20 November 2019

Smart contracts: Smarter insurance?

By automating the claims process, insurers hope to provide a new level of customer experience that far exceeds today’s norm

Photo: Pexels.com

By Howard James

Globally, a recurring theme at the boards of carriers is the need to continually improve customer experience.

Claims notably lie at the heart of the insurance sector’s angst. The process is laborious and costly for carriers — and is immensely frustrating for policy holders.

So when the idea of fully automating claims surfaced a decade ago, industry interest exploded. If only it was that easy.

Ten years on, use of disruptive ledger technology (DLT) — AKA blockchain — to automate claims through smart contracts is being piloted by both carriers and InsurTechs alike. Widespread deployment of the technology, however, is some way off. Technology itself isn’t the problem; the challenge is for developers to clearly articulate to the industry and customers what smart contracts are and how they work. Wordings vary considerably.

“A smart contract is a line of code, where we can put some rules, and then try to find an automated way to execute it,” says Frank Desvignes, Global Head of AXA Next Labs. There’s no doubt that to techies this makes sense, but what about the rest of us?

“It’s called a contract, but we’re not entirely sure whether it’s a legal contract,” adds Brian Harvey, Registered Foreign Lawyer at Clifford Chance. By now many in the auditorium are confused and we’re only three minutes into the discussion.

David Treat, Global Blockchain Lead at Accenture tries to elaborate further: “If you’re going to co-locate the business logic with the data, and have this business logic automatically executed, what you are then doing is stripping away, hopefully, a whole set of messages back and forth between participants.”

What everyone is trying to articulate, it later transcends, is that a smart contract in the context of insurance is where claims are processed automatically, through use of DLT and additional third-party input from an oracle, whether a human or a machine.

Desvignes discusses use cases of their deployment. In the Philippines, for instance, smart contracts protect farmers against the financial fallout of natural disasters like typhoons. Using satellite images, AXA is able to identify an area that has been damaged, and issue a claim instantly. The contract is reliant to a third-party expert, or oracle, verifying that crops have indeed been damaged.

For smart contracts to work, trust exerted by policy holders is critical, explains Zia Zaman, CEO of Metlife’s LumenLab. Think of them like drink vending machines, he quips. Consumers insert money into them because they trust they will automate an order. Insurers must create an insurance product that’s as simple as a buying Coca-Cola, Zaman says.

Parametric insurance is particularly suited to automated claims. Policy holders can de-risk a specific scenario that might happen in the future. These events could range from getting divorced, to de-risking a particular illness, to protecting homes from the effects of bad weather. If an event happens, compensation is paid into the policy holder’s bank account immediately.

Issues remain, however, especially when a claim is expected yet not made. Harvey points out that satellite images, for instance, could be distorted, which could prevent payments to farmers. Likewise, a doctor could make an incorrect decision about the health of a patient, and compensation be denied. Third-party verifiers are notably reluctant to get involved.

Furthermore, how do claimants file a dispute on a system that uses DLT, the lawyer questions. Panellists agree that while smart contracts will bring unprecedented efficiencies to the insurance industry, they will also create a new set of challenges that will take much thought — and more technology — to overcome.

Strategy, Technology