Can DeFi Solve the Micro-Insurance Crisis? We Think So.
Micro-insurance penetration in emerging markets has remained dangerously low, leaving 1.7 billion people without access, primarily due to limited market awareness and distribution complexities, to name a few hurdles. So this March, Lemonade announced it would form the Lemonade Crypto Climate Coalition, a joint initiative between Lemonade, Etherisc, Chainlink, and DaoStack, among other leading players in the insurance and blockchain industries. Formed as a DAO, the coalition will offer permissionless weather insurance to farmers across the African region.
In Africa alone, over 300 million small farmers do not have any form of financial protection. Micro-insurance is a powerful financial instrument that can end the cycle of poverty for these millions of entrepreneurs, allowing them to cope with financial losses and take calculated risks to grow their businesses. While the tools to adequately fill this void have not previously existed, several underlying technologies within DeFi — DAOs, Smart Contracts, and Oracles — may now allow for the insurability of these long at-risk populations.
A DAO, or decentralized autonomous organization, is a community governed entity that is fully transparent and encourages the participation of all members, or token holders, in its decision making.
While this structure allows for a better alignment of incentives, from an operations perspective, the company, or NGO in this case, can function much more efficiently than a traditional one. For example, the chart below outlines the overwhelming capital and operational efficiencies captured by Nexus, a mutual (DAO-like) insurance company built on the Ethereum blockchain, compared to Lemonade.
Oracles are a blockchain technology solution that link data sources between smart contracts and external systems. They provide immense value to the crypto ecosystem as Blockchains cannot otherwise connect to external data sources, making DeFi applications ineffective as they require access to real-world data.
In the context of micro-insurance, the oracle solves the conflict-of-interest challenge by helping to determine the claim outcome through black and white data outcomes. For example, upon a trigger event, such as 100 mph windstorms, the oracle would transfer windstorm data in real-time, instantly triggering a smart contract to pay the pre-determined policy limit. This automated, tamperproof, and transparent method of data transfer revamps the current supply chain of data that passes through multiple intermediaries via email, applications, and other analog means.
In parallel, smart contracts enable complete transparency and easily understood insurance policies, solving the complexity and trust issues that are typically enormous hurdles to acquiring customers. Finally, because smart contracts live on the Blockchain, they can be dynamic (increase limits upon request), allow for the rapid claims settlement as described above, and significantly lower operating costs by eliminating all middlemen and administrative layers.
