Still on the starting block? Implications of blockchain for the Insurance Industry
Blockchain is a digital ledger technology that allows for secure and transparent record-keeping of transactions without the need for a centralised intermediary. It is a distributed database that is used to maintain a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data, and is open to inspection by all participants to the ledger. Once a block is added to the chain, it cannot be altered or deleted, making the blockchain tamper-resistant and immutable.
Blockchain technology is best known for its use in cryptocurrencies, such as Bitcoin, where it is used to securely record and verify transactions. However, the nascent technology has potential to enhance the business model of insurers, brokers and policyholders.
Potential benefits of blockchain
- Transparency
One of the primary benefits of blockchain for the insurance industry is increased transparency. Policies can be complex and confusing for consumer policyholders and blockchain can be used to expediate and simplify claims handling. For example, the UK start-up InsurETH is developing a flight insurance policy that utilises blockchain and smart contracts. When a verified flight data source signals that a flight has been delayed or cancelled, the smart contract pays out automatically. This type of policy can improve trust between the insurer and customer, as the policies exist on a shared ledger that is accessible to both and there is little or no scope for dispute as to when an indemnity should be provided.
- Fraud Prevention
Another issue within insurance, especially consumer insurance, is fraudulent claims. The ABI detected over 95,000 dishonest insurance claims in 2020 alone with an estimated combined value of £1.1 billion. Blockchain could significantly assist with preventing fraud by providing a secure and transparent way to record and verify claims made. While the process would require extensive cooperation between parties, it is perfectly plausible (and indeed likely in the future) that blockchain could substantially reduce fraud by cross-referencing police reports in theft claims, verifying documents such as medical reports in healthcare claims, and authenticating individual identities across all claims.
- Efficiency
Underpinning the above two points is blockchain’s clear potential to reduce operational costs. The technology’s automated nature can cut out middle men and streamline the insurance process. Another UK start-up, Tradle, has developed a blockchain solution that expediates ‘Know your customer’ checks – a time-consuming process for companies and a source of annoyance for clients. Tradle’s technology verifies the information once, and then the customer can pass a secure ‘key’ to whoever else may have a regulatory requirement to verify identity and source of funds. This simple utilisation of blockchain saves time and money in what is usually a tedious process.
Possible issues
- Participants (standardisation)
Blockchain’s potential impact may be impeded, however, by various issues preventing a revolutionary deployment of the technology. As pointed out above, there needs be a wide level of consensus for blockchain to work properly. There is currently no standardisation in the Market in relation to how and when the technology should be implemented, and participants are understandably cautious about making investment into blockchain when there is no guarantee that it will initiate efficient solutions (due to the current ‘state of play’). Consensus among competitors will take time to evolve. It is telling that the two companies mentioned above as ones who use blockchain are start-ups – the traditional Market is somewhat glacial.
- Scalability
And even if the London Market effected a wholesale adoption of blockchain tomorrow, there could be issues of scalability. Blockchain relies on an ever-increasing storage of data, meaning that the longer the blockchain becomes the more demanding the need for bandwidth, storage and computer power. The data firm iDiscovery Solutions found that 90% of the world’s data was created in the last two years, and there will be 10 times the amount of data created this year compared to last. Some firms may be faced with the reality that they do not have the computational hardware and capacity to provide for the technology, especially when the blockchains will be fed by data that is ever-increasing in terms of quantity and complexity.
- London Market use?
Finally, questions arise about exactly which insurance contracts stand the most to gain from blockchain. Consumers would certainly benefit from smart contracts with their home/health/travel insurance policies. But within sophisticated non-consumer insurance, where the figures are large but the number of parties involved is limited, it is questionable whether current transaction models need blockchain. Where there is trust between a policyholder and broker, and a personal relationship between the broker and the underwriter (as is often the case at Lloyd’s), it is unclear what blockchain would really add to the process. It is worth mentioning that in late 2016 Aegon, Allianz, Munich Re and Swiss Re formed a joint venture known as B3i to explore the potential use of Distributed Ledger Technologies within the industry. B3i filed for insolvency in July 2022 after failing to raise new capital in recent funding rounds. It seems, at least in relation to the London Market, blockchain will have a slower, organic impact as opposed to revolutionising the industry.
Dru Corfield is an Associate at Fenchurch Law
Covid BI claim jurisdiction overturned on appeal
In Al Mana Lifestyle Trading LLC & others v United Fidelity Insurance Co PSC & others [2023] EWCA Civ 61, the Court of Appeal (by a 2:1 majority) held the English courts did not have jurisdiction to hear business interruption claims pursued under multi-risk insurance policies issued in the Middle East, reversing the first instance decision.
The claimants operate in the food, beverage and retail sectors and sought recovery of around $40 million losses arising from the pandemic, against defendant insurers located in the UAE, Qatar and Kuwait. A dispute arose concerning interpretation of the following clause contained in the policies:
“APPLICABLE LAW AND JURISDICTION
In accordance with the jurisdiction, local laws and practices of the country in which the policy is issued. Otherwise England and Wales UK Jurisdiction shall be applied,
Under liability jurisdiction will be extended to worldwide excluding USA and Canada.”
The Commercial Court construed this as a non-exclusive jurisdiction provision, allowing proceedings to be brought either in the country where the policy was issued or England & Wales. The policies had been issued as part of a suite of insurances intended to provide comprehensive cover for group operations in numerous jurisdictions, reinsured in the international market, and the court was influenced by the commercial advantage of facilitating resolution of disputes through a single neutral venue. In reaching this decision, Cockerill J noted that English courts are: “particularly well-versed in the issues relating to claims for indemnity for Covid-related business interruption losses [and] highly experienced in dealing with issues of foreign law, where they arise.”
The Court of Appeal agreed that the question to be determined was how the words of the contract would be understood by a reasonable policyholder. Of central importance was the adverbial conjunction “otherwise” - which could be taken to mean, for example, “or”, “or else”, “alternatively”, “if not” - and its impact on surrounding provisions in the context of this clause. A degree of choice was implicit but did the clause provide for a true “either/or” alternative; or a conditional “primary/secondary” position?
By a majority (Males LJ and Nugee LJ), their Lordships allowed the appeal and decided that the clause gave exclusive jurisdiction to the courts in the country in which each policy was issued. Only if the jurisdiction of the local court is not available would the courts of England & Wales have jurisdiction in relation to claims under the policy. Males LJ saw no reason why parties should not agree to confer jurisdiction on one court, with another as a fall-back in case the primary choice was not available. The word “otherwise” was therefore construed as equivalent to “if not available”, as opposed to “if not fancied by whichever party is the claimant”.
In a dissenting judgment, Andrews LJ took a different view: “Whereas the defendants' interpretation might commend itself to a commercial lawyer, I doubt it would even occur to the reasonable policyholder, appraised of all the relevant circumstances, that it could be understood as meaning that it was mandatory to bring proceedings in the local forum, and that they could not go to the English court unless they could establish that the local court had declined, or would decline jurisdiction. They would understand it to mean that if, for whatever reason, they did not bring proceedings in the local forum, they would have to do so in England and Wales."
It is striking to note the opposing conclusions reached by senior judiciary in this case, applying the same test of contractual interpretation. The inherent complexity of construing ambiguous language was acknowledged by Nugee LJ (at paragraph 63): "It must be admitted … it is not always easy to articulate with precision why one reading of a disputed provision seems more natural and ordinary than another, as the way in which language strikes a reader is an accumulation of experience of how language is ordinarily used. And, as the present case illustrates, the same words may strike different readers differently".
Policy wordings should be carefully considered prior to inception of the indemnity period to ensure the parties’ intention is clearly expressed. Jurisdiction and other important provisions dealing with alternative scenarios in a single clause require proper explanation as to triggering events and orders of application. Particular caution should be exercised in the use of words with multiple meanings, to minimise the prospect of disputes.
Amy Lacey is a Partner at Fenchurch Law
