Smart Contracts in Insurance: A Law and Futurology Perspective

Abstract

Smart contracts are innovative contracts that differ from traditional ones in that they are self-executing, as they entail the possibility of representing contract terms in programming code that gets automatically executed on a blockchain or other distributed ledgers. Following the latest developments in blockchain technology, smart contracts have been the focus of growing attention and are currently among the major innovations that are taking place in financial services. This paper investigates the scope for their application in insurance both in the near and longer term, exploring the legal challenges that they pose. The analysis shows that in the near term smart contracts will be mainly exploited to automate underwriting, claims handling and payouts. It considers how the automation of these processes will operate at law and emphasises the impact that smart contracts can have especially on the reduction of transaction costs and on the very essence of the insurance contract—the insurer’s promise to pay. Building on current technological developments, the paper then turns to role that smart contracts can play in insurance in the longer term, advancing the prospect of the automation of the entire insurance contract. In particular, it argues that the interaction between smart contracts and artificial intelligence and machine learning can challenge traditional frameworks of thought such as incomplete contracting and, in the farther-distant future, will culminate in contracts that will both self-interpret and self-enforce their terms—what can be called the true smart contracts. The analysis identifies and addresses the main legal issues that can arise in this context, exploring how to strike a balance between the goal of fostering innovation and the need to ensure policyholder and investor protection.