According to AdvisorSmith research, more than 30% of small businesses have not purchased insurance in 2020, and 75% of business owners said that they encountered emergencies that required insurance claims during the year. One of the key reasons is that the traditional insurance market has a high barrier to entry for small businesses, because they often face lengthy and complicated claims settlement processes, and even have no channels to purchase insurance. It takes a lot of effort for small businesses to find an insurance product that suits their needs and budget, and vulnerable groups such as farmers cannot even buy any insurance.

Parametric insurance triggers payment by predefined events, and customers do not need to go through a lengthy claims process, so the above problems can be solved to a certain extent. However, traditional parametric insurance contracts are very costly for insurance companies. They must go deep into various unfamiliar market segments and hire people to monitor unquantifiable events, verify whether the event actually happened, and finally approve the payment. Often, these costs are passed on to the end customer. However, blockchain technology could make insurance products cheaper, faster, and more accessible for market segments.

The logic of parametric insurance is fully compatible with smart contracts. Smart contracts are digital agreements on the blockchain that can be executed based on predefined conditions, such as: if event X occurs, then result Y is executed. An oracle network like Chainlink can feed the blockchain into the external data needed to determine if payment conditions are met and trigger an insurance company to settle a claim. Insurance will automatically pay compensation according to the logic predefined in the smart contract. The combination of blockchain, smart contracts and oracle network will better provide parametric insurance for small businesses, reduce operating costs and provide required protection for specialized insurance companies, and issue insurance products with automatic claims settlement. Transactions on the blockchain cannot be tampered with, so accountability can be fully realized; smart contracts can be automatically executed, so efficiency can be improved; the oracle network can link the blockchain to data in the real world, verify whether the event actually happened, and Ensure automated payment processes cannot be manipulated.

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01 Crop Insurance

According to parametric crop insurer Arbol, $1 trillion worth of crop risk is not covered by insurance. Much of this is in developing countries, where many farmers do not have any access to insurance. Small businesses or individuals facing adverse weather effects can also struggle to obtain the insurance products they need. Due to climate change, weather is becoming more unpredictable and extreme weather events are becoming more frequent, thus intensifying the demand for weather insurance in the market.

Parametric crop insurance can protect the economic interests of farmers in all countries. Such products are already on the market. For example, people can buy Arbol's crop insurance as long as they use their smartphones. Arbol is connected to Chainlink to obtain weather data from the National Oceanic and Atmospheric Administration of the United States to create parametric insurance contracts. For example, a farmer could get an insurance payout if data sent by the oracle network shows that an area receives less than 20 inches of rain in a two-month period.

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02Flight and delay insurance

Anyone who travels has experienced the pain of flight delays. While airlines compensate passengers for canceled flights, flight delays can also cause passengers to miss important itineraries or connections. Passengers experiencing delays have little choice but to book new flights at a premium. Now, however, new insurtechs are emerging to fill this unmet need. Insurance companies such as Etherisc will use the innovation of blockchain technology to further promote the development of the insurance industry.

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03Logistics and supply chain insurance

For businesses, very low probability events are usually not covered by insurance. However, these events can often have extremely serious consequences. For example, before the outbreak of the epidemic, few companies purchased epidemic insurance, or there was no such insurance at all, which also led to a sudden outbreak of demand after the epidemic. Parametric insurance is suitable for events with very large variables and very low probability, such as epidemics and extreme weather. In addition, the oracle network can also be used to connect the data of IoT sensors to the blockchain, provide insurance services for supply chain companies, and avoid quality control risks, such as economic losses due to shipping quality problems, especially perishable goods. .

One advantage of parametric insurance is that it can customize insurance contracts. For example, a supply chain company whose operations are vulnerable to winter ice storms can purchase insurance to hedge the risk. While it’s impossible to know exactly how an ice storm will affect shipping times, parametric insurance can obtain ice thickness data for an area from the National Oceanic and Atmospheric Administration and use that as a basis for making claims. Whether the ice storm delays shipments by hours or days, suppliers have some protection.

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04 On-site event insurance

Live events such as concerts and sports games are also often affected by weather factors and sudden disasters such as epidemics. Parametric insurance can play a role in this space, as these activities often cannot be insured through traditional channels. Event organizers can hedge the risk by making up for losses caused by event cancellations. Cancellations by event organizers are also required to refund all participants, or reschedule and organize events. Parametric insurance can also compensate event organizers in this regard. In addition, if the attendance rate of the event is affected, compensation can also be obtained through parametric insurance, for example, 20% of the audience is absent due to the impact of commuting due to icy roads. Insurance contracts can also include variables that allow event organizers to insure specific amounts. Mark Cuban, an investor in the blockchain weather data project dClimate, pointed out in a recent interview with the Wall Street Journal that the Dallas Mavericks (note: he is the owner of the Dallas Mavericks) can also purchase this type of weather insurance to hedge risks.

Compared with traditional insurance contracts, parametric insurance has lower price, faster speed, higher transparency and flexibility. Small businesses can tailor insurance products for themselves and bypass the complicated and lengthy claims process. Blockchain insurance can reduce risks, mobilize key resources and achieve operational stability in an unprecedented way, which is bound to set off a revolution in the insurance industry.