Smart contracts are gaining traction in the insurance industry due to their potential to reduce costs, improve transparency, and enhance transaction security. These contracts, built on blockchain infrastructure, operate without intermediaries and execute automatically when predefined conditions are met.
A smart contract in insurance functions similarly to a parametric policy. It initiates payout based on objective data inputs rather than traditional claims assessment.
This automation simplifies settlement and reduces administrative overhead. Since smart contracts are decentralized, they are resistant to tampering, with data stored securely and permanently on the blockchain.
Smart contracts eliminate the need for third-party involvement, lowering both premium prices and operational expenses. While they define agreements between parties as traditional contracts do, they also monitor claims and enforce compliance without manual intervention.
Development and Use Cases
The concept of smart contracts originated in 1994, introduced by Nick Szabo, a computer scientist and cryptographer. At the time, there were no practical implementations. With blockchain developments in recent years, the model has become viable for real-world applications.
Smart contracts are particularly suited to parametric insurance products. These models pay claims based on event triggers rather than post-event assessments.
For instance, Reask, a firm focused on climate risk, offers flood coverage with preset parameters. Once flood levels meet a defined threshold, the smart contract automatically initiates payment—no claims process required.
Similarly, Breach Insurance offers crypto-investor protection based on predefined risk events, using blockchain contracts for automation and transparency.
Cybersecurity Applications
Smart contracts also offer improved data security. Blockchain’s cryptographic and timestamped architecture makes it difficult to alter records undetected. As cybercrime escalates, particularly in sectors with large-scale data collection, insurance providers can use smart contracts to improve data integrity and reduce breach-related costs.
For example, Anthem Insurance’s 2015 data breach affected 80 mn individuals and cost $115 mn in settlements. At the time, blockchain was not in use.
With smart contracts, data storage is distributed and encrypted, reducing single points of failure. Although no system is entirely immune to attacks, blockchain’s structure makes manipulation detectable and reduces systemic risk.
Adoption and Outlook
Smart contracts remain in the early stages of adoption across the insurance sector. While the pandemic accelerated digital transformation, the use of blockchain contracts has not yet reached industry-wide deployment. Several challenges remain, including data protection laws, regulatory clarity, legacy infrastructure, and scalability.
Sibylle Fischer of Baloise Group notes that product availability is limited and current implementations address only a narrow set of risks.
Broader adoption will require industry consensus, infrastructure upgrades, and regulatory coordination. However, as blockchain and decentralized finance continue to progress, smart contracts are expected to become a more common part of insurance product development and administration.