How Blockchain Can Transform Insurance Sector
According to AdvisorSmith, more than 30% of small businesses were uninsured in 2020, despite the fact that 75% of business owners said they had encountered an insurable occurrence that year. One of the main reasons for this is that small businesses often find it difficult to navigate the traditional market, which can result in long and expensive claims processes, even if they are able to obtain insurance in the first place. Niche businesses may have difficulty finding packages that meet their demands (and budgets), while some of the smallest and most vulnerable (such as independent farmers) may be without any coverage at all.
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Some of these gaps can be filled by parametric insurance, which pays out based on predetermined events rather than through a claims adjustment procedure. A traditional parametric insurance contract, on the other hand, still incurs significant costs for providers because they must delve deeply into highly specific and potentially unfamiliar markets while hiring individuals to monitor for the qualifying event, verify that it occurred, and authorize the payout. Traditionally, these expenses have been passed on to policyholders, but advances in blockchain technology are making specialty insurance cheaper, faster, and more accessible.
Smart contracts, which are digital agreements on blockchains with constraints connected to their implementation, readily transfer the logic of parametric insurance (if X occurs, execute action Y). Outside the blockchain, Oracle networks like Chainlink give the essential information to confirm that payment conditions have been completed and that the insurance company should pay out the claim. Claims are then paid automatically according to the preset logic of the smart contract. Because specialized providers can cut operating costs and acquire the certainty they need to underwrite policies with automated payouts, the combination of blockchains, smart contracts, and oracle networks makes parametric insurance more accessible to small enterprises.
Smart contracts improve efficiency by automating contracts, and oracle networks, which connect blockchains to real-world data, validate that an event did indeed occur and that the automated payment cannot be manipulated. Blockchains also keep an immutable record of transactions, providing accountability; smart contracts improve efficiency by automating contracts; and oracle networks, which connect blockchains to real-world data, validate that an event did indeed occur and that the automated payment cannot be manipulated.
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Because providers know that claims are paid out based on predetermined, verifiable, and objective parameters, using smart contracts to provide insurance allows participants to circumvent the claims procedure and obtain payments more rapidly. Small firms can use four blockchain-based parametric insurance products to increase operational security and reduce risk.
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1. Crop insurance
According to Arbol, a parametric crop insurance provider, $1 trillion in agricultural risk remains uninsured, with the majority of it concentrated in underdeveloped countries, where many farmers lack access to insurance at all. Smaller businesses and those operating in highly changeable weather circumstances may find it difficult to get the coverage they want, and climate change may intensify the need for this coverage as weather patterns become less predictable and catastrophic weather events become more common.
Regardless of the possibilities available in their home nations, metric crop insurance can help farmers secure economic protection. These goods are already accessible, with markets like Arbol allowing anyone with a smartphone to purchase crop insurance. The National Oceanic and Atmospheric Administration’s weather data is used by Arbol to construct parametric insurance policies. For example, if data from the oracle network revealed that their location had less than 20 inches of rain over a two-month period, a farmer may be compensated.
Farmers that have access to this coverage avoid having to uproot their families and abandon farmland due to poor weather conditions. They can also feel assured that aid will be sent fast, since providers can be confident that the process is responsible, transparent, and fraud-proof because all activity takes place on-chain, and rewards are based on verifiable external circumstances.
2. Flight and travel delay coverage
Anyone who has traveled knows the feeling of dread that comes with learning that a flight may be delayed. Although airlines will reimburse passengers for cancellations, delays may lead passengers to miss crucial events or connecting flights, leaving them with little choice except to purchase new, expensive last-minute tickets. Insurtechs (insurance-related new technologies) are emerging to satisfy these demands, and providers utilizing blockchain technology, such as Etherisc, will help the space advance even further.
Business owners may rest assured that a $1,000 investment in flights to attend a vital conference will not balloon due to a last-minute scramble for replacement tickets with parametric flight insurance. Once the decision to cancel is made or it becomes evident that the flight will not depart on time, Parametric insurance would instantly pay out policyholders, allowing a company representative to quickly repurpose the cash to purchase a replacement ticket. Parametric insurance, when coupled to the correct incoming flight data, gives passengers additional time and freedom to make other travel plans, as airlines frequently fail to notify passengers of anticipated forthcoming delays.
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3. Logistics and supply chain insurance
Businesses are frequently uninsured for occurrences with a very low chance but the potential to be disastrous. Prior to the Covid-19 pandemic, for example, very few firms had obtained (or had the option of obtaining) pandemic insurance, resulting in a rush in demand at the last minute. From pandemics to extreme weather, parametric insurance can cover extremely unpredictable and unusual catastrophes. Additionally, supply chain organizations can acquire coverage to reduce any potential quality control difficulties, such as losses from shipment quality issues, particularly for perishable items, by leveraging oracle networks to connect Internet-of-things (IoT) sensor data to blockchains.
The flexibility to modify contracts is one of the advantages of parametric insurance. A supply chain organization with operations that are susceptible to winter storms, for example, might purchase a coverage to safeguard against disruptions. For example, it may not be known when or to what degree an ice storm will cause delays, but a parametric insurance policy can use NOAA data on ice accumulation in a location to compensate the policyholder. The provider is protected whether the storm delays delivery by hours or days.
The use of oracles to connect IoT device data to blockchains can also improve shipping quality data. Refrigerated unit sensors could be used to inform a parametric insurance policy that pays out if product safety is jeopardized by temperature changes. The payouts would be triggered by Oracles connected to sensors (like PingNET, which wants to use Chainlink to automate supply chain payments). Payouts are much faster with these contracts (quality tests are normally necessary for ruined goods claims processes), and there’s also the added benefit of knowing that if a cargo arrives, it will be in good shape, as safety issues will be logged on-chain prior to delivery.
4. Live events coverage
Concerts and sporting events are particularly vulnerable to bad weather (as well as, it turns out, rare and catastrophic events like pandemics). Because specialty events in these areas are unlikely to find coverage through typical brokers, metric insurance can help. It can be used by event organizers to absorb cancellation losses, reducing risk and smoothing out the impact of canceled dates. It would also safeguard event organizers in the event of event cancellations that necessitate refunding all attendees or rescheduling (which creates additional logistical challenges).
If event attendance is merely suppressed (for example, if snowy weather force 20% of attendees to avoid an event because they don’t want to drive), parametric insurance can help. Variability can be included in the coverage contract, allowing event planners to get exactly what they need. In a recent Wall Street Journal interview, Mark Cuban, an investor in the blockchain-based climate data project dClimate, stated that the Dallas Mavericks (of which he is the owner) could benefit from this form of weather insurance.
Traditional insurance contracts are more expensive, slower, less transparent, and less flexible than parametric insurance. Small businesses can get the exact coverage they need without having to deal with time-consuming claims processes. Blockchain-enabled insurance coverage has the potential to transform the insurance industry by reducing risk, freeing up vital resources, and ensuring unparalleled operational stability.