Professor Michael Mainelli and Bernard Manson

Sponsored by

  • London Market Group

Published by
Z/Yen Group, Long Finance, & The London Market Group (January 2017) on smart ledgers, 66 pages.

Share on social media:

london market group international-underwriting-association.png lloyds-of-london.png lloyds-market-association.png london-and-international-insurance-brokers-association.png

From Slips To Smart Contracts: Intelligent Technology In The London Wholesale Insurance Market

Long Finance identifies an appetite for ‘Smart Contracts’ in wholesale insurance. Sponsored by the London Market Group and conducted by Z/Yen, this research shows there are exciting prospects for the use of smart contracts in wholesale insurance*. The research included interviews with brokers, insurers, reinsurers, regulators and trade bodies from across the sector, together with discussions with technical experts.

Smart contracts translate legal contract terms directly into executable computer code within a business process. This creates a rigorous link between the legal contract and its operational implementation. By enabling closer integration between back office, business areas, and negotiation of external contractual agreements, smart contracts can improve efficiency, reduce errors, and improve maintainability as business, regulatory, and contractual environments change.

The report identifies five broad areas where smart contracts could be applied in wholesale insurance: Process, Product, Portal, Performance, and Privacy. Processes in wholesale insurance are particularly complex, with complicated contracts managed through a network of clients, brokers, insurers, reinsurers, external providers such as loss adjusters, and central market organisations, often crossing and recrossing national boundaries. Smart contracts offer the possibility of making processes more transparent and maintainable, reducing the need for manual intervention and reducing costs and error rates. Smart contracts could also support new product features or allow new classes of products where the risk is defined using complex analysis of ‘big data’. They could support new automated distributed channels for insurers through the use of internet portals, making it economic to transact more standardised products with smaller clients. By guaranteeing confidentiality of granular data, they could facilitate sharing of aggregate data to provide aggregated industry data and indices. They could reduce barriers to sharing They could also be used in the analysis and management of risk and claims, improving overall performance of insurers. Privacy legislation is an important area where smart contracts could help provide ‘smart compliance’ – linking back office processes to the explicit wording of statute and regulation.

The report highlights examples of where individual firms, ‘coalitions of the willing’, or cross market initiatives, could drive specific smart contract applications to provide business benefits.

The following table summarises the potential benefits of each of these five areas, both to Market firms and to clients. The benefits of cost, accuracy, and speed accrue directly to the Market, although the net effects should include at least some reduction of premium costs to the client. Oversight of the market should also be simpler and more effective with better information. ‘Risk management’ refers particularly to preventing losses or mitigating the impact of losses which do occur; it should be a direct benefit both to the firms and to the client. ‘Client facility’ means that the client has the ability to purchase a policy with capabilities or at a price that was not previously available.

Cost Accuracy Speed Oversight Risk management Client facility
Process X X X
Product X X X X
Portal X X X X
Performance X X X X
Privacy X X

The large number of use cases in different areas which we found for STP and smart contracts indicates that these are technologies which could have a strong impact on the London Market over the next few years, and they should be part of the strategic debate within firms and at Market level, such as:

  • Commercial vehicle fleet insurance with access to client data;
  • Cybersecurity policy with access to client systems;
  • Hull insurance with access to telemetry;
  • Geolocation of shipping containers;
  • ‘Follower syndicate’;
  • Parametric insurance;
  • ILWs;
  • Insuring intangibles with loss defined from Big Data;
  • War risk on demand;
  • Generator cover on demand;
  • Individualised insurance for car hire;
  • Cyber index and ILS.

There is no simple way to progress smart contracts, given the multi-party nature of the Market, and this report recognises that a core recommendation is that smart contracts remain on the strategic agenda for the Market as a whole and for individual firms for the foreseeable future. Smart contracts will be important for wholesale insurance and need to be part of future discussions and gain the attention needed to be built appropriately into future Market processing architecture. We suggest further development of the ideas surrounding:

  • ‘follower syndicate’ proposal for applying smart contracts;
  • opportunity for smart contracts in implementing STP for settling payments;
  • smart contracts for contract wordings;
  • governance structure for sharing data that feeds smart contracts;
  • geolocation information feeding smart contracts.

You may also be interested in its sister report - A Wholesale Insurance Executive's Guide To Smart Contracts.