United States: Breaking Down Blockchain: Implications Of Blockchain Technology For The Insurance Industry

As the decade comes to a close, new technologies are having a major impact on how insurance industry participants conduct their operations – especially how they collect, process, analyze, store and disseminate vast amounts of data – as well as how they interact with those with whom they do business. In recent years, blockchain technology has gained increased visibility as a type of innovative technology with the potential to transform the insurance industry. Although insurance industry participants have generally been eager to learn about the capabilities of blockchain technology, relatively few have begun the process of identifying ways to incorporate such technology into their business, preferring a more cautious "wait and see" approach instead. Similarly, insurance regulatory authorities, while generally curious about the nature of blockchain technology, have only started taking steps to ensure that the regulatory framework can keep pace with the potential changes accompanying this technology.

Yet change is on the horizon. In 2018, the Vermont legislature mandated the Vermont Department of Financial Regulation (the "Vermont DFR") to review the potential application of blockchain technology to the provision of insurance and banking and to make recommendations for potential adoption of blockchain technology and any necessary regulatory changes. In January 2019, the Vermont DFR submitted its report and recommendations to the legislature: Blockchain: Implications for the Banking and Insurance Industries, Michael S. Pieciak, Commissioner Vermont Department of Financial Regulation, January 15, 2019. In addition, the Vermont DFR announced a pilot program to explore the use of blockchain technology in digital recordkeeping practices for captive insurers domiciled in Vermont.

This article sets out a brief overview of blockchain and related technologies, potential obstacles for the use of blockchain, potential applications of such technology in the insurance industry and Vermont's novel approach to assessing the impact on the regulatory framework.

The basics of blockchain

Blockchain is a type of distributed ledger technology ("DLT") and is a system of maintaining records utilizing advanced encryption methods over a decentralized network of computers. Generally, equal access rights are provided to all participants although certain data can only be accessed if a user has the proper encryption keys. Blockchain organizes data into "blocks" of data. Each block of data may contain information about a transaction and the parties involved in such transaction, although personally identifiable information is encrypted through a digital signature called a "public key". A user can only unlock the personally identifiable information in the block if the user also has the corresponding private key which the user can store offline or in a digital wallet. Once a block is created, it then needs to be connected to the blockchain network. This is done through attaching the block to another block that is already part of the network "chain". In order for a block to be added to the chain, the content of the data in the block must be verified by the network of computers on the blockchain through a complex algorithmic process. Once the information in the block is verified as accurate, the block is added to the chain and given a unique "hash" to identify the block from other blocks.

This chain of blocks, or the blockchain, is stored on all computers in that particular blockchain's network. This collection of information, therefore, is decentralized as the data is not just stored in one location or by one user; the data verification process is also done on a collective basis. Once a block is added to the blockchain, the block and the data on such block is technically permanent and cannot be changed because it has its own unique hash identifier and encryption keys. Many forms of blockchains are public, permissionless systems which allow any individual to participate, contribute data to the system, and to receive identical copies of the records maintained on the system. While some blockchains impose, as a qualification for becoming a participant in the system, possession of a specified threshold level of computing power established by "proof of work" in solving a complex mathematical puzzle, many blockchains do not include any requirements for participation (beyond the minimum amount of computing power required to support the actual requirements of the system). A widely publicized example of a public blockchain is the DLT underlying the Bitcoin cryptocurrency. Because this type of public blockchain is essentially a public database operated by anonymous, unauthenticated individuals (as opposed to a centralized database operated by known, trusted individuals), the participants in such a system must agree on protocols for determining how data may be published to or edited on the blockchain system. In addition to public blockchains, there is a growing number of private blockchains which require participants to have been granted prior permission in order to gain access to the specific distributed ledger system. The closed, restricted access nature of private blockchains may make them potentially a better fit for a highly regulated industry such as insurance.

Because blockchains are decentralized in nature, they rely on consensus in order to operate. Indeed, a primary purpose of a blockchain is to allow for potentially adverse parties to collaborate on transactions without relying on other actors to process or otherwise manage the transaction. Proponents of blockchain assert that the technology creates the potential to eliminate certain "intermediary" parties to transactions, such as insurance brokers, and thereby achieve increased efficiencies and reduced costs. Additionally, as blockchains create permanent ledgers to which information can only be added but not deleted, the use of blockchains would create a complete audit trail, which would potentially reduce the risk of fraud.

An additional technological development facilitated by the use of blockchain technology has been the creation of "smart contracts." A smart contract is a programmable, code-based contract, which is stored in the blockchain system itself and which automatically executes upon the occurrence of specified conditions that have been previously agreed upon by the parties – for example, upon the payment of the consideration for a transaction. Use of smart contracts, particularly in conjunction with distributed ledger technology, would theoretically reduce the need for intermediaries, lower costs and increase transparency. It should be pointed out, however, that most of these smart contracts rely on an impartial, arm's-length third party (the so-called "oracle") to verify the occurrence of contractual conditions. At this early stage, smart contracts are best suited for simple, straightforward, standardized transactions with clear, unambiguous parameters that can be readily verifiable, rather than for complex, customized transactions that are inherently ambiguous because a number of variables may be involved.

Potential stumbling blocks for blockchain

Blockchain will need to successfully address some fundamental challenges if its potential for increased accuracy, efficiency, security and privacy is to be realized in the insurance industry. While there is always room for improvement, currently insurance transactions are generally conducted efficiently, securely and privately by established institutions which operate in a well-structured, professional manner within a clearly defined regulatory framework. Blockchain's overarching challenge is to demonstrate that it is potentially a significantly better alternative in terms of cost savings, improvement in customer experience and prudential regulation of insurance companies for the protection of policyholders. Among the specific challenges that blockchain faces are technological constraints and regulatory uncertainty.

From a technological perspective, two key issues limit the growth of blockchain technology. First, in their current stage of development, blockchains are limited in their ability to grow. For many public blockchains, each party or "node" must process every single transaction (to affirm compliance with the protocols in place) and then maintain a copy of the entire revised ledger of records. As a consequence, a blockchain is constrained in the number of transactions it can process in a set period of time. Presently, for example, blockchains have a fraction of the transactionprocessing capacity of established centralized transactions and data processing entities such as VISA. Second, the amount of storage space and computing power required for blockchain technologies to operate in a timely manner is quite high and results in massive energy consumption issues, which is neither cost-effective nor environmentally friendly from both enterprise and community perspectives. In this regard, the growth of blockchain technology may benefit from the ability of such systems to interact with one another. While hundreds of blockchain systems currently exist, each operates independently from the others. The ability to share information between blockchain systems as well as within such systems may allow participants to derive greater value from their use of such systems. Blockchain technology is still in the early stage and advances are currently being developed to improve the number of transactions that can be processed per second and interconnectivity of different blockchains.

To view the full article click here

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2019. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions