motor insurance. Automated verification of claims and settlement payment reduce settlement costs and can assist insurance companies in viewing past claim transactions.

Also within the motor insurance industry, a smart contract could be linked to sensors in a vehicle which automatically alert the insurers once a collision occurs. Once coded, smart contracts are not controlled by any central authority.

The potential for blockchain technology to disrupt the way the insurance industry operates, mainly through the enforcement of smart contracts which provide transparency and efficiency within the administration and settlement of claims, including also the manner in which data is processed, is intriguing. But for the industry to experience adoption and implementation of blockchain technology, investment in research and development and human resources is necessary. Understanding whether there are conditions under which blockchain may provide a beneficial solution to a business model is crucial.

The views expressed in this article are the author’s own and should not be interpreted as legal or financial advice. Christina Scicluna is a senior associate in the corporate and fintech department, Mamo TCV Advocates. She started her legal career with one of the Big Four firms in the personal tax department specialising in personal tax compliance and personal tax advisory services including advising high-net-worth individuals on matters relating to taxation and immigration. Dr Scicluna advises a variety of multinational clients on international corporate structures, including legal matters relating to virtual financial assets, exchanges and distributed ledger technology projects. She has also formed part of the internal Blockchain Committee at the firm which was set up in September 2017 and which today is known as the fintech department. She handles all legal matters related to blockchain, fintech, cryptocurrency, Initial Coin Offerings (ICOs), exchanges and distributed ledger technology projects.


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