As blockchain gathers more and more interest in the insurance space, one of the things that will have to be clarified is how the technology will affect the industry and, more importantly, how regulations should adapt.

Abaris Global’s J.P. Schmidt spoke at #D1Conf in Cancun about how regulators are getting involved in the blockchain development in insurance. “They (regulators) have started paying attention, which is a good thing because they need to,” said J.P.

“Because of the increase in value of tokens and initial coin offerings, insurance regulators have started to pay attention.” — J.P. Schmidt, Abaris Global

Concerns with blockchain

Many aspects of blockchain — transparency, immutability, security, and privacy — are beneficial to regulators but they have to be convinced about the technology first. According to J.P., the two primary concerns for regulators are:

Capital adequacy. Ensuring there are sufficient funds to pay claims as they come due.

Ensuring there are sufficient funds to pay claims as they come due. Business conduct. Regulations designed to protect the consumers.

For capital adequacy, the issue now is in dealing with tokens, because reserves and surplus have to be a conservative and liquid asset.

“Tokens are liquid, but for a lot of insurance regulators they’re going to be too volatile to be considered an admitted asset,” explained J.P. “On the other hand, for the structure you want to set up, often you’re going to want to issue tokens. Tokens are going to be part of your surplus and reserve. You also want to pay claims with tokens.”

Another issue is the decentralized nature of insurance using blockchain. In a traditional corporation, it’s easier to place liability. “With a decentralized system, if something goes wrong, who is going to be responsible?” wondered J.P.

For business conduct, the issue is on how insurance providers deal with localized regulations, such as the right to be forgotten in EU. J.P. noted that with the immutability of blockchain, something like this would present a problem.

“You don’t want to accept tokens as premiums, change them into fiat, and then when somebody makes a claim, change them back into tokens and pay the claims.” — J.P. Schmidt

Improvements with blockchain

Some of the processes involved in insurance are made simpler due to the underlying technology of blockchain. These processes include:

Record keeping

Payments

Claims processing

Reporting

Additionally, smart contracts can be used to streamline parametric, peer-to-peer, and microinsurance.

“The fundamental structure of blockchain is going to address a number of problems that they (regulators) would have to deal with every day.” — J.P. Schmidt, Abaris Global

More education is needed

The International Association of Insurance Supervisors (IAIS) and the National Association of Insurance Commissions (NAIC) have drafted model laws for handling virtual currency — such as tokens — but these have their limits. “Unless you can convince a particular state or a country to enact a law adopting a model law, it’s not going to apply and be effective, but it has a persuasive effect,” explained J.P.

While groups like the IAIS and the NAIC exist, there is still a need to further educate regulators about blockchain. In this regard, J.P. urged blockchain insurance developers and startups to work together with regulators to find common ground.

“Model laws are very good from the standpoint of persuasion, but they really don’t have any effect until a particular jurisdiction enacts it into law.” — J.P. Schmidt, Abaris Global

How will this affect insurance?

While everyone likes improvement, nobody likes change. Regulators are used to dealing with laws regulating traditional forms of insurance. It also takes a lot of time and effort from getting a new law drafted and getting it passed.

Even though blockchain is already a talking point for some regulators, the initiative for change will have to come from developers, startups, and other major players using the technology. The emphasis here is how do regulators benefit from it?

For more on J.P.’s presentation, watch the video below.

Insurance regulators increased attention on blockchain (1:50) Working with insurance regulators (4:12) Concerns of insurance regulators (7:20) Capital adequacy issues (8:27) Business conduct issues (13:00) How blockchain can help insurance (21:48) Problems for insurance companies using blockchain (25:50)

His slides can be viewed below, as well.