Distributed Ledger Technologies and Smart Contracts: Challenges and Opportunities for the London Insurance Market

Ledgers are ancient tools for recording assets such as money and property. Modern advances in technology have enabled the existence of a distributed ledger - a database that can be shared and updated simultaneously (and transparently) across all users of a system without each user having to separately amend its own records. The radical nature of this technology (DLT) arises in conjunction with other applications, such as 'smart' contracts - in which contract terms can be automatically executed by a computing system. It is proposed that the project be investigated via themes that have emerged from a preliminary survey of the topic - briefly discussed below.

The current centralised model of operating delivers poor customer service and is not economic, principally due to a heavy paper- and intermediary-based means of working. DLT in principle enables de-centralisation, which extensively eliminates these issues. An important issue is inter-operability and its syntactic and semantic foundations. With DLT operating securely, transacting parties need not trust each other. If trust is a risk judgment between two actors, what is the nature of risk in this context and what does it mean for a subscription market like Lloyd's?

The scope for any form of written material to be traceable on a blockchain via smart contracts is vast. Add to that the possibility of tracking physical assets, and a truly integrated system of information becomes a reality. Add further the automation of how both document and asset interact and one has a 'programmable economy'. Taken to its logical conclusion the insurance industry may become integrated into a yet unknown economic model, rendering an insurance 'market' redundant. Understanding how these technologies are being taken up and how the industry adds value enables an analysis of how the market can adapt.

Data can be shared on a great scale with this technology, thus raising the potential for a vast 'information marketplace'. Moreover, on the assumption that smartphones will be the primary and trusted customer device, the portability and sensory capability of such devices opens up a huge vista of information exchange. Understanding through discussion what constitutes risk appetite will allow enable analysis of potential future opportunities.

Automation and the improvement of services are major aspects of change likely to be precipitated. With a wealth of information available insurers will have a clearer picture of risk. It is anticipated that this will provide a highly personalised service, though also invariably creating a very dynamic industry due to product diversity and choice. Automation can only occur because technical code is deterministic and the parameters are certain. Expansion of smart contracts relies upon the existence of unambiguous language. Whether and how this is possible, and what this means for contract law needs to be understood.

Addressing privacy and security examines the obvious trade-off between openness and privacy. Moreover, the transparency of DLT presents an intrinsic challenge as inferences can be made on a variety of sensitive commercial matters (eg buying profile of users or turnover of an online merchant).

DLT and related technologies rely on two types of code: legal and technical - the right balance needs to be struck. As humans still must define the rules legal code is still of central importance. Who should be subject to those rules? With increased mechanisation control becomes more centralised - what does this mean for a human being's relationship with rules and the law?

Finally, it can be said that DLT and associated technologies are at the radical end of the change spectrum - how could this come about and what effect could it have on society? A sense of the radical emerges through the dramatic effect such technology can have on hierarchies and the increased level of complexity that such technology brings to commercial and human relationships.