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Contract-based smart insurance holds promise, but can it be expanded?




The new world of insurance comes where smart contracts replace insurance documents, “Oracle” replace claims settlement tools, and Decentralized Autonomous Organizations (DAOs) Take over traditional insurance companies. Millions of poor farmers in Africa and Asia would be eligible for insurance coverage like crop insurance as well, when before they were too poor and too dispersed to justify the cost of underwriting.

That’s the vision, however, that was demonstrated at the recent Smartcon 2022, a two-day conference that sought to provide “exclusive insights into the next generation of Web3 innovations.”

subsistence farms, where families live mainly on what they farm and there is almost nothing left, the account for up to two-thirds of the developing world’s three billion rural population, according to the United Nations. They hardly qualify for insurance coverage and likely won’t know what to do if offered.


“In sub-Saharan Africa, for example, where I grew up in Kenya, there is basically no insurance available. Roy Confino of Lemonade explained at a two-day event in New York City, 3% have access to it, but no one is buying it, basically .

The Lemonade Foundation, a nonprofit founded by US insurer Lemonade, is behind the recent formation of the Lemonade Crypto Climate Coalition, a group that believes that “blockchain has the potential to pool these risks together” and “solve the underlying problem that has prevented the underlying problem that has prevented the creation of the new Lemonade Crypto Climate Coalition,” Confino said at Smartcon 2022. : “The volume of insurance in the developing world of profit services and that is the cost.” Other founding members include Hanover Re, Avalanche, Chainlink, DAOstack, Etherisc, Pula and

Insurance is a problem in poor countries for many reasons. It is not easily distributed because there are hardly any local insurance agents or brokers, and historically insurance is ‘sold’ rather than ‘purchased’. Also, insurance claims cannot be validated without significant expense because, normally, there are no claims investigators at the scene to conduct damage assessments. This makes underwriting uneconomical.

But, it doesn’t necessarily have to stay that way. Modular insurance models can lower product costs by automating many traditional insurance processes, making it profitable to insure those that were previously considered uninsurable. Sometimes called index insurance, these forms insure the policyholder against a specific event by paying a specified amount based on the size of the event rather than the losses incurred.

For example, if it hasn’t rained in a certain pre-determined area of ​​Kenya for three weeks, an “oracle” blockchain — possibly a local weather station — automatically sends a message to a smart contract that remotely triggers a payout to the farmer’s insurance smartphone. It bypasses the entire claims settlement process. It does not matter whether a farmer’s field is damaged. Payment is made to all policyholders in the region.


Crop insurance is a good use case for parametric models because many of the forces that can damage crops can be measured objectively, such as rainfall, wind speed, temperatures, and others.

Self-executing smart contracts also ensure that payments for weather and similar disasters are almost instantaneous, noted Syed Jha, founder and CEO of Arbol – a modular insurance provider – and this is especially important in the developing world where many farmers live side by side. “You don’t have customers waiting weeks, months can go bankrupt in many cases waiting for a security check,” he said, speaking at a separate session for Smartcon 2022.

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Standard insurance isn’t entirely new; It has been around for several decades. But, blockchain-enabled modular insurance has just appeared in the past few years. Most, if not all, cases of its use are still in the experimental stage. For example, the coalition does not expect to expand its programs until next year.

Many believe that legacy insurance systems could experience some substantial improvement. “Traditional indemnity insurance has many drawbacks: it is slow, bureaucratic, and constrained by home damages, and comes with a great deal of uncertainty,” Wrote Wharton Associate Professor Susanna Berkwer recently. She described a standard hurricane insurance product that uses blockchain technology in the Commonwealth of Dominica. NASA hurricane alerts stop automated international bank transfers to policyholders’ bank accounts. Such projects deserve further study in Berkwer’s view.


Barriers remain: Will farmers get involved?

However, providing the world’s subsistence farmers with affordable crop insurance and possibly other protections via standard chain-based insurance faces some formidable hurdles. The first is to teach farmers the intricacies of insurance. There is no way at the moment that this can be easily done by technology or automation alone.

Tinka Koster and her colleagues at Wageningen University in the Netherlands, for example, recently accomplishment A review of the participation of the World Bank Group’s Global Indicator Insurance Facility (GIIF) in Kenya. In order to increase index-based insurance take-up rates among African subsistence farmers, the GIIF and others need to promote “awareness, knowledge and understanding by farmers about insurance,” Koster said.

“Access to the last mile is a major challenge for many services for smallholder farmers, including index insurance,” Koster told Cointelegraph in email responses coordinated with teammates Marcel van Asseldonk, Kaur Watel and Haki Pamuk. “Technology can help fill part of this gap, but technology alone is not enough.”

“Sales and product understanding are often huge costs in remote and hard-to-reach places,” Lee Johnson, assistant professor in the University of Oregon’s department of geography, told Cointelegraph. “Renewal rates are very poor.”

“Many farmers need to see that insurance is a tool for managing risk and not gambling on a particular outcome,” said Jha, who agreed that educating farmers about the need for risk management tools like insurance is critical. As Jha told Cointelegraph:


“When farmers have access to some type of subsidized insurance provided by the government or an NGO, they become more familiar with and comfortable with the concept, and this educational process becomes easier in terms of providing specialized coverage products that meet the unique requirements and needs of farmers.”

In GIIF’s Bima Pima product for Kenyan farmers, the World Bank Group program used Village Advisors (VBAs) to help distribute the insurance product – replacing traditional insurance agents. VBAs are paid monthly for their efforts. according to According to Wageningen’s report, these consultants were “happy with the SMS and direct premium payments. But they are finding it difficult to convince farmers who are unsure about the insurance payments because the product is so new.”

Does Standard Insurance Need DLT?

If modular insurance is going to work in emerging markets, does it even need blockchain technology? For example, the World Bank Group’s GIIF Standard Insurance projects in Africa did not use blockchain technology. What exactly does index insurance lose if it does not use a decentralized digital ledger?

“Blockchain is just a tool,” Jha told Cointelegraph, and one can use many tools to get the same result. However, the stability and auditability of the digital ledger can build credibility for the software:

“What DLT does offer is trust in areas that generally tend to lack trust, allowing perhaps a more efficient micropayment system than currently exists in some of these countries in terms of disbursement and collection.”

On the other hand, Johnson “comes squarely into the ‘no smart contracts’ camp, precisely because parametric contracts go a lot worse, and there is an important case for retroactively correcting them” in the interest of fairness.

In a 2021 article, Johnson pointed Environmental assessments made by standard market devices used to commodify risk are “often wrong, sometimes blatantly”. In the first season of Ethiopia’s R4 programme, Johnson wrote, “one of the world’s most popular programs insures smallholder farmers against weather hazards using parametric indicators.” as a gift “Voluntary donation” to teff growers “after the scarcity of rains did not lead to the start of the decade.” These transfers later became “fairly routine”.


“I am not sure how much information farmers will need to return smart contracts/blockchain at the time of registration, but one can imagine that they are very skeptical of unknown financial technologies and companies,” Johnson told Cointelegraph.

Koster added that if blockchain technology can increase farmers’ awareness and knowledge about insurance, “it will also help raise the level of the index.” [parametric] Insurance in the African context”.

However, all this may take some time. Jha was asked how long it might be before agricultural insurance could achieve widespread use among subsistence farmers in the developing world in places like Southeast Asia or Africa – two years? five years? Decade?

“Maybe ten years,” Jha told Cointelegraph, citing education challenges, cost and lack of data, that is, “everything from a lack of weather stations, crop production history, and a lack of data on agricultural practices.”

Many farmers need to see that insurance is a viable risk management tool, and this is where self-executing smart contracts can provide a powerful example. If farmers see their neighbors being compensated immediately during a severe weather event, they may consider purchasing an indicator policy themselves.


Government subsidies can help. “There is a lot of work needed in terms of making insurance affordable so that disadvantaged stakeholders who need these tools can access them,” Jha said, while Johnson added, “I think the best progress will come from the state’s wider adoption of safety net programs that use Modular solutions – this is how you get broad coverage.”

In terms of expansion, the World Bank’s GIIF has already made some progress. “The milestone of one million insured farmers has already been reached in Zambia, with index insurance integrated with the subsidized fertilizer program,” Koster said, while in Senegal, GIIF is currently reaching half a million farmers, with a similar number in Kenya with a government-supported program.

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“This shows that it is possible to reach large numbers of smallholder farmers, but not without significant government support,” Koster told Cointelegraph.

In short, while modular insurance models have enabled underwriters to pool risk, making it profitable to secure once-uninsurable blockchain-enabled smart contracts ensure cash-strapped farmers receive payments during disasters almost immediately There is still much work to be done in persuading the financially inexperienced and often distrustful farmers to sign up for such programmes. Technology alone won’t do the trick, and state entities may need to get involved.