Lesson 10: The benefits of automation with smart contracts
Making a claim almost always involves hassle and paperwork. Now imagine a smart contract with blockchain technology that allows the conditions of an agreement to be executed automatically without any intermediaries or time-wasting. The future of smart contracts begins in insurance.
No intermediaries, no bureaucracy, no supervision, no major costs. And, above all, no misunderstandings. With certainty, transparency, speed and autonomy. Broadly speaking, these would be the advantages of a smart contract created and stored in blockchain technology. This digital contract between two or more parties automates the activation and execution of all the actions and clauses provided when the requirements are met.
Technically, these are lines of code embedded in computer protocols executed in a distributed way on a blockchain-based network. These types of protocols allow two or more subjects to specify any contract without using intermediaries (notaries, banks, etc.), or meeting in person, thus reducing expenses.
When the smart contract is generated, blockchain validators verify the accuracy of the information and the digital agreement becomes part of a block. Smart contracts accept parameters via blockchain transactions (as input), process them according to a deterministic algorithm, and generate (as output) a state change in the contract report or a new blockchain transaction. Ethereum is generally used, although there are other platforms that offer smart contract services, such as Cardano and Ripple.
The responsibility for ensuring that the contract conditions are fulfilled is attributed to an external agent (such as a smartphone application). When the application sends the signal to the blockchain that one or more of the expected conditions have occurred, it automates the execution of the contract.
Smart contracts are based on the if/then binomial, that is, in case of a certain event provided for in the contract, the computer protocols automatically validate the contractual formula, activating the pre-established consequence. In fact, this self-execution, that is to say the guarantee of the automatic execution of the contract in the event of pre-established conditions, is the key characteristic of smart contracts.
In fact, this eliminates the risk of incorrect, failed or imperfect application of the clauses and contractual conditions, sterilising the human component or, where appropriate, the risk that a counterparty arbitrarily decides not to respect the established payments terms and/or conditions.
This technology has many fields of application, for example:
- Real estate transactions.
- Works contracts.
- Currency exchange.
- Management of stock assets.
- Banker’s drafts to freeze the amount to be transferred and release it on a specific date.
- Financial transactions.
- Company transactions.
- Intellectual property protection.
Smart contracts can also significantly improve supply chain management: from more precise and transparent traceability of the goods and greater trust between suppliers and retailers to reducing fraud and theft throughout the chain.
Advantages in insurance
Undoubtedly, one of the most promising areas and that is already experiencing the advantages of smart contracts is the insurer. In particular, some travel insurance companies already propose parametric policies provided by some airlines through the Ethereum platform. The contract includes information on flight departure times and, in case of a notified delay and in accordance with the conditions provided in the contract, automatically activates reimbursement directly to the user’s account, avoiding the entire bureaucratic process inherent in the claim for compensation.
In general terms, the use of smart contracts in the world of insurance would eliminate many errors and inefficiencies in the current system: for example, in the case of life insurance, the blockchain allows rapid and precise verification of all data, determining the validity of the policy immediately after receiving the death certificate, with a progressive automation of processes such as compensation and reimbursements. The same mechanism, of course, is also applicable to claims for damages and accidents.
It is an objective fact that the insurance industry is undergoing an unprecedented digital transformation. Therefore, the processing of claims through blockchain technology and smart contracts –automating the execution of the policy and contract enforcement terms– is becoming more commonplace. For a start, it simplifies a procedure that for users is usually (and considered) cumbersome and slow. And with a benefit for insurance companies too: fraud detection and risk management.