A new insurance world is coming where smart contracts replace insurance documents, blockchain “oracles” supplant claim adjusters, and decentralized au
A new insurance world is coming where smart contracts replace insurance documents, blockchain “oracles” supplant claim adjusters, and decentralized autonomous organizations (DAOs) take over traditional insurance carriers. Millions of poor farmers in Africa and Asia will be eligible for coverages like crop insurance too, whereas before, they were too poor and too dispersed to justify the cost of underwriting.
That is the vision, anyway, on display in the recent Smartcon 2022, a two-day conference that sought to provide “exclusive insights into the next generation of Web3 innovation.”
Subsistence farms, where families basically live off what they grow and almost nothing is left over, account for as much as two-thirds of the developing world’s three billion rural people, according to the United Nations. They almost never qualify for insurance coverage and most probably wouldn’t know what to do if it were offered.
“In sub-Saharan Africa, for example, where I grew up in Kenya, insurance is basically unavailable. 3% have access to it, but nobody buys it, basically,” Lemonade Foundation’s Roy Confino explained at the two-day New York City event.
The Lemonade Foundation, a nonprofit founded by United States insurer Lemonade, is behind the recent formation of the Lemonade Crypto Climate Coalition, a group that believes “blockchain has the potential to pool that risk together” and “basically solve the core problem that has inhibited the scale of insurance in the developing world for profit services and that is cost,” said Confino at Smartcon 2022. Founding members also include Hanover Re, Avalanche, Chainlink, DAOstack, Etherisc, Pula and Tomorrow.io.
Insurance is problematic in poor nations for many reasons. It can’t be easily distributed because there are hardly any local insurance agents or brokers, and historically insurance is “sold,” not “bought.” Also, insurance claims can’t be validated without great expense because, typically, there aren’t any claims adjusters on the scene to make damage assessments. This renders underwriting un-economic.
But, it need not necessarily remain that way. Parametric insurance models can potentially cut producer costs by automating many traditional insurance processes, making it profitable to underwrite those previously deemed uninsurable. Sometimes called “index insurance,” these models insure a policyholder against a specific event by paying a set amount based on an event’s magnitude rather than the losses incurred.
For example, if rain hasn’t fallen in a certain predetermined region in Kenya for three weeks, a blockchain “oracle” — it could be a local weather station — automatically sends a message to a smart contract that remotely triggers a payout to the policyholding farmer’s smartphone. It bypasses the claims adjustment process entirely. It doesn’t matter whether an individual farmer’s field is damaged. All policyholders in the area are paid.
Crop insurance is a good use case for parametric models because many of the forces that can damage crops can be objectively measured, such as rainfall, wind speeds, temperatures and others.
Self-executing smart contracts also ensure that payouts for weather disasters and the like are almost immediate, noted Sid Jha, founder and CEO at Arbol — a parametric insurance provider — and this is especially important in the developing world where many farmers live hand to mouth. “You don’t have customers waiting weeks, months who in many cases can go bankrupt waiting for an insurance check,” he said, speaking at a separate Smartcon 2022 session.
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Parametric insurance isn’t entirely new; it has been around for several decades. But, blockchain-enabled parametric insurance has just emerged in the last few years. Most, if not all, its use cases are still in the pilot stage. The Coalition, for instance, isn’t expecting to scale up its programs until next year.
Many believe that legacy insurance systems could stand some substantial improvement. “Traditional indemnity insurance has many disadvantages: it is slow, bureaucratic, constrained to home damages, and comes with significant uncertainty,” wrote Wharton School associate professor Susanna Berkouwer recently. She described a parametric hurricane insurance product that employs blockchain technology in the Commonwealth of Dominica. NASA-generated hurricane alerts touch off automated international bank transfers to policyholders’ bank accounts. Projects like these are worthy of further study in Berkouwer’s view.
Hindrances remain: Will farmers sign up?
Supplying the world’s subsistence farmers with affordable crop insurance and possibly other protections via chain-based parametric insurance faces some daunting obstacles, however. One is educating farmers in the complexities of insurance. There is really no way at present that this can be…
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