Applications of Blockchain: Delving into Parametric Insurance
What is Blockchain?
A blockchain is a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format.
Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions. The innovation of blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.
Although blockchain was originally devised as the backbone for the digital currency known as bitcoin, its potential reaches far beyond cryptocurrencies.
Imagine an application that doesn’t run on one server but harnesses the excess power of thousands of computers globally and that can be controlled by business automation software that ensures if a specific parameter is met, only then can a function be carried out.
That’s a decentralized application — or dApp, as it’s sometimes abbreviated.
What is Parametric Insurance?
The term Parametric insurance describes a type of insurance contract that insures a policyholder against the occurrence of a specific event by paying a set amount based on the magnitude of the event, as opposed to the magnitude of the losses in a traditional indemnity policy.
The occurrence of an insured event referred to as a trigger is defined by an unambiguous 3rd party data source.
“Global parametric premiums have reached $US5 billion and are growing by 6–9% every year”.
How does Insurance affect Us?
Insurance plays a key role in fostering economic growth and igniting innovation at the macro level. Insurance provides peace of mind to automobile owners, tourists, homeowners, farmers, and others in everyday life. It is both a need and an afterthought, as the majority of people who pay for insurance will never need to use it. Those who do file claims, however, frequently discover that the procedure is not as straightforward as it might be.
How does Blockchain technology improve the insurance industry?
- Claim Management — Reduces fraudulent claims and automates claim submission.
- Peer-to-Peer Insurance — Guarantees the payment from the investor to the customer in case an insurance demand event occurs.
- Reinsurance — Reduces operational costs of reinsurers and allows them to receive verified real-time data directly from insurers.
- Fraud Detection & Risk Prevention — Makes claims more reliable and less fraudulent. They also entitle policyholders to collect higher premiums for the service.
Blockchain has demonstrated the ability to help alleviate both the core problem of transparency, which leads to the mutual mistrust cycle outlined above, as well as the cycle of mutual distrust itself.
It is possible to upgrade the foundational infrastructure of insurance by combining blockchains, smart contracts built on top of them, and decentralized oracles to not only solve the problem of transparency but also to streamline the entire insurance process and make insurance globally accessible to disenfranchised consumers. Decentralized insurance protocols provide better, faster, cheaper, and less trust-based operating capabilities, resulting in quicker insurance claims, arbitration, and payouts.
When could Parametric Insurance be used?
Natural disasters or severe weather occurrences, which can be described by a magnitude (e.g. earthquakes, tropical cyclones, floods), wind speed, or precipitation metrics, are now the most prevalent causes. Other applications where rewards may be determined using reliable data sources chainlink’s decentralized oracle network which provides a reliable connection to different external weather data sources in a manner that’s provably secure end-to-end. It also broadcasts that data within insurance smart contracts for all parties to independently verify.
Given robust implementations, smart contracts can automate a large portion of the insurance process in a way that promotes transparency and fairness while drastically reducing associated costs. From coverage against adverse weather to flight insurance, the possibilities for better insurance models are almost endless.
Blockchain in Parametric Insurance Use Case
Case study 1: Consider Arbol, a blockchain-based parametric insurance platform that leverages smart contract technology to provide weather insurance to people all over the world.
Assume you’re a farmer who requires weather insurance to protect against drought. Your crops require at least 20 inches of rain to be market-ready, and you want to get insurance that will compensate you if you receive less than 20 inches of rain.
This procedure is made as simple as possible with Arbol’s smart contract insurance. The farmer is not compensated when there is more than 20 inches of rain. If there are fewer than 20 inches, the farmer is compensated automatically. There is no way to alter or manipulate this negotiated agreement since smart contracts are implemented on decentralized infrastructure. Rather, all of the parameters are already stated in the contract: the farmer’s location, risk parameters, and so on. Once determined, the insurance payout is carried out in a deterministic manner depending on the pre-determined criteria and the weather event.
Crop insurance isn’t the only thing that goes through this procedure. On a basic level, blockchain insurance based on real-world data sources eliminates the power imbalances that lead to a lack of confidence between insurance providers and policyholders.
Future of Next Generation Parametric Insurance Models?
The insurance business could use Chainlink-enabled smart contracts to transition from a manual, trust-based system to a more automated, trust-minimized one. As the business moves toward a 1:1 information equilibrium between insurers and policyholders, information asymmetry is decreased. Instead of the unverifiable hearsay that exists in the existing paradigm, information is supplied through third-party sources that provide a source of truth.
The claims procedure shifts the focus away from individual interpretation and toward the execution of an “incident,” which is deterministically confirmed using IoT data and sourced with user privacy in mind. Because neither party can tamper with the outcome once it’s sent to the blockchain, trust is restored.
Many insurance firms are keeping an eye on blockchains, smart contracts, and decentralized oracles, which are expected to spark a paradigm shift toward trust-minimized insurance models refocused on information parity. According to a Deloitte poll, 58 percent of insurers anticipate spending more on blockchain and distributed ledger technology in the coming year. Though it’s unlikely to happen tomorrow, insurance firms and data suppliers should start looking at what Chainlink-enabled smart contracts can do for their business and how they can stay on top of the burgeoning blockchain insurance market.
DISCLAIMER: This material is for educational purposes only and should not be considered as individual advice because it does not take into account your specific requirements. Before purchasing insurance, think about whether it’s right for you and read the Product Disclosure Statement or policy wording.
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