How blockchain can transform insurance

Connecting IoT device data to blockchains via oracles can also improve shipment quality data.

In 2020, more than 30 per cent of small businesses were uninsured, even though 75 per cent of business owners reported experiencing an insurable event that year. One pivotal reason is that navigating the traditional insurance market can be challenging for small businesses, which can face long and complicated claims processes – if they’re even able to secure insurance in the first place.

Blockchain-based parametric insurance can help address some of these needs as it issues payouts automatically according to predetermined events (rather than through a manual and inefficient claims process). Developments in blockchain technology are making parametric insurance solutions from specialised providers cheaper, faster, and more accessible for social good.

Parametric insurance smart contracts are digital agreements on blockchains with conditions attached to their execution (if x occurs, execute action y). Oracle networks, such as the clear industry-leader Chainlink, provide the necessary real-world information from outside the blockchain to confirm that conditions for payment have been met and that the insurance company should therefore pay out the claim. Blockchains keep an immutable record of transactions, providing accountability. Smart contracts improve efficiency by automating contracts. And oracle networks, which connect blockchains to real-world data, validate that an event did indeed occur and that the automated payment cannot be manipulated.

Here are four blockchain-based parametric insurance products that small businesses can use to maximise their operational security and minimise risk.

Crop insurance

According to parametric crop insurance provider Arbol, $1 trillion of agricultural risk is not insured. Much of this risk is located in developing nations, where many farmers do not have access to insurance at all. Smaller farmers, or those facing highly variable weather conditions, may also struggle to receive the coverage they need. Climate change will exacerbate the need for crop insurance as weather patterns become less predictable and extreme weather events become more frequent. 

Parametric crop insurance that helps farmers secure economic protection is already live, with providers such as Arbol making it available to anybody with a smartphone. Arbol uses Chainlink to create insurance contracts around weather data from the National Oceanic and Atmospheric Administration (NOAA). For instance, a farmer could receive a payout if data from the oracle network indicated their region received less than 20 inches of rain over a two-month period.

Access to insurance prevents farmers from needing to uproot their families and abandon their farmland in years where they face unfavourable weather conditions. They can also benefit from quickly disbursed aid, while insurance providers are assured that the process is accountable, transparent and fraud-proof because all activity happens on-chain and payouts are determined by verified external conditions.

Flight and travel delay insurance

Anybody who flies knows the slow dread that accompanies the realisation that a flight has been delayed or cancelled. Though airlines will compensate fliers for cancellations, delays may cause them to miss important events or connecting flights with little recourse other than booking new, expensive last-minute replacements. Insurtechs are emerging to meet flight insurance needs, and providers leveraging blockchain technology, such as Ensuro and Etherisc, will help the space advance further. Parametric insurance allows a traveler to quickly repurpose the funds and purchase a new ticket, as compensation is automatically distributed as soon as a flight is cancelled or delayed.

Logistics and supply chain insurance 

Businesses are often uninsured for improbable events that nonetheless have the potential to be catastrophic. For example, prior to the Covid-19 pandemic, very few businesses had purchased (or even had the choice to purchase) pandemic insurance, leading to a last-minute surge in demand. Parametric insurance for logistics can cover highly variable and rare events, from pandemics to extreme weather. Additionally, using oracle networks to connect IoT sensor data to blockchains, supply chain companies can purchase parametric insurance to mitigate any potential quality control issues such as losses from shipment quality issues, particularly for perishable goods.

One of the benefits of parametric insurance is the ability to tailor contracts. For instance, a supply chain company with operations vulnerable to winter storms may take out a policy to protect against disruptions. It may not be clear when, or to what extent, an ice storm could lead to delays. A parametric insurance policy can source NOAA data about ice accumulation in the relevant region and pay the policyholder accordingly. Whether the storm delays shipments by hours or days, the supplier is protected.

Connecting IoT device data to blockchains via oracles can also improve shipment quality data. Refrigerated unit sensors could inform a parametric insurance policy that pays out if temperature fluctuations compromise product safety. Oracles connected to sensors such as PingNET would trigger the payouts. With these contracts, payouts are much faster than the quality tests typically required for claims processes for spoiled goods. There’s also the added benefit of knowing that when a shipment arrives, it is in good condition, as safety issues would be recorded on-chain prior to delivery.

Live event insurance

Live events such as concerts and sports are sensitive to inclement weather (as well as, it turns out, rare, catastrophic events such as pandemics). Parametric insurance can help, as these niche events are not likely to secure insurance through traditional brokers. Event organisers can use parametric insurance to absorb cancellation losses, helping them mitigate risk and smooth out the impact of cancelled events.

Parametric insurance would protect organisers in the case of event cancellations that require refunding all attendees or rescheduling, which creates additional logistical challenges. However, parametric insurance can also help if event attendance is simply suppressed (for instance, if icy conditions prompt 20 per cent of attendees to skip the event because they don’t want to drive). Variability can be built into the parametric insurance contract, allowing event organisers to secure the exact amount of coverage they need. Mark Cuban, an investor in the blockchain-based climate data project dClimate, pointed out in a recent Wall Street Journal interview that the Dallas Mavericks could benefit from this type of weather insurance.

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