Risk Management » Smart Contracts and Insurance Costs

Smart Contracts and Insurance Costs

March 2, 2023

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In an overview of how blockchain technology works in financial services, Kyle Owens and Matthew Queen describe how smart contracts could be implemented in the insurance industry. In theory, smart contracts obviate the need for middlemen to facilitate transactions. When such contracts are stored on a blockchain, tampering with them becomes virtually impossible. Nobody can tamper with the code, and no single person can force the release of funds because other individuals on the network will spot it and mark it invalid. Owens and Queen identify some possible problems in the insurance sector. Fraud by the claimant is one, but it can probably be overcome. The other is a situation where the question is the extent of the damage, not whether there is any. There are various solutions that could in theory mitigate this issue. The insurance company could delegate the damage assessment to a specific chain or network. It could delegate authority to an unbiased smart contract, and have it refer to a data source to decide when and how funds are to be distributed. In the case of captives, savings would be modest, because they are not highly staffed. Nevertheless, if smart contracts were created for every risk that a captive is insuring, and if there was a verifiable method of automatically discerning when the conditions of the contract have been met, paperwork and work hours could be reduced considerably.

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