Conference Issue 2018


Blockchain, smart contracts ‘opportunity for insurance’

Smart contracts and blockchain technology will not sound the death knell for insurers and intermediaries, University of Adelaide law lecturer Dr Mark Giancaspro says.

There was a fear the technology would cost jobs, but "it's technology to help us, not replace us", he said. "There are always things computers cannot do."

Dr Giancaspro spoke on smart contracts at the AILA conference in Perth.

He said the technology's major advantage was reduced transaction costs because there was less involvement of traditional intermediaries. "Once you cut out the middleman, with fewer human hands in the process, there's a reduction in costs."

Smart contracts, which operated in conjunction with blockchain technology, used decentralised ledger networks, software that automated much of the contract formation process, and digital currency payments.

Blockchain recorded digital transactions made in cryptocurrencies.

Dr Giancaspro said smart contract technology was readily available but required "a large-scale cultural shift" and infrastructure investment before smart contracts became "part of the vernacular". He predicted their use would be more widespread within a decade.

While smart contracts were unlikely in personal lines, they were likely to be adopted for large-scale insurance policies.

Benefits included increased efficiency – "a computer's doing the dirty work" – and reduced transaction costs because blockchain users process transactions themselves, without a central authority or intermediary.

While traditional insurance contracts' terms could be easily amended, smart contracts were harder to alter once terms and conditions had been accepted. "It's near impossible to rectify errors. The insurance industry is built on risk allocation so, if you get that wrong, the industry could be undermined."

Dr Giancaspro said liability issues had yet to be determined. "Computers can fail. Is the computer an agent of the insurer? If so, is the insurer liable?"

He said the concept of computers writing contracts and agreeing terms with far less human intervention was "scary only because it's different".

"We like to be in control but, in reality, we've been allocating a lot of responsibility to computers over many years."

Smart contracts could be programmed to apply "artificial intelligence on a commercial scale not yet seen".

But brokers should view them as opportunities. "Intermediaries' roles will change, but not be eliminated. It's an opportunity to up-skill."

Dr Giancaspo advised intermediaries to develop a basic understanding of programming because someone needed to explain how to convert human functions to code.

The insurance industry needed to consider risk management implications. "Millions of dollars are being poured into this technology, but we need to understand what to do if it starts working against us."

The industry must "follow its mantra and ask ‘is this an appropriate risk'," Dr Giancaspro said.

Legislation was slow to keep pace with evolving technologies like blockchain and smart contracts. Dr Giancaspro hoped to see a legal test case and contract law rules that were "applicable to the digital world". "At the moment, we're stretching the rules, and it's not a clean process."

The technology "should be infallible, but I assure you it is not". The infrastructure wasn't available yet but "the Federal Government's pumping a lot of money into it".

There was legal uncertainty. On the face of it, smart contracts were not strictly legal, even though they were in place.

Computers could not generate human traits, like empathy and emotion. "Can you guarantee a smart contract will act in your best interests? No."

Dr Giancaspro predicted 88% of functions would be automated in 15 years' time.

"Don't panic; prepare," he said. "Be cautiously optimistic.

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Resolve is the official publication of the Australian Insurance Law Association and
the New Zealand Insurance Law Association.