Yunus Scheepers, Chief Technology Officer at SilverBridge Holdings
The global smart contracts market is expected to top the $8.3 million mark by 2030, growing annually by 21.4% from this year. The blockchain and smart contracts allow insurers to automate the execution of an insurance product agreement without any involvement from mediators. Not only does this speed up claims processing it also lowers administrative costs and reduces the risk of fraud.
The potential of smart contract technologies in South Africa was highlighted as far back as 2016, with experts stating it could have a transformative impact on the insurance market. However, they cautioned that ‘it is difficult to code in a smart contract what happens when parties to a contract do not perform as they are expected to or are simply in breach of a term of the contract. In insurance, this problem is made worse by insurance-specific nuances such as pre-contractual disclosure obligations. Insurance is also a regulated market and so the concerns of regulators, particularly in relation to consumer outcomes, must be considered and catered for. Added to that, there are difficulties arising from the fact decisions of underwriters and regulators are often of an extra-contractual nature.’
However, recent innovations have made it possible for smart contracts to connect securely with any off-chain data. This enables the triggering of smart insurance contracts using data from real-time insurable events. If anything, smart contracts are accelerating the normalisation of decentralised finance that will gradually replace more traditional financial intermediary approaches. While incumbents are understandably keeping a close eye on these developments, changing customer demand for real-time and personalised solutions could see them embracing these smart contracts more readily than in the past.
The impact on life insurance
According to Deloitte, the potential of smart contracts for health and life insurance is significant. For example, it can enable healthcare providers to move towards interoperable, comprehensive health records. This provides for the secure transfer of patient medical records – something that is vital when a person moves between service providers who might not have access to a full patient medical history.
Furthermore, smart contracts can detect fraud more effectively. When a person submits fraudulent information to a life or health insurer via false claims, falsified applications, or other channels, smart contracts determine if the submission is valid.
Deloitte also writes that smart contracts can simplify the application process by making it more client centric. As personal medical and other records can be saved securely on a blockchain, users can give access to an insurer and automate approval as opposed to having to go through a lengthy application process.
Automation done right
In insurance, smart contracts stipulate the rules between two parties, similar to a physical contract. But unlike those traditional paper-based options, smart contracts can track insurance payments or claims and hold both the parties accountable. Think of these insurance policies as being written as coded, decentralised smart contracts in which the company commits to help cover the potential future medical expenses of the individual who, in turn, agrees to pay money to the insurance provider in exchange.
In effect, the smart contract contains all the data an insurer needs to automate the claims process when certain events happen. Additionally, the insurer can just as easily deny a claim if aspects of the smart contract are not enacted.
In South Africa, the regulatory environment is less clear about how insurers can use smart contracts. According to one article, ‘the Electronic Communications and Transactions Act 25 of 2002 (ECTA) allows contracts to be concluded electronically but arguably does not go far enough to regulate the execution of the contract through electronic agents, without any human intervention. ECTA views electronic agents in a passive light and as mere tools of communication. ECTA does not differentiate between electronic agents based on the degree of their autonomy and therefore the complexity of smart contracts may not fit into ECTA’s conceptualisation of contracting. One possibility is that ECTA can be amended to provide for a more complex framework to regulate smart contracts or that new legislation may be passed to provide for a more autonomous method of contracting.’
There is still much work to be done for smart contracts to become mainstream in South Africa and many other countries. Critically, the process to accept this technology is followed to ensure that insurers can deliver on the ever-evolving needs of an increasingly digitally-aware customer base.