Computable contracts – implications for insurance consumer protection and supervision

Complexity in insurance

Insurance is complex. The overall complexity of the insurance products makes it difficult for consumers to understand the difference between them, their features and risks. Consumer trust in financial and insurance services is low compared to other markets.

Supervisory and regulatory toolbox for overcome complexity includes tools such as disclosures, product design and development rules, consumer journey design principles, product standardisation (?simple or basic products“ approach). Digitalisation might provide further tools – open insurance ecosystem can act as an enabler for increased transparency and simplicity if designed and applied appropriately.

Another tool seems to be ?computable contracts“. While ?computable contracts“ have been discussed in academia for some time it is noteworthy that most recently CodeX – The Stanford Center for Legal Informatics have started detailed work on this from insurance perspective.[1]

In short note I will briefly summarise the notion of computable contracts (largely based on the work done by CoveX) and then will try and explore further how it might especially influence consumer protection and supervision in insurance and pensions sector and impact open insurance development.

What is computable contract?

A contract is a legally enforceable agreement that creates, defines, and governs mutual rights and obligations among its parties – in case of insurance – between policyholder and insurer. This includes insurance cover, exclusions, costs and fees, special terms on execution, rights, disclosure obligations etc.

A computable contract is legal contract that is specified in sufficient detail to provide unambiguous answers to questions about compliance of clearly specified circumstances with the terms and conditions of the contract. From a pragmatic point of view, computable contracts are useful as the basis for computer systems capable of automated compliance management.[2]

There are different levels of maturity of computable contracts, however it can be said that computable contracts are understandable by both humans and computers and agnostic about the platform on which it executes (e.g. it can be executed on a blockchain, but it could also execute on other systems).[3] This differentiates it from pure smart contracts and makes it interesting from consumer protection and supervisory point of view.

Insurance use cases

CodeX Discussion Brief states that computable contracts will create significant improvements in efficiency, and in customer experience and outcomes and facilitate innovation, data collection and analysis and supervisory capabilities and industry-wide interoperability. More concretely:

·????????Facilitating marketing and sales, permitting customization and instant quotes

·????????Making the policy more transparent and understandable for the consumer

·????????Creating structured data over the contractual life cycle,

·????????Allowing advanced analytics

·????????Clarifying underwriting calculations:

·????????Improving, simplifying, and standardizing policy design and pricing, allowing the creation of new products and accelerating the development timeline:

·????????Improving policy servicing and administration

·????????Supporting the internal oversight and external regulation of the company:

·????????Creating a broader marketplace for reinsurance and other inter-company transactions.

Implications for consumer protection and supervision

Computable contracts might facilitate consumer protection through simplification. Insurers and intermediaries will be able to provide insurance contracts or full fledge solutions that enable to compare different products and coverage so that consumers are able to find easily most suitable option. Consumers might be actually able to understand their contract terms and implications. While some firms, including insurance firms[4] , are putting more onus on contract simplifications, average insurance contract is still too difficult to understand for an average consumer (and to be honest sometimes even with extensive insurance/law background).

Computable contracts will also help supervisors, both conduct and prudential. The pandemic exemplified the need to better understand exclusions (e.g. travel insurance; business interruption insurance). War-related exclusions are currently topical. Computable contracts seems to facilitate those analysis. Computable contracts might also help to analyse/understand better silent cover in cyber insurance, including in the context of broader new developments such as insuring Web3 and Metaverese. Different stress scenarios could be easily tested both on firm/member state/EU level.

Computable contracts might also facilitate product changes – understanding the impact of the change for the whole portfolio, including impact for consumers or better understanding the impact of upcoming changes in the legislation or planned changes in contractual terms.

?Computable contracts – enabler of open insurance?

Open insurance can include different use cases. One is comparison tool/dashboard type of solutions which enables consumers to compare new products with each other and with their existing ones so to make informed choice.

This requires that product information (risks covered, exclusions, price, duration of the contract, provider name, distribution cost, other personal insurance contract details) are somehow available in a standardised and machine-readable form.

The potential standardisation efforts cannot be underestimated taking into account the heterogeneity of contracts and national contract laws. Computable contracts could arguably act as an enabler for open insurance use cases by providing certain standardisation while allowing still to address the heterogeneity of the current insurance contract framework. ?

Are computable contracts future for insurance?

Overcoming complexity is…complex. It might not require “faster horses” but complete re-thinking of the current approach. Computable contracts that are understandable by both humans and computers could be one area to further look in this context (together with its potential risks).

However it seems to provide potential tools both for consumer (simplicity, better user experience) industry (efficiency, interoperability, internal analysis) and supervisors (enabler of new analytical tools so to understand better the impact of stress scenarios and potential consumer harm).

Views? Additional reading recommendations?

[1] See an overview of CodeX Insurance Initiative https://law.stanford.edu/codex-the-stanford-center-for-legal-informatics/codex-insurance-initiative/ . See also CodeX Discussion Brief: COMPUTABLE CONTRACTS AND INSURANCE: An Introduction https://www-cdn.law.stanford.edu/wp-content/uploads/2021/03/Short-Paper-1-Computational-Contracts-and-Insurance-Postable-Version-3.2-April-15-2022-update.pdf

[2] See the definition in https://compk.stanford.edu/homepage/index.php

[3] https://www.dhirubhai.net/pulse/computable-contracts-financial-services-industry-vinay-k-chaudhri/

[4] https://www.lemonade.com/de/en/policy-two