Overview
On April 29 2021, EIOPA (European Insurance and Occupational Pensions Authority) published a consultation paper on blockchain and smart contracts in insurance. Such initiative, that follows the public consultation on Open Insurance closed on April 28, 2021, is part of a larger plan of the EU institutions which includes, inter alia:
- the proposal for a regulation on crypto-asset markets (MiCA) e
- the proposal for a regulation on a pilot scheme for market infrastructures based on DLT technology (Distributed Ledger Technology – Systems based on a distributed ledger).
As recalled by EIOPA, Distributed ledger technology (DLT) enables parties with no particular trust in each other to exchange any type of digital data on a peer-to-peer (P2P) basis with fewer or no third parties or intermediaries. Blockchain is a subset of DLTs, using ‘blocks’ of information to keep track of data transactions in a distributed network of multiple nodes or computers.
Key characteristics of the blockchain are the following:
- immutability (each validated and approved block can no longer be modified after the approval of the whole network)
- traceability (each block checks and approves all transactions allowing their traceability);
- validation (blocks are linked in such a way that each transaction is validated by the network) and
- security of transaction data, through the use of cryptographic tools
From an insurance perspective, the key element for using blockchain in practice is smart contracts. Smart contracts are computer programs stored on a blockchain which allow the automation of a contract’s execution without any intermediary’s involvement, when predetermined conditions are met. A practical example of blockchain and smart contract technology in insurance is the so called parametric policies, that cover the risk of travel cancellation. Such policies automate settlement and indemnity of claims when the event occurs (e.g. travel cancellation due to bad weather). This means significant benefits for insurance companies and for customers in terms of user experience.
The Consultation Paper
That said, the aim of the paper is to provide an overview of risks and benefits of blockchain and smart contracts in insurance from a supervisory perspective, as well as to gather feedback from stakeholders.
On EIOPA opinion, blockchain has the potential to:
- deliver key digital opportunities;
- reduce duplication of processes;
- increase process automation and efficiency;
- enhance customer experiences, and
- improve data quality.
At the same time EIOPA emphasised that the adoption of blockchain may also trigger new risks to insurers, supervisors, and consumers, such as:
- the complexity of the technology;
- energy consumption;
- data protection and privacy;
- cyber risk and
- integration with legacy infrastructures, or interoperability and standardisation between different blockchains
That’s why it is crucial – as stressed by the Authority – to ensure appropriate understanding by insurance undertakings and supervisors as well as proportionate governance policies and processes, to guarantee that all relevant risks are identified and properly managed. The deadline for providing opinions / comments to EIOPA is July 29, 2021.
For more information on this topic, contact Andrea Maura at AMaura@aliantlaw.com.
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