The debate about the most effective use of blockchain in insurance has been going on for some years now - the main focus being to improve the security and centralisation of data - the idea of having one confirmed version of the truth shared by many stakeholders. Blockchain technology has the potential to increase efficiency, lower costs, and improve transparency in even the most basic of insurance processes. And the applications and benefits of blockchain extend far beyond individual businesses - and cryptographic ledger systems are now being used to help some of society’s most vulnerable communities access financial protection.
A white paper released by software and technology provider Etherisc - a MiN member - in 2017, analysed the seemingly endless prospects and possibilities of – what was back then – a new and relatively unchartered territory. The paper focused on ways blockchain could be used to decentralise insurance structures, to standardise protocols to allow access to an open marketplace, and even explored ways to replace capital with “tokens”.
Fundamentally, the distributed ledger principle behind blockchain was seen as something that could be the “core of insurance”, a route to determine transparent data that would bring insurance back to its roots – or as the authors stated, to be “the safety net of society”.
In practice, blockchain could present a way to access and analyse data in an open market. In today’s climate, this has come to fruition in the form of parametric insurance, where claims are triggered by open-source data, removing any “conflicts of interest” normally seen in the traditional payout process, whereby claims managers regularly find themselves torn between company goals and customer expectations.
The trust this technology can therefore build between the customer and the insurer – for both underwriting and claims – is invaluable. There is, in essence, nowhere for data to hide.
Trust and transparency
It is this understanding and transparent nature which is potentially driving uptake of blockchain-based policies in vulnerable communities, a trend that has been indicated following the development of index insurance policies like Bima Pima crop insurance, for example. Although still in its early phases, this weather index insurance – developed in partnership by Etherisc and ACRE Africa and designed for farmers facing climate-related risks in Kenya – has so far on-boarded 17,000 smallholder farmers across Kenya.
The policies are referred to as “smart contracts”, meaning processes are both transparent and auditable, with claims triggered by weather data via a blockchain platform. But there is no “claims process” as such, with payments instigated instead by Etherisc’s Generic Insurance Framework (GIF) technology, which allows payments to be made directly to the farmers through an M-PESA mobile payment gateway.
Blockchain technology is also the driving force behind Luxembourg-based startup Inclusive Blockchain Insurance Using Space Assets (IBISA), which has recently launched a new microinsurance solution aimed primarily for those in agriculture. The insurance index products and platforms rely on satellite data to provide damage assessments, with payouts triggered by set parameters. Working remotely in this sense keeps costs down, but it also entails a transparent working practice, which is even more ingrained with payouts reliant on a “collective index”.
This process is proving to be fundamental in a sector where insurance penetration is low – a circumstance of cost implications, paperwork, social barriers, and even trust.
Blockchain and bitcoin
The result of these transparent processes and lower costs is creating another avenue for insurance, particularly cryptocurrencies. This was something Etherisc touched on in its white paper, and in practice, this blockchain-based commodity is being increasingly accepted, even in the agricultural sector.
This “tokenisation” – as it has been referred to – has been witnessed in the agricultural sector, where Argentinian-based insurance company Rio Uruguay Seguros (RUS) has developed RUS coin, a bitcoin-style currency generated from farm sales. Over time, these tokens build up, allowing farmers to buy products, such as notebooks, in the RUS store, to help them develop and adapt their business – an important element in the face of climate change.
This idea of converting “crops into commodities” is also a stance taken by Agrotoken, a global platform which creates tradable digital assets set by the price of grain. Farmers can use Agrotokens to pay for seeds, machinery, or even microinsurance, ensuring their investments can continue – even when their harvest is in silos.
It appears that from those initial ideas, the use of blockchain in insurance is no longer a pipedream – improving transparency and connecting a somewhat disjointed sector, while keeping costs lower and improving data awareness. Blockchain is, in this instance, providing a way to both help and protect the emerging consumer – a principle which is, essentially, what insurance is all about.