What is Blockchain and What Can it do for the Insurance Industry?

Christopher Grant McDaniel, President of The Institutes’ RiskBlock Alliance and Edward Diffin, Partner at Freeborn & Peters, presented an overview of blockchain and distributed ledger technology, potential uses in the insurance industry, and issues that may arise as the technology is further developed. One of the use cases discussed involved an auto accident involving two vehicles. Today, after the incident is assessed by the parties involved, the drivers typically exchange insurance information. With the use of blockchain or distributed ledger technology behind the scenes the simple step of exchanging proof of insurance would be a matter of tapping the drivers’ phones together. Another case discussed involved trucking companies. Trucking companies wishing to transport a load currently go through a 30-minute manual process for each load to prove they are insured to transport that particular load. This thirty minutes of downtime would disappear if the information was immediately available in a trustworthy source in one place. When you consider one trucking company does this process 200,000 times per day, you can see the savings that could be generated. 

Blockchain is a distributed ledger replicated across a network of nodes. These nodes process transactions where every new transaction is built upon a portion of the previous transaction. In this way the ledger become immutable since changing one transaction a year ago would require changing every transaction that followed it. The salient characteristics of this emerging technology encapsulate an immutable and encrypted system of record that is entirely decentralized making it more or less indestructible. If ever there were to be a data entry mistake, an amendment can be entered alongside the existing data for that transaction.  Distributed ledger technology also affords “smart contracts” --- a decentralized bit of instructions or code that can be executed in real time given certain conditions are met.  Smart contracts are rather like a vending machine dispensing a product in response to a series of actions. For example, if one purchases flight insurance in case of a delay, a non-biased data stream can trigger the instruction of a smart contract to execute and payout for the loss.

The examples of distributed ledger technology illustrated above are either existing or potential “use cases” of the RiskBlock Alliance consortium. Christopher Grant McDaniels shared a slide that listed the “wish list” of use cases, as well as another with a list of member companies currently participating in the consortium. The RiskBlock Alliance is a non-profit organization, industry-led blockchain consortium for the risk management and insurance industry that is developing this technology with a view to real production value. The framework is called Canopy and Canopy 2.0 is an ecosystem in which distributed ledger technology software can be developed by participating member companies using the Canopy tools and frameworks to expand the ecosystem, developing further use cases and creating greater value.

Edward Diffin then discussed the various issues, both regulatory and contractual, that may arise in the implementation of this technology. He stressed that the technology is still in its infancy, so there are legal questions that still need to be answered. He noted that ordinary contract law principles should be considered when evaluating smart contracts. Since “nodes” can be located anywhere, and contract/regulatory law can differ from jurisdiction to jurisdiction, determining the law that is applicable to a blockchain may be difficult.  Edward suggested having a traditional contract not on the blockchain, but linked to it, that provides what the parties intended with regard to use, their agreement to be bound by the “smart contract”, and choice of governing law and jurisdiction, as well as a dispute resolution clause to be followed. The blockchain ledger would then be operating like a DocuSign for a traditional contract.