Application of Smart Contracts in the Reinsurance Industry
L. van der Meer (TU Delft - Technology, Policy and Management)
Sander Renes – Mentor (TU Delft - Economics of Technology and Innovation)
Rutger van Bergem – Graduation committee member (TU Delft - Economics of Technology and Innovation)
Michel van Eeten – Coach (TU Delft - Organisation & Governance)
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Abstract
This paper explores the potential of smart contracts in the reinsurance industry to address escalating non-productive costs driven by market dynamics. Reinsurers, aiming to enhance stability amid increasing inflation, claim severity, and frequency, have adopted stricter underwriting criteria and raised premiums. This has led to a more detailed drafting of reinsurance contracts, reminiscent of the formalization trend that began in the 1970s. However, this formalization has inadvertently inflated administrative and dispute resolution costs, counter to the industry's core objective of efficient risk and capital allocation.
The study delves into how smart contracts can offer a solution. Smart contracts are computerized protocols that can automate contract clauses, potentially aligning better with industry goals. The examination focuses on their impact on transaction costs, involving expenses incurred by insurers and reinsurers to execute transactions.
Findings reveal that smart contracts can effectively reduce administrative costs by automating tasks, particularly in high-volume and standardized scenarios. However, their effect on dispute resolution costs is more nuanced, as the reinsurance sector still benefits from human interpretation.
In conclusion, while smart contracts hold promise for reducing transaction costs in reinsurance, the industry's unique complexities and high financial stakes may pose challenges and necessitate post-implementation adjustments. The paper recommends exploring smart contract applications in industries with smaller disputed amounts and lower trust levels than reinsurance.