SEP 22, 2023
BLOCKCHAIN WILL BRING BACK THE “TRUST” IN INSURANCE INDUSTRY
OCT 18, 2022
Blockchain “oracles” will replace claim adjusters, insurance documentation will be replaced by smart contracts, and traditional insurance companies will be replaced by decentralized autonomous organizations (DAOs). Millions of struggling farmers in Asia and Africa will be able to purchase coverages like crop insurance when in the past they were too numerous and impoverished to warrant the expense of underwriting. In any case, that was the vision presented at the recent Smartcon 2022 conference, a two-day event that aimed to offer “unique insights into the future wave of Web3 innovation.”
The Lemonade Crypto Climate Coalition was recently established by the Lemonade Foundation, a nonprofit organization established by American insurer Lemonade. According to Confino at Smartcon 2022, the coalition believes that blockchain technology “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, which is cost.” Hanover Re, Avalanche, Chainlink, DAOstack, Etherisc, Pula, and Tomorrow.io are additional founding members. “Insurance is essentially nonexistent in sub-Saharan Africa, for instance in Kenya, where I was raised. At the two-day event in New York City, Roy Confino of the Lemonade Foundation said, “3% have access to it, but nobody buys it, practically.
According to the United Nations, up to two-thirds of the three billion rural people in developing countries live on subsistence farms, where families essentially survive off what they raise and have very little left over. They hardly ever meet the requirements for insurance coverage, and if they did, they probably wouldn’t know what to do with it. Poor countries struggle with insurance for a variety of reasons. Since there aren’t many local insurance brokers or agents, and historically, insurance is “sold” rather than “bought,” it’s difficult to distribute. Additionally, because there are often no claims adjusters to examine the extent of the damage, insurance claims cannot be verified without incurring significant costs. This makes underwriting unprofitable. But it doesn’t have to stay that way forever. By automating many conventional insurance processes, parametric insurance models have the potential to reduce producer costs, making it economical to underwrite persons who were previously judged uninsurable. These approaches, often known as “index insurance,” protect a policyholder from a particular catastrophe by setting a predetermined payment based on the size of the event rather than the losses sustained.
For instance, a blockchain “oracle” (which might be a local weather station) would automatically transmit a message to a smart contract that would then remotely trigger a payout to the policyholder farmer’s smartphone if it hadn’t rained in a specific designated region of Kenya for three weeks. It completely evades the claims adjudication procedure. Whether a specific farmer’s field is harmed is irrelevant. All local policyholders are compensated. Because many of the forces that can harm crops can be objectively quantified, such as rainfall, wind speeds, temperatures, and others, crop insurance is an excellent application for parametric models.
The concept of parametric insurance isn’t brand-new; it’s been around for a while. However, blockchain-enabled parametric insurance has only recently begun to take off. Its use cases are still primarily, if not entirely, in the pilot stage. For instance, the Coalition does not anticipate expanding its initiatives until the next year. Does blockchain technology even matter if parametric insurance is going to work in emerging markets? For instance, blockchain technology was not used in the GIIF parametric insurance programs of the World Bank Group in Africa. If index insurance doesn’t use a decentralized digital ledger, what exactly does it lose? Blockchain technology could assist in further scaling up index parametric insurance in the African context if it could increase farmers’ awareness and knowledge of insurance.
Self-executing smart contracts could offer a useful illustration of how insurance is a practical instrument for risk management for many farmers. Government grants might be beneficial. In conclusion, while blockchain-enabled smart contracts can ensure that cash-strapped farmers received payouts during disasters almost immediately, and parametric insurance models might enable insurance underwriters to pool risks, making it profitable to insure the previously uninsurable, much work still needs to be done to persuade farmers to sign up for such programs. State agencies might need to get involved because technology alone won’t solve the problem.