Smart contracts are a new and exciting area in computing science. Their application in finance, gambling, e-commerce, and automation of various tasks that are currently performed semi-manually is very promising. Smart contract are computer scripts (software) that aid in the self-execution and self-enforcement of traditional contracts. For the first time in history money or more precisely digital tokens, like bitcoin, are native to these software contracts, opening up wide areas of possibilities. Having money as a native type available to a computer program is a big deal. It allows the removal of the whole complicated layer of payment processing that current websites, apps, and other software systems have to deal with. One area that might benefit immensely from smart contracts is insurance. Insurance is an old industry that has not changed much over the years. We will discuss here how smart contracts may change, or even revolutionize the insurance industry.
Smart contracts are computer software scripts that encode the rules or logic of a contract in a unambiguous way. Because they are software there is little or no room left for interpretation. Software smart contracts require an infrastructure to run on. That infrastructure consists of a way to store data, this is handled by a shared ledger commonly referred to as a blockchain. The contracts need the ability to execute the code of the contract, this part is taken care of by miners who earn money for their computing power. Lastly, smart contracts need a way to handle value transfer, this could be bitcoin or any other digital token with value. Richard Gendal Brown summarizes smart contracts very eloquently as follows: “A smart-contract is an event-driven program, with state, which runs on a replicated, shared ledger and which can take custody over assets on that ledger”. Bitcoin provides a protocol and the infrastructure to enable smart-contracts. Bitcoin scripting however, is not Turing-complete and therefore it allows only the simplest of contracts. To alleviate this problem other platforms have been built to accommodate more complicated smart contracts.
Smart Contract Platforms
Currently there are two types of existing platforms that enable smart contracts, with a third one emerging soon. There are platforms built on top of the Bitcoin blockchain. One example would be Counterparty. The other type are platforms with their own blockchains, such as Ethereum or Bitshares. In the near future we will see a third type, platforms that are tied to Bitcoin via a sidechain, but they still have their own blockchain. An example of such platforms is Rootstock.
|Taxonomy of Smart Contract Platforms|
|1.Platforms built on top of the Bitcoin blockchain|
|2.Platforms built on top of the Bitcoin blockchain|
|3.Platforms tied to Bitcoin via a sidechain|
The insurance industry collects premiums, pays out claims, and invests the money it holds, known as float, in a variety of instruments. That is the centralized model of insurance. Until very recently it would be impossible to have a decentralized, or peer-to-peer model of insuring risk. There would be just too much overhead involved in collecting premiums and paying out claims. With the advent of smart contracts a P2P model of insurance is possible. A large number of manual tasks can be now automated via smart contracts. Insurance is a vast industry underwriting almost any type of risk. From life insurance, property insurance, investment insurance, and any other type of risk that may exist. We will concentrate here on the niche of insuring autonomous vehicles. Currently a vast majority of vehicles are either owned or leased by the driver. Technological progress allowed cars to be autonomous, that is to drive themselves without a need for human intervention. We envision a future where a large number of cars are available to be hired on a per trip basis. Such a scenario requires a different type of insurance than is available today. Smart contracts fulfill that need.
Insurance on a Blockchain
Blockchains can be thought of as databases. All types of information can be stored in a blockchain, either directly, or indirectly by storing only hashes of a document. Corporations including insurance providers can use blockchains in their day-to-day operations. Services like document registration, identity verification, payment administration, and a variety of others can be handled on a blockchain. This would aid with automation, cost reduction, auditing, and in some cases it would provide higher levels of transparency. Blockchain technology coupled with smart contracts enable an insurance company to exist in the form of a Decentralized Autonomous Corporation (DAC) – itself a smart contract. A DAC has all of its business rules specified in code. This make it impossible for people to break or even bend the rules. DACs can raise capital by selling shares in themselves, and in the case of our insurance DAC it can be structured in such a way that the policyholders are the owners of the DAC.
Autonomous Vehicle Insurance
Our insurance DAC will sell coverage for autonomous vehicles via smart contracts that reside on a blockchain. There are tools that already exist to accomplish such an endeavor, perhaps the most prominent platform for this purpose is Ethereum. All the required information would be included in the smart contract representing the insurance policy. Payments can also be managed on the blockchain, they can be recurring or upfront. Since the vehicles operate without a driver, then the driver risk is a non-issue. Perhaps the geographical area where the vehicle is operated most of the time may have an effect on the policy’s pricing. This issue can be solved by dynamic pricing based on location – the vehicle supplies its GPS information, or even the complete route information and the price of insurance for a given trip is calculated. Insurance on a per trip basis is also possible. An autonomous vehicle that operates as a taxi needs not to pay any insurance (other than theft and vandalism) when it is not in operation. Smart contracts enable dynamic pricing based on any number and combination of inputs. Perhaps insurance on a sunny day should cost less than in a snow blizzard. Competitive pricing is also possible by looking up competitors’ quotes.
Perhaps handling of claims is a little bit more complicated, as some of the details may not be available in digital form. A claim can be initiated on a blockchain via invocation of a claim clause in the smart contract. This can be done automatically even by the vehicle itself. In the event of a collision a variety of data collected by the vehicles involved in the collision can be used in determining which vehicle was at fault. Vehicles can even collect footage as they drive to be used as evidence in case of an accident. Theft can be verified via GPS, and vehicles can be recovered quickly, either by law enforcement or by themselves (they are self-driving after all) as their location is known. Other information, such as road conditions, weather, and any additional information can be supplied by information supplying businesses known as Oracles. Personal injury claims will require medical opinions which can supplied in a machine readable format. Access to legal information can also be made available to the DAC evaluating the claim.
If the need arises for human intervention, DACs can hire independent insurance adjusters or dispute arbitrators in case of a dispute. Such individuals can offer their services on a per-case basis and be compensated accordingly. To guard against fraud their digital reputation can be consulted, which should prevent dishonest rulings. The DAC can also subcontract repair shops for estimates and repairs, towing companies for transportation of damaged cars, and salvage auction services for disposal of cars deemed not suitable for repair. Any other services could be subcontracted similarly. Even investment of the float can be subcontracted to investment professionals, or the DAC can use algorithmic trading to trade on its own behalf. All these examples will have to stand the test of legal courts, currently in almost all jurisdictions courts have the final say in a contractual or legal matter.
Smart contracts have a great deal of potential to disrupt industries that have been so far left largely unchallenged by nimble start-ups. This is all possible thanks to the emergence of smart contract platforms. The financial industry is an obvious one to feel the effects of having money native to computer software. The insurance industry is perhaps the second most obvious one to be disrupted by smart contracts. Insurance policies are almost directly transferable to computer code, as they are mostly if-then statements. We have explored a niche insurance product that currently does not yet exist – insurance for autonomous vehicles. Self driving cars are the ideal product for automated insurance as the human risk is removed. Together with ubiquitous internet access, GPS data, and a plethora of other sensors there will be enough information to properly access the risks involved and therefore properly price the policy. The most amazing part is that all of this can be automated. There are still some areas where human intervention maybe required, such as all the processes that go with claim handling, repairs, transportation of damaged vehicles, and vehicle disposal. All those obstacles can be overcome with time. We firmly believe that in the mid- to long-term future we will see insurance being offered in the form of smart contracts. Perhaps even insurance companies will exist as a smart contract themselves, known as a DAC or DAO.
DAC – Decentralized Autonomous Corporation
DAO – Decentralized Autonomous Organization
GPS – Global Positioning System
P2P – peer-to-peer
Szmigielski Albert, Jones Paul, Piasecki Piotr, Smart Contracts Summery & Crypto 2.0 https://docs.google.com/document/d/1SjEMlEroAHksVLA6mi80qi9RewbE4VyqFYZE1WefVWs
Insurance products and the Blockchain http://blog.cryptoiq.ca/?p=46
Mainelli, Michael and von Gunten, Chiara. “Chain Of A Lifetime: How Blockchain Technology Might Transform Personal Insurance”
Stolyarov, Gennady II. “Blockchain Insurance Company”, SOA 11th Speculative Fiction Contest.