About SmartInsurance Contracts Based on Virtual Currency under the European Legal Framework
Dr. Remy Zgraggen
Attorney at law,Leximpact, Zurich, Switzerland
Remy Zgraggen博士（Leximpact 律师事务所）
1. PRELIMINARY REMARKS
There is widespread agreement that smart insurance contracts or blockchain technology in general will have a relevant impact on a variety of application scenarios within the insurance sector in the future, such as for example in the form of pay-per-use insurance models, micro insurance contracts, identity/data verification or frauds prevention systems . However, up today the big insurance companies in Europe, Japan or the US still do not offer purely smart contract based, or in generally blockchain-based, insurance solutions. One main reason could be found in the discrepancy between what is technically possible and what is legally allowed within the relevant regulatory framework. Especially in Europe the insurance market is highly regulated, which makes it difficult to establish new products based on a new technology or to enter the insurance market as an insurance-start-up company in general. The present article shall explore these legal or regulatory barriers for blockchain-based insurance application, especially through the example whether and under what conditions an insurance solution can be based on a so called smart insurance contract.
2. SMART INSURANCE CONTRACTS
The term smart contract was already defined in 1996 by  as a “set of promises, specified in digital form, including protocols within which the parties perform on these promises”. The general objectives of a smart contract are the satisfaction of common contractual conditions (payment terms, periods, confidentiality, or even enforcement clauses), minimize exceptions and minimize the need for intermediaries, such as for example insurance brokers. In other words, smart contracts can be defined as computer programs regulating the rights and obligations between two or more parties. Smart contracts are in general (but not necessarily) linked to blockchain. The legal classification of a smart contract is however still disputed and inconsistent. In general, smart contracts cannot be considered as contracts in the legal sense, as a legal contract must be based on two corresponding declarations of intent . Consequently, an insurance, which is based on a smart contract, needs a traditional contractual basis besides the smart contract as a backup. This is also the case for “Fizzy”, one of the first smart insurance solutions on the market, where however a traditional contractual agreement is necessary between the insures and AXA. In addition, in the case of “Fizzy” the insurance premium needs to be paid in Euro .
Table 1 gives an overview about the proposal of a legal classification of insurance contracts depending on the nature of the underlying currency (ordinary or crypto currency) and on the underlying contractual agreement (traditional legal contract or smart contractor both).
Table 1: Legal Classification of Smart Insurance Contracts
Even though Fizzy (and similar blockchain-based applications) can be considered as a pioneering innovation within the insurance sector, the next step should be a blockchain-based insurance-contract, where no additional contract is necessary and where the insurance premiums and the claims payments will be made in virtual currency. Whereas the legal equal treatment of traditional contracts and smart contracts need a fundamental change of the concepts and definitions of a contract from a legal point of view, a traditional insurance contract where premiums and claims payments can be made in crypto currency is prima vista in principle conceivable, at least from a civil or contractual law approach. According to the principle of contractual freedom, any kind of obligation can be foreseen in principle between the contractual parties. In financial market law this principle is however highly restricted by provisions of public law, in especially regulatory requirements and financial supervisory law in general. Consequently, in order to be able to offer a private insurance contract as an insurer, precisely defined regulatory conditions must be fulfilled. These conditions are appropriate and necessary because of overriding public interests, which cannot be achieved through the self-regulatory powers of the free market . In the insurance sector, one of the main public interests is consumer protection – which means that the financial and non-financial interests of the individual policyholders need to be protected against the interests of the insurance undertakings. Besideconsumer protection, financial regulation aims to guarantee the proper and efficient functioning of the financial market in general.
3. CONCLUSIVE REMARKS
The legal hurdles for blockchain-based insurance products are diverse and very high, however, they are not insurmountable in the medium and long term. As shown in Table 1 above, the way to purely blockchain-based smart insurance contracts can be undertaken step by step. In general, the legal barriers in the Europeanre gulatory framework can be found on the one hand in private law, especially in contractual law, and on the other in public law, especially in financial supervisory law. In contractual law the most important step will be the recognition of smart contracts as generally accepted legal contracts.
In financial supervisory law the consistent and uniform classification and recognition of virtual currencies and crypto-assets within the balance sheet of an insurance company will be one of the main challenges for the future. If crypto currencies or crypto-assets in general cannot be used by the insurance companies to fulfill the capital requirements, it becomes much more difficult for insurers to be able to offer blockchain-based insurance products. However, if cryptocurrencies remain very volatile and as long as they are not widely accepted as means of payment in everyday life and as an official currency, it is difficult to imagine a full legal equivalence of insurance products based on virtual currencies and of those based on fiat currencies. Especially with regard to consumer protection issues, the regulatory framework cannot allow for example life insurance or pension products in crypto currency, when these products are intended to guarantee the full coverage of living expenses in the future for the insured persons. In addition, also for non-life insurance products, such as for example car insurance products, the insurance company and the regulator must make sure that insurance premiums in the long run do not only have to cover the potential damages but also the administrative costs (e.g.personnel costs) of the insurance company. With some exceptions these days the car repair shops and the personnel costs of an insurance company for example cannot be paid in virtual currency.
Nevertheless, it can be expected on the long run that smart insurance contracts will be officially accepted within insurance industry under a given legal framework. However, in a first step these smart insurance contracts need to be based on ordinary currency (See Table 1 above). Probably in a second step, when large parts of the economy will become token- or blockchain based, smart contracts based on virtual currency will be possible. For the near future only very simple smart insurance products based on crypto currencies are conceivable, such as for example an add-on life-insurance product, which is not intended to cover the full cost of living, but which foresees only a certain additional amount in crypto currencies in the case of realization of the insured event. To summarize, as it was the case for other historic technological innovations, the way from technical feasibility to full legal acceptance can be hard and difficult in particular cases in practice, also for smart insurance contracts.
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