Claims adjusters will be replaced by blockchain “oracles,” insurance documents by smart contracts, and traditional insurance corporations by decentralized autonomous entities (DAOs). Previously they were too numerous and poor to justify the cost of underwriting, but now millions of struggling farmers in Asia and Africa will be able to obtain coverages like crop insurance. The recent Smart con 2022 conference, a two-day gathering that promised to provide “unique insights into the next wave of Web3 innovation,” offered that vision as its goal.
The Lemonade Foundation, a nonprofit organization founded by American insurer Lemonade, recently launched the Lemonade Crypto Climate Coalition. The alliance is of the opinion that blockchain technology “has the ability to pool that risk together” and “essentially solve the underlying challenge that has limited the expansion of insurance in the developing world for profit services, which is cost,” according to Confino at Smart con 2022. Additional founding members include Hanover Re, Avalanche, Chainlink, DAOstack, Etherisc, Pula, and Tomorrow.io. “In sub-Saharan Africa, such as Kenya, where I was reared, insurance is basically nonexistent. “3% have access to it, but nobody really buys it,” said Roy Confino of the Lemonade Foundation at the two-day event in New York City.
Up to two-thirds of the three billion rural residents in developing nations live on subsistence farms, where families primarily rely on the food they produce and have a very little extra. Even if they did, they probably wouldn’t know what to do with the insurance as they seldom ever match the standards for it. For a variety of reasons, insurance is difficult in developing nations. It is challenging to distribute insurance since there aren’t many local brokers or agents, and historically, insurance has been “sold” rather than “purchased.”
Additionally, insurance claims cannot be validated without incurring large fees since there are sometimes no claims adjusters to evaluate the severity of the damage. As a result, underwriting is not lucrative. But that state need not persist indefinitely. Parametric insurance models offer the ability to lower producer costs by automating many common insurance activities, making it feasible to insure people who were previously deemed uninsurable. These strategies, which are sometimes referred to as “index insurance,” shield a policyholder from a specific disaster by establishing a fixed payout based on the magnitude of the occurrence rather than the damages incurred.
For instance, if it hadn’t rained in a certain defined region of Kenya for three weeks, a blockchain “oracle” (which might be a local weather station) would automatically send a message to a smart contract that would then remotely trigger a payout to the policyholder farmer’s smartphone. The claims adjudication process is entirely avoided. It doesn’t matter if a certain farmer’s field is damaged. Every local policyholder receives payment. Crop insurance is a great application for parametric models since many of the factors that might affect crops can be objectively measured, such as rainfall, wind speeds, temperatures, and others.
The idea of parametric insurance is not a recent invention; it has existed for some time. But blockchain-based parametric insurance has only lately started to gain traction. Most of its use cases, if not all of them, are still in the pilot stage. For example, the Coalition does not plan to increase its activities until the next year. Does blockchain technology even important for the success of parametric insurance in developing markets? For instance, the GIIF parametric insurance plans of the World Bank Group in Africa did not employ blockchain technology. What specifically does index insurance lose if it doesn’t employ a decentralized digital ledger? If blockchain technology could raise farmers’ awareness and insurance expertise, it may help scale up index parametric insurance in Africa.
Self-executing smart contracts may be able to provide an insightful example of how insurance is a valuable tool for risk management for many farmers. Grants from the government could be useful. Conclusion: While parametric insurance models may allow insurance underwriters to pool risks, making it profitable to insure the previously uninsurable, and blockchain-enabled smart contracts may ensure that cash-strapped farmers received payouts during disasters almost immediately, much work still needs to be done to convince farmers to sign up for such programs. Since technology won’t be able to fix the issue on its own, state authorities may need to become involved.
