Distributed ledger technology, blockchain and insurance: Opportunities, risks and challenges

This article canvasses examples of developments and initiatives driven by distributed ledger technology or blockchain technology within the insurance industry. These activities undertaken by insurers and reinsurers are designed to improve efficiency, lower the costs of transaction processing and to improve data quality and transparency. Fraud detection, risk prevention and ‘smart’ contracting are at the forefront of several collaborative efforts undertaken within the industry or in conjunction with major external technology entities. However, as this article discusses, these opportunities are not without their corresponding challenges and risks, technological, legal and otherwise. Key challenges and risks to be considered in the context of existing legal frameworks relate to security and privacy, governance, scalability and standardisation. While this new technology may enhance data security it is not ‘bullet proof’ and may commonly give rise to three major types of potential liability risk: ledger transparency risks, cyber risks and operational risks. Paradoxically, for example, one of the perceived strengths of distributed ledgers being the enhanced level of transparency whereby every node operator has access to data stored on a distributed ledger, does also facilitate re-personalisation of data stored on a distributed ledger or enable nodes to make an informed guess as to identities entering into certain transactions. This in turn leads to two main legal risks, being data privacy and insider trading and market abuse. Regulators globally have to date largely taken a ‘light touch’ approach to the question as to whether existing legal frameworks are sufficient to meet the technological challenges posed by distributed ledger technology or blockchain technology. This article considers industry initiatives within the existing legal framework and reviews some of the challenges in extending and applying private law and regulation to blockchain applications.