Smart contract-enabled insurance holds promise, but can it be scaled?

A new insurance world is coming where smart contracts replace insurance documents, blockchain “oracles” supplant claim adjusters, and decentralized autonomous organizations (DAOs) take over traditional insurance carriers. Millions of poor farmers in Africa and Asia will be eligible for coverages like crop insurance too, whereas before, they were too poor and too dispersed to justify the cost of underwriting.

That is the vision, anyway, on display in the recent Smartcon 2022, a two-day conference that sought to provide “exclusive insights into the next generation of Web3 innovation.”

Subsistence farms, where families basically live off what they grow and almost nothing is left over, account for as much as two-thirds of the developing world’s three billion rural people, according to the United Nations. They almost never qualify for insurance coverage and most probably wouldn’t know what to do if it were offered.

“In sub-Saharan Africa, for example, where I grew up in Kenya, insurance is basically unavailable. 3% have access to it, but nobody buys it, basically,” Lemonade Foundation’s Roy Confino explained at the two-day New York City event.

The Lemonade Foundation, a nonprofit founded by United States insurer Lemonade, is behind the recent formation of the Lemonade Crypto Climate Coalition, a group that believes “blockchain has the potential to pool that risk together” and “basically solve the core problem that has inhibited the scale of insurance in the developing world for profit services and that is cost,” said Confino at Smartcon 2022. Founding members also include Hanover Re, Avalanche, Chainlink, DAOstack, Etherisc, Pula and Tomorrow.io.

Insurance is problematic in poor nations for many reasons. It can’t be easily distributed because there are hardly any local insurance agents or brokers, and historically insurance is “sold,” not “bought.” Also, insurance claims can’t be validated without great expense because, typically, there aren’t any claims adjusters on the scene to make damage assessments. This renders underwriting un-economic.

But, it need not necessarily remain that way. Parametric insurance models can potentially cut producer costs by automating many traditional insurance processes, making it profitable to underwrite those previously deemed uninsurable. Sometimes called “index insurance,” these models insure a policyholder against a specific event by paying a set amount based on an event’s…