The business of law is an old one, but one that increasingly needs to keep pace with a digital world. Entrepreneurs are looking at how the latest technologies can create new business models to increase efficiency, reduce administration and make services attractive to today’s digital natives. One such technology is Blockchain. 

What is blockchain, what does it do and how does it work? 

Blockchain is append-only distributed ledger technology, which allows information to be collected and stored immutably in a de-centralised manner on a network of computers worldwide. In other words, a blockchain is distributed across many computers and by virtue of its nature it cannot be changed or edited unlike a traditional database. The changing state of the network is supported by a common agreement based on game theory and cryptography to ensure the validity of all entries.

First and foremost, it is a solution to the problem of trust; where we have needed third parties to mediate transactions or contracts in the past, blockchain is a technology that offers the possibility of removing the need for third parties.

The first real application of the blockchain technology has been Bitcoin - the global cryptocurrency where blockchain solves the double spend problem. In traditional currency a bank is required to ensure money cannot be spent more than once. With Bitcoin, blockchain does away with the need for any central coordination at all.

The basic principles of blockchain technology are:

Redundancy: A copy of the blockchain is stored on each computer (node) within the blockchain network and as a result there is no single point of failure.

Peer to peer transaction: each record (known as a block) is timestamped and linked to the previous block.

Consensus: each party on a blockchain has access to the entire database and its history. No single party can execute a transaction without agreement by all.

Immutable: once a transaction is entered in the database and the accounts are updated, the records cannot be altered retrospectively. Changing any one block breaks the entire chain.

A question of trust

One such industry where blockchain is starting to play a role is insurance. Insurance services and processes have evolved to respond to a perceived lack of trust and transparency. And brokers emerged as important and necessary mediators in the insurance process - creating trust and bridging the gaps between insurers, reinsurers and customers. However, if blockchain solves the problem of trust, the future role of the broker (or any other form of intermediary) may be brought into question. Indeed, might we get to a point that removes the need for others involved in the service of insurance contracts - including lawyers, loss adjusters or claims handlers - or even the insurers themselves!?

A smart future

What if an insurance policy could be written as a code, offer full transparency and be executed in a de-centralised way without any human intermediary?

An additional feature of blockchain is the ability to execute smart contracts. The smart contract is a computer program which is stored in a blockchain platform. It automates the obligations of the parties under an agreed contract - if a set of required conditions are met, then payments are made or property transferred, and the required transactions recorded on the blockchain.

In order to work effectively in an insurance context, the Smart contract depends on a reliable data feed which can be utilised to determine if a payment should be made and if so, how much.

Indeed, AXA has launched a product called 'Fizzy' that does exactly that - insuring customers against flights that are delayed by two hours or more. Products like this make the claim process entirely transparent and substantially improve the perceived fairness of the product.

Other potential Smart contract examples include:

• Payouts to insured farmers when drought conditions are reported by verified climate/weather databases.
• Cars, electronic devices or home appliances having their own insurance policies that detect damage; triggering repair and payment.
• Keeping track of who owns media assets such as music and automating copyright payments
• Substituting tradition escrow services for Smart contracts like Proppy who facilitate real estate transactions

An answer to fraud?

The final potential big win for blockchain centres on fraud. In the UK, the ABI estimates that insurance fraud costs approximately GBP2.1 billion per annum. Most fraud exploits the lack of trust and transparency in the insurance process, exploiting the gaps between insurer databases. Blockchain offers the potential to record all policies and all claims, along with the ownership and authenticity of goods to be validated. Further, because Blockchain is a ‘cake and eat it’ technology, no one insurer is required to share their book of claims with any other insurer.

Challenges and risks

Like all new technologies, there are issues and risks. Bugs in the code that supports blockchain and Smart contracts can be extremely costly. In June 2016, one third of a venture-capital fund was lost to unscrupulous users who exploited a vulnerability. During a pilot of blockchain enabled ‘Flight Delay’ insurance, de-centralised insurance platform startup Etherisc allowed customers to buy insurance for past flights - thus guaranteeing a payout.

Other potential issues include:

• Standardisation: to realise sustainable benefits from a shared and distributed system, standards are absolutely critical. With Blockchain in its infancy, technical standards themselves are also in their infancy and will need to be developed to support future applications.
• Scalability issues:  as presented by the consensus-based validation mechanisms and the continuous replications that underpin early forms of blockchain.
• Security: new technology means new potential security loop holes and by enabling multiple organisations to put their trust in a single ledger albeit distributed there is, arguably, still an industry wide single point of failure.

Conclusion

Blockchain is a network technology. Like all network technologies - the value of the network is determined by the number of people who use it. It is possible that existing database technology may be deemed satisfactory. Indeed, in the UK, fraud databases have been operating for some time – it’s not yet clear whether blockchain offers sufficient advantage over existing practice to justify a shift. Nevertheless, blockchain technology offers the potential to break down many of the structural issues that have created frictions and a lack of trust in insurance markets.