How Blockchain Can Transform the Insurance Industry

blockchain and insurance

According to AdvisorSmith, more over 30% of small businesses were uninsured in 2020, despite the fact that 75% of business owners reported having encountered an insurable occurrence during that year. There are several reasons for this, one of which is that small firms often have difficulty navigating the traditional insurance market, which can result in lengthy and costly claims processes, and that’s assuming they can even obtain insurance in the first place. Niche businesses may have difficulty finding insurance packages that meet their demands (and their budgets), while some of the smallest and most vulnerable (such as independent farmers) may be unable to obtain any insurance coverage at all.

Parametric insurance, which pays out based on predetermined events rather than through a claims adjustment procedure, can assist fill in some of the gaps left by traditional insurance policies. But even with the use of a standard parametric insurance contract, carriers must go extensively into very particular and potentially unfamiliar markets while employing humans to monitor for the qualifying event, verify that it has occurred, and sanction the payout. Traditionally, these expenses have been passed on to policyholders, but recent advancements in blockchain technology are making insurance from specialist providers more affordable, faster, and more readily available to consumers.

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When it comes to smart contracts, which are digital agreements on blockchains that have conditions connected to their implementation, the logic of parametric insurance is straightforward to transfer (if X occurs, execute action Y). It is via the use of Oracle networks such as Chainlink that information from outside the blockchain may be obtained to validate that the conditions for payment have been completed and that the insurance company is obligated to compensate the claimant. Claims are then paid out automatically in accordance with the logic set by the smart contract. Parametric insurance is becoming more accessible to small businesses thanks to the use of blockchains, smart contracts, and oracle networks in conjunction with one another. Specialized providers can lower operating costs while also obtaining the assurance they require in order to underwrite policies with automatic payouts. Blockchains also provide accountability by maintaining an immutable record of transactions; smart contracts increase efficiency by automating contracts; and oracle networks, which connect blockchains to real-world data, validate that an event did, in fact, occur and that the automated payment cannot be manipulated.

Participants can avoid the claims procedure and obtain payments more quickly when smart contracts are used to provide insurance since providers are aware that claims are paid out based on predetermined, verifiable, and objective parameters. Below is a list of four blockchain-based parametric insurance solutions that small businesses can utilize to increase their operational security while reducing risk.

Crop insurance

According to Arbol, a supplier of parametric crop insurance, $1 trillion in agricultural risk remains uninsured, with the majority of it occurring in poor countries, where many farmers do not have access to any form of insurance. Weather coverage may be difficult to obtain for smaller organizations or those that operate in extremely changeable weather circumstances. Climate change may intensify the demand for this type of coverage as weather patterns become less predictable and extreme weather events become more frequent.

Farmer’s economic protection can be enhanced by using parametric crop insurance, independent of the options available in their home country. These goods are already available, with markets such as Arbol making crop insurance accessible to anybody who owns a smartphone. Weather data from the National Oceanic and Atmospheric Administration is used by Arbol to develop parametric insurance policies, which are then sold to customers. The oracle network could, for example, give a compensation to a farmer if data from the network indicated that their region had received less than 20 inches of rain over the course of two months.

Farmers who have access to this insurance coverage are less likely to be forced to uproot their families and abandon their crops in the event of unfavorable weather conditions. They can also be comfortable that aid will be given fast since providers are confident that the procedure is responsible, transparent, and fraud-proof because all activity takes place on-chain and payouts are determined by external conditions that have been validated.

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Flight and travel delay coverage

Anyone who has ever traveled knows the feeling of gradual dread that comes with the knowledge that a flight will not depart on schedule. Although airlines will reimburse passengers for cancellations, delays may force passengers to miss crucial events or connecting flights, leaving them with little choice except to purchase new and expensive last-minute tickets. Insurance technology startups (insurtechs) are emerging to satisfy these demands, and blockchain technology providers such as Etherisc will aid in the advancement of this field even further.

Because of parametric flight insurance, business owners can rest assured that a $1,000 investment in airfare to attend a vital meeting will not balloon in the midst of a last-minute scramble for alternative travel arrangements. When the decision to cancel is reached or it becomes evident that the flight will not depart on time, parametric insurance would automatically pay out policyholders, allowing a company representative to immediately repurpose the funds to purchase a replacement ticket. When linked to the correct incoming flight data, parametric insurance gives passengers greater time and flexibility to make alternate travel arrangements, which is important because airlines are typically reluctant to notify passengers of anticipated imminent flight delays.

Logistics and supply chain insurance

Businesses are frequently uninsured for disasters that have a very low probability of occurring but have the potential to be catastrophic nonetheless. For example, prior to the Covid-19 pandemic, only a small number of firms had obtained (or had the option of obtaining) pandemic insurance, resulting in a sudden rise in demand at the last possible moment. Insuring against highly variable and infrequent events, such as pandemics and harsh weather, is possible with parametric insurance. Supply chain companies can also purchase coverage to mitigate any potential quality control issues, such as losses from shipment quality issues, which are particularly prevalent in the perishable goods industry, by utilizing oracle networks to connect Internet-of-things (IoT) sensor data to blockchains.

One of the advantages of parametric insurance is the opportunity to create contracts that are specific to your needs. For example, a supply chain organization with operations that are susceptible to winter storms may decide to get insurance to protect themselves from disruptions. Even though it is not always evident when or to what degree an ice storm will cause delays, a parametric insurance policy can use NOAA data to determine the amount of ice buildup in a region and compensate the policyholder as a result of the data. Whether the storm causes a delay of a few hours or several days, the provider is protected.

The use of oracles to connect IoT device data to blockchains can help increase the quality of shipment data. Sensors in refrigeration units could provide information to a parametric insurance policy that pays out if temperature fluctuations endanger the safety of the product. The payouts would be triggered by Oracles connected to sensors (such as PingNET, which wants to use Chainlink to automate supply chain payments) and would be triggered by the sensors themselves. Payouts are much faster with these contracts (typically, quality tests are required for claims processes for spoiled goods), and there’s also the added benefit of knowing that if a shipment arrives, it will be in good condition, as any safety issues would be recorded on-chain prior to delivery with these contracts.

Live events coverage

Events such as concerts and sports are particularly vulnerable to severe weather (as well as, it turns out, rare and catastrophic events like pandemics). Parametric insurance can be beneficial in these situations because unique events in these fields are unlikely to be covered by regular brokers. Using it, event organizers may absorb cancellation losses, allowing them to manage risk and level out the impact of canceled days. If an event is cancelled and all guests are refunded, or if the event must be rescheduled, it would provide protection for the event organizers and attendees alike (which creates additional logistical challenges). Additionally, parametric insurance might be beneficial when event attendance is simply suppressed (for example, when snowy weather lead 20 percent of attendees to avoid an event because they don’t want to drive in the snow). This type of contract can provide flexibility, which allows event organizers to acquire the exact quantity of coverage that they require. A recent Wall Street Journal article with Mark Cuban, an investor in the blockchain-based climate data project dClimate, noted that the Dallas Mavericks, of whom he is the owner, might benefit from this form of weather insurance.

Traditional insurance contracts are more expensive, take longer to process, are less transparent, and are less flexible than parametric insurance contracts. Small businesses can obtain the exact coverage they require without having to deal with lengthy claims processes that delay access to assistance and assistance. Blockchain-enabled insurance coverage has the potential to completely transform the insurance industry by minimizing risk exposure, freeing up vital resources, and ensuring unparalleled operational stability and reliability.