Insurance is a financial tool that is widely used and frequently taken for granted in the developed world, but it is important to remember that a significant proportion of the world’s population still lacks access to the protection provided by basic insurance products.
Low-income consumers account for approximately US$4.7 billion — or 60% of the global population — and only one in every five of this group has some form of insurance. Meanwhile, insurance penetration in Latin America, the Caribbean, Asia, Oceania, and Africa is currently at a pitiful 7%. Similarly, up to 90% of agricultural losses are not insured, resulting in severe consequences for farmers and their families. Furthermore, nearly two-thirds of the US$268 billion in economic losses caused by natural disasters in 2020 were uninsured.
These figures appear even more bleak when you consider that demand for insurance has never been higher than in the last 18 months, thanks to the Covid-19 pandemic and recent climate change-related natural disasters. It appears that the people who need insurance the most are having the most difficulty accessing its benefits. The implementation of a democratic insurance model, on the other hand, would go a long way toward correcting this imbalance.
Now, new blockchain-based technologies are opening up previously unseen doors to the global insurance industry’s democratization. The use of decentralized autonomous organizations (DAOs) and decentralized oracle networks (DONs) in conjunction with parametric insurance could provide a novel solution to a growing problem and help propel the industry into the Web 3.0 economy.
Microinsurance and metric insurance
Parametric insurance products, which provide automated payouts based on statistical models that evaluate data from validated sources, could be a significant first step toward increasing risk protection among the uninsured. Unlike traditional insurance, parametric insurance does not require a claims assessor to quantify damage and approve claims, which significantly reduces operational costs for the insurer. Instead, the process is much more objective and automated, with payouts triggered when a clearly defined event occurs.
Insurtech innovators have recently begun to use smart contracts to mimic the way parametric insurance works. These contracts operate on a blockchain in a fully decentralized manner, with all transaction details visible to all parties involved while remaining immune to manipulation or tampering. Smart contracts will not be executed until the insurable event has been verified, allowing you to reap the many benefits of blockchain technology.
With its ultra-low premiums, microinsurance provides a vital lifeline to millions of people from India to Nigeria, Bolivia to Kenya. It can be viewed as an extension of microfinance, serving as an inclusive alternative to traditional insurance. This solution explicitly addresses a significant portion of society that has traditionally lacked access to insurance and consists of low-income households with low-value assets.
A fresh perspective
Blockchains containing cryptocurrencies, utility tokens, non-fungible tokens (NFTs), DAOs, DONs, and other novel new instruments are no longer just about technology. They are a market in their own right, and are frequently referred to as decentralized finance (DeFi). As a result, for large, traditional insurance companies, the question is no longer whether they want to adopt this technology, but rather whether they want to participate in this market, which is ripe with opportunity.
DONs are a group of self-contained blockchain oracles that provide data to a blockchain. They effectively eliminate any single point of failure in a smart contract by utilizing multiple data inputs, thereby assisting in the establishment of end-to-end reliability and enabling the viability of high-value smart contracts in low-trust environments.
DONs and oracles will play a significant role in providing the high-quality certified and secure data required for on-chain transactions to insurance smart contracts. Naturally, the more data that the insurance smart contract has access to, the more refined the policies can become. Of course, this benefits the industry as a whole and allows for more specific regulations across jurisdictions. Meanwhile, regulators will begin to recognize the technical certainty provided by smart contracts on the blockchain, as well as the benefits they can bring to a regulated industry.
More high-quality data sets are becoming available to confirm insured events as the internet of things (IoT) advances and an increasing number of connected devices and sensors are used to feed data to oracles. This enables the efficient production of more accurate policies, which frequently results in significant price reductions for the consumer.
Smart contracts can now interact directly with standard application programming interfaces (API) and IoT infrastructure thanks to blockchain oracles. This enables the input of data from outside the blockchain and the unmanned execution of parametric insurance smart contracts, all while reducing concerns about data exploitation.
In many countries around the world, blockchain networks and oracles are already forming the backbone for parametric insurance products. These contracts are activated using weather data from the National Oceanic and Atmospheric Administration delivered by Oracle (NOAA). This technology can also be used to provide automated flight delay insurance, hurricane protection, natural disaster protection, and crypto wallet insurance, among other things.
DAOs can also aid in the formation of cross-country communities centered on insurance policies, allowing for the decentralized exchange of ideas, advice, and new developments. DAOs, in conjunction with many emerging staking concepts, are very likely to become a valuable tool in the insurance sector for organizing the sharing of risks amongst a number of actors.
Investors could, for example, invest in a risk pool that provides the capital required to cover specific risks, potentially opening up entirely new sources of capital to protect the underinsured. DAOs have made rapid advances in modern society in recent years and could easily contribute to the rapid evolution of multiple industries.
The concept of DAOs may force us to reconsider the very foundations of traditional company law, which will have an impact on the insurance industry. However, achieving these outcomes will necessitate collaboration from both governments and regulators. While organizations and businesses require compliance guidelines to prevent illegal activity, regulators must also embrace innovative governance models. Individuals and businesses would be encouraged to create innovative products that provide viable solutions to real-world problems. These technologies would also aid in addressing certain flaws in centralized systems, such as a lack of transparency and a misalignment of interests, among other things.
Considering the Future
Gartner estimates that the blockchain industry will generate US$3.1 trillion in new business value by 2030, and Accenture estimates that blockchain in the insurance market will grow from US$64.5 million in 2018 to US$1.39 billion by 2023. Similarly, blockchain technology would allow property and casualty (P&C) insurers to process claims faster and accelerate payouts through the use of automated smart contracts, saving them more than $200 billion per year.
Given the undeniable need to include billions of people in a democratic insurance model, especially in light of the devastating effects of climate change on a global scale, it is up to governments and insurers alike to embrace these new technologies and transition to a decentralized insurance paradigm. DAOs and DONs could be the missing link in the Web 3.0 puzzle, propelling the insurance industry to new and inclusive heights.