Smart Contrast-enabled Insurance Promise Many New Opportunities

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Blockchain technology can be used in a variety of fields, including insurance, making insurance available to a wide range of users from around the world who previously had no access to banking or insurance services.

With the advent and development of blockchain comes a new insurance world in which smart contracts replace insurance documents, blockchain "oracles" displace claims adjusters, and decentralized autonomous organizations (DAOs) take the place of traditional insurance organizations.

Millions of poor people in Africa and Asia will have access to insurance, such as crop, property or life insurance, previously unavailable to them because the poverty levels in those regions were too high to justify the cost of insurance.

According to the United Nations report, farms, where families live off what they grow and have no spare cash for other necessities and products, account for up to two-thirds of the three billion rural people in the developing world. 

These farmers never qualify for insurance coverage and have no experience with insurance companies because they are not interested in them.

In sub-Saharan Africa, insurance is virtually unavailable. 3% of the agricultural population there has access to insurance, but essentially no one buys it.

How insurance works on blockchain

Insurance is problematic in poor countries for many reasons. It is not easy to distribute it because there are no local insurance agents or brokers. 

Insurance claims cannot be validated without great expense because there are no claims adjusters at remote accident locations who can assess the damage. 

All of this makes insurance uneconomic and even unprofitable for insurance companies.

However, there are ways to change this insurance model. Parametric insurance models can reduce producer costs by automating many traditional insurance processes. 

This will make it profitable to insure places and objects that were previously considered uninsurable.  And it will substantially reduce insurance costs.

For example, if a certain insured region has not had rain for three weeks, a blockchain "oracle" such as a local weather station automatically sends a message to a smart contract, which remotely triggers a payment to the insured farmer's smartphone. 

This significantly reduces the cost of maintaining the insurance policy and completely bypasses the claims adjustment process. It doesn't matter if an individual farmer's field is damaged. All policyholders in the area get paid.

Crop insurance is a good option to use parametric models because the natural forces that can damage crops can be objectively measured, such as rainfall, wind speed, temperature and others.

Self-executing smart contracts ensure that payments for weather-related disasters are almost immediate. 

This is especially important in developing countries, where many farmers live in poverty. Thanks to blockchain, there will be no customers waiting weeks, months, who in many cases may go bankrupt during that time waiting for insurance coverage.

There is already a parametric hurricane insurance product that uses blockchain technology in the Commonwealth of Dominica. NASA-generated hurricane alerts trigger automatic international bank transfers to policyholders' bank accounts.

While traditional indemnity insurance still has many drawbacks: it is slow, bureaucratic, limited to damage to the home and involves considerable uncertainty.

Problems of insurance on the blockchain

However, parametric insurance on blockchain faces serious obstacles in practice. One is educating farmers about the complexities of insurance. Currently, there is no way in which this can be done through technology or automation alone.

Selling and understanding the product requires a huge expenditure in remote and hard-to-reach places.

The use of blockchain technology in insurance provides trust in areas that typically lack trust. It allows for perhaps a more efficient micropayment system than what currently exists in some of these countries in terms of payout and fundraising.

At the same time, keep in mind that blockchain is a new technology that has its own vulnerabilities, just as mistakes in writing smart contracts are possible.

Environmental assessments made with parametric market devices used to commoditize risk are often wrong, sometimes to a significant degree.

In addition to the problems of education and the novelty of the technology, it is worth noting the high cost and lack of data, starting with the lack of weather stations, yield history, and lack of data on farming practices.

Many farmers need to understand that insurance is a viable risk management tool. This is where self-executing smart contracts can be a prime example. 

If farmers see that their neighbors receive immediate compensation during extreme weather events, they will want to buy such a policy themselves.


Parametric insurance models allow insurance companies to combine risks, making it profitable to insure previously uninsurable items. 

Blockchain-enabled smart contracts can ensure that cash-strapped farmers receive payouts during disasters almost immediately. 

Despite the convenience and benefits of blockchain-based parametric insurance, much work remains to be done to convince financially unsophisticated and often distrustful farmers to use such programs.

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