Smart Insurance Contracts: Part II

This is an early draft of a post that I revised and republished under a different title on LinkedIn. Part of what I realized as I wrote and revised this is that insurance we need simple solutions to big problems first. Insurance needs wome work on fundamentals before fancy stuff will make sense. And the simple stuff — providing and storing copies of insurance policies — is fancy enough in its own way.

Many insurance coverage disputes are dumb.[1] Insurers and insureds frequently fight about simple things, like what an insurance policy actually says.

Insurance silos — each containing different people and data — can contribute to this problem. A smart insurance policy would help avoid dumb disputes by taking policies out of silos.

Before we get to the solution, what are insurance silos, and why are they problems? Underwriting and claims departments are two examples.[2] You can also characterize insurers, insurance brokers, and insureds as external silos.

Many simple coverage disputes can be traced to what happens during the underwriting process. Generalizing broadly, underwriting is the process by which an insurance company decides (1) whether to issue a new policy or renew an old one; (2) what terms will apply; and (3) what premium will be charged. An insurance broker (or brokers) may serve as an intermediary between underwriting department personnel[3] and the insured, creating yet another data silo.

Assuming an insurer and insured come to terms, coverage is “bound” and a policy “issued.” (I put those two words in quotes because what they mean can depend. More on this in a moment).

In the event of a claim, an insured is unlikely to deal with underwriting, and will communicate with the claims department, in a claims silos. That’s where decisions will be made about whether and what on terms to pay a claim.

In order to make coverage payment decisions, a claims adjuster will generally need to look at the insurance policy that underwriting “issued”. (Sometimes, claims departments may not have a copy of the policy that an insured believes is at issue. This can depend on the structure of the insurance company, age of the policy, and a variety of other factors. Suffice it to say that this can get complicated fast).

What exactly does the policy actually say? Sometimes your view on this point will depend on your silo. For example: an insured may (or may not) have received a full copy of the issued policy; the insurer may or may not have sent it; The insured may or may not have lost it; terms may have been modified or changed by subsequent change endorsements; the parties may disagree about what terms were or were not agree to. Add an insurance broker as an intermediary, and you may suddenly have three or four different parties with three or four different sets of documents, data, understanding of what the policy actually “is.” Add additional insureds and others claiming a right to coverage, and you have more complication.[4]

How can we reduce or avoid disputes about what an insurance policy contains? Having only one copy might help, where the insurer and insured have equal access to it at all times.[5] Here is where a blockchain/distributed ledger based solution might help.

This doesn’t sound as fancy as some other use cases you’ll find described if you poke around for information on “smart contracts” and insurance and blockchain. In fact, you’ll find a lot of discussion about how this technology can be implemented, with more chatter than uptake at this point. In a recent article, Steve Evans asks “Is blockchain a solution in search of a problem? For the insurance industry, there’s been plenty of chatter about distributed ledger technology and smart contracts, but take-up has been thin.”[6]

Here’s how the folks at McKinsey[7] put it:

“Blockchain is a digitization technology that could be of strategic interest for insurers. The biggest challenges to its industry-wide implementation are facilitating collaboration between market participants and technology leaders, succeeding in the operational transformation, and shaping a stimulating regulatory environment. Laying the foundation to address these challenges today will put insurance companies in a position to have at-scale blockchain use cases and profit from the technology’s benefits in about five years from now.”

In short, sophisticated insurance use cases may take more time to build and may not all be suitable for blockchain applications. But there are some basics that can be fixed, and that remain big pains points for many. It may seem silly, but if you spend any time dealing with insurance claims you’ll know that finding the right policy can often be a huge hurdle. One way to build the“foundation” that McKinsey describes is to rethink focus, and find simple fundamental problems that a distributed ledger or “smart contract” (performance automation script) can fix. Before you build payment automation, why not fix policy issuance and distribution?

Using blockchain/distributed ledger technology could help fix some really basic problems in insurance delivery, including getting everyone (literally) on the same page. It could also be a step towards further insurance contract automation. This may seem like an obvious answer to someone immersed in blockchain technology. But from an insurance standpoint, removing or reducing simple disputes would be a significant step forward in and of itself. Plenty of complexity will remain.

** Picture credit: License: CCO Public Domain. Several months ago I wrote a post titled “Smart Insurance Policies and Time Based Coverage Triggers”. Though I’ve titled this post “Part II”, what I describe here is arguably more fundemental than my earlier post.

[1]. I am generalizing broadly about a large industry, with ancient antecedents. This is not intended to be a treatise on an insurance.

[2]. See, for example: Kevin Quinley, “Underwriting and Claims: Time To Become Friends?” available at (“At least, management may now find it necessary to insist that underwriting and claims accept each other as friends on Facebook.”)

[3]. Underwriters may be employees of an insurance company, or the underwriting function may be outsourced. As noted above, I’m generalizing. For purposes of this post, this particular nuance isn’t material.

[4]. I’ve written about this previously, in connection with insurance certificates: see

[5]. The business logic is not without complexity, to be sure, and I don’t mean to minimize it. But it can be modeled and built.


[7]. “Blockchain-in-insurance-opportunity-or-threat.pdf”, McKinsey & Company, July 2016. See also

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