Blockchain: Getting Smarter than Smart ContractsBy Tom Johansmeyer | May 18, 2018
Admittedly, my interest in blockchain has been fairly narrow. Given the role of PCS® in the global industry loss warranty (ILW) market, I’ve been particularly focused on how blockchain-enabled smart contracts could benefit the reinsurance and insurance-linked securities (ILS) market. The concept extends to parametric instruments as well—any risk-transfer transaction that relies on an independent third-party data source (or “oracle,” in blockchain parlance) as a trigger. While the use of blockchain for this purpose is intuitive, it may not be the most important use case for our industry.
Smart contracts seem to have distracted the reinsurance industry from the full set of benefits afforded by blockchain. Smart contracts are really nothing more than sets of rules. An ILW smart contact, for example, may cause a cedent to be paid when PCS reports a catastrophe event of a certain magnitude. Even aggregate structures, which can become a bit more complicated, still involve fairly straightforward logic.
And that logic doesn’t require that there be a blockchain platform beneath it. Smart contracts can be constructed on just about any technology platform to provide cedent, market, and intermediary the benefits of automation. It’s been a long, long time since I’ve attempted a line of code, but I can still conceive of how to hack together a platform-agnostic ILW smart contract (although it probably would be in a dated language!).
So, where does this leave blockchain?
I wouldn’t suggest dismissing the importance of smart contracts in the blockchain ecosystem, but I’d add that other factors warrant consideration as well. Blockchain can help establish trust among parties to a transaction, provide a complete audit trail, and prevent attempts at fraud through the fact that records can’t be altered. Applications in large commercial insurance and traditional reinsurance may be more compelling than those in the ILW market.
Of course, blockchain is in its infancy, and insurers and reinsurers are still feeling their way through an innovation that has transformational potential. As the process of evaluation proceeds, it will be crucial to remember what makes blockchain unique—and where it’s most relevant.
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