The insurtech revolution has worked its way into the captive insurance sector, but as with any emerging technology, every opportunity is not without some challenge, as Gavin Woods, counsel, and Josephine Noddings, associate, at Appleby's Bermuda office explain.
There is no getting away from it: the insurtech revolution has arrived and, with insurers spending more time and increased resources to create and trial prototype technology, it looks as though the development and use of financial technology in the insurance sector is here to stay.
One of the main reasons for the insurance industry's focus on insurtech is the development and viability of technology that, it is hoped, will facilitate increased efficiencies in the insurance process—specifically, distributed ledger technology: blockchain.
Blockchain is perhaps most famously known as the technology that enables the trading of bitcoin, but the software has innumerable applications that go beyond cryptocurrencies. At its core, blockchain is a ledger that records and verifies data, enabling consensus-based mechanisms to ensure the validity of each part of any given transaction without the need for intermediaries.
Blockchain has no centralised database; instead, the database is duplicated across a network of computers (known as nodes) and information that is added to the ledger must be verified by the rest of the network before it can be accepted. Once the information has been verified by the network it is sealed, creating a 'block' that is added to the ledger. As more blocks are added to the ledger, a 'chain' of blocks is created which together form the 'blockchain'.
Using a blockchain protocol, upon the occurrence of a triggering action the nodes automatically produce outputs verifying and updating the information contained in the ledger without third party intervention. Information that has been added to a blockchain cannot be removed or changed.
The technological advances afforded by blockchain could impact many facets of the insurance sector. For example:
- Streamlining client on-boarding processes (including know-your-customer and anti-money laundering requirements);
- Improving administration through the automated verification of policyholders;
- Setting underwriting criteria;
- Sharing data required to analyse risks and set premium, allowing insurers to more accurately assess and price risk in real time; and
- Automating claims handling and payment processes.
It is expected that these advancements will lead to lower operational costs, increased speed of transactions and enhanced data security. As a result, it is no surprise that insurance companies are increasingly looking at ways to incorporate such technology into their day–to-day operations.
Smart contracts are another important element of the insurtech revolution. A smart contract uses computer coding to enable self-executing contractual arrangements. The smart contract can take the form of a contract entirely in code, or that of a 'traditional' written contract that has certain aspects that are automated through coding.
For example, a smart contract can automate an insurance policy whereby, upon a specified trigger event (say, a natural disaster), the code evaluates predetermined data and automatically calculates and effects a payout to policyholders.
However, contract law has developed over hundreds of years and differs from jurisdiction to jurisdiction. In Bermuda, the law of contract generally follows English law principles and, in order to form a legally binding contract, a number of elements must be present, such as offer, acceptance of that offer and consideration.
There are also rules with respect to the form that a contract must take, enforcement and remedies available in the event of a breach. For example, the law of contract may dictate that a particular type of contract must be in writing and, in certain cases, be in the form of a deed.
A smart contract will need to satisfy these requirements if it is to be an effective, legally binding contract and, given the manner in which smart contracts currently operate, it is unlikely that they will be able to satisfy all of the legal requirements for every type of transaction (at least for the present time).
Despite the potential benefits of insurtech, as is the case with any emerging technology, there are important issues that need to be considered:
- Laws and regulation: the emergence of insurtech and the changes that it will have on the way that captives do business means that laws and regulations currently in place need to be reviewed and, possibly, updated.
- Data security: confidential and proprietary information will be stored using blockchain, and unlawful access to such information will be a concern to businesses and consumers alike.
- Transparency: one of the main benefits of blockchain comes from the ability to share information and streamline data exchange between insurers, consumers and other industry professionals. For blockchain to work effectively, it will require transparency and trust between such parties.
Bermuda is positioning itself as a leading jurisdiction for insurtech and the jurisdiction has already taken steps to address the aforementioned issues, with government and industry collaborating to create a robust regulatory framework for insurtech.
In particular, the Bermuda insurance regulator has established a committee which, among other things, has been tasked with identifying areas for future development of insurtech within Bermuda. To date, the committee has developed a supervisory regime for cyber-related data for commercial insurers and is creating a regulatory 'sandbox' and innovation hub, the purpose of which is to give insurtech creators and users the opportunity to test new technologies within a regulated environment.
We may be only at the beginning of the insurtech revolution, but it is only a matter of time before insurtech matures to be integral to every aspect of the insurance industry.
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