Computable Contracts: Transforming Consumer Protection and Supervision in Insurance
Insurance is complex. The overall complexity of insurance products makes it difficult for consumers to understand the differences between them, their features, and their associated risks. Consumer trust in financial and insurance services is low compared to other markets.
The supervisory and regulatory toolbox to address this complexity includes tools such as disclosures, product design and development rules, consumer journey design principles, and product standardization (e.g., the "simple or basic products" approach)[1]. Digitalization might offer additional tools—an open insurance ecosystem could act as an enabler for increased transparency and simplicity if designed and applied appropriately.
One emerging tool is the concept of "computable contracts." While computable contracts have been discussed in academia for some time, it is noteworthy that CodeX – The Stanford Center for Legal Informatics has recently begun detailed work on this from an insurance perspective.[2]
In this short note, I will briefly summarize the concept of computable contracts (largely based on the work done by CodeX) and explore how they might influence consumer protection and supervision in the insurance and pensions sectors, as well as their impact on open insurance development.
What Is a Computable Contract?
A contract is a legally enforceable agreement that creates, defines, and governs the mutual rights and obligations of its parties—in the case of insurance, between the policyholder and the insurer. This includes coverage, exclusions, costs and fees, execution terms, rights, disclosure obligations, and more.
A computable contract is a legal contract specified in sufficient detail to provide unambiguous answers to questions about compliance in clearly defined circumstances, based on the terms and conditions of the contract. From a pragmatic perspective, computable contracts serve as a foundation for computer systems capable of automated compliance management.[3]
Computable contracts are understandable by both humans and computers and are agnostic about the platform on which they execute (e.g., they can run on a blockchain but could also execute on other systems).[4] This distinguishes them from pure smart contracts and makes them particularly relevant for consumer protection and supervisory applications.
Insurance Use Cases
The CodeX Discussion Brief suggests that computable contracts can significantly enhance efficiency, customer experience, and outcomes, as well as foster innovation, data collection, supervisory capabilities, and industry-wide interoperability.
Specific use cases include:
- Facilitating marketing and sales by enabling customization and instant quotes.
- Making policies more transparent and understandable for consumers.
- Creating structured data throughout the contractual lifecycle.
- Supporting advanced analytics.
- Clarifying underwriting calculations.
- Improving, simplifying, and standardizing policy design and pricing, which enables the creation of new products and accelerates development timelines.
- Enhancing policy servicing and administration.
- Supporting internal oversight and external regulation of companies.
- Creating a broader marketplace for reinsurance and inter-company transactions.
Implications for Consumer Protection and Supervision
Computable contracts could enhance consumer protection through simplification. Insurers and intermediaries would be able to provide insurance contracts or full-fledged solutions that make it easier for consumers to compare different products and coverage, helping them identify the most suitable options.
Consumers might finally understand their contract terms and implications. While some firms, including insurers,[5] are focusing more on contract simplifications, the average insurance contract remains too complex for most consumers (and sometimes even for experts with extensive insurance or legal backgrounds).
For supervisors—both conduct and prudential—computable contracts offer new opportunities. The pandemic highlighted the need to better understand exclusions (e.g., in travel insurance or business interruption insurance). War-related exclusions are similarly topical now. Computable contracts could facilitate such analyses. They might also help assess "silent cover" in cyber insurance, especially as new developments like Web3 and the Metaverse emerge. Stress testing could also be conducted more efficiently at the firm, Member State, or EU-wide level.
Moreover, computable contracts could support product changes by enabling better analysis of their impact on the entire portfolio, including consumer outcomes, or understanding the implications of legislative changes or updates to contractual terms.
Computable Contracts: Enablers of Open Insurance?
Open insurance includes a range of use cases, such as comparison tools or dashboards that allow consumers to compare new products with existing ones to make informed choices.
This requires product information (e.g., risks covered, exclusions, price, contract duration, provider details, distribution costs, and other personal insurance contract details) to be available in a standardized, machine-readable form.
The potential for standardization should not be underestimated, given the heterogeneity of contracts and national contract laws. Computable contracts could act as enablers for open insurance use cases by providing a degree of standardization while addressing the diversity of existing insurance contract frameworks.
Are Computable Contracts the Future of Insurance?
Overcoming complexity in insurance is…complex. It may require not just incremental changes but a complete rethinking of current approaches. Computable contracts, which are understandable by both humans and computers, could play a key role in this transformation (while considering potential risks).
They offer significant potential benefits for:
- Consumers: Simplicity and an improved user experience.
- The industry: Increased efficiency, interoperability, and better internal analysis.
- Supervisors: New analytical tools to better understand the impact of stress scenarios and mitigate consumer harm.
Do you see potential in computable contracts? Are there areas I haven’t explored that merit discussion? Would you recommend additional reading or perspectives?
[1] See more in Moutinho, Ana Teresa and Lehtmets, Andres (2023, January 1). Pan-European regimes: A pathway to mitigate lack of trust and complexity in insurance. In the Journal of Financial Compliance, Volume 6, Issue 2. https://doi.org/10.69554/CFGF9070
[2] 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
[3] See the definition in http://compk.stanford.edu/homepage/index.php
[4] https://www.linkedin.com/pulse/computable-contracts-financial-services-industry-vinay-k-chaudhri/
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