The importance of decentralized insurance in a destabilizing climate

14.10.2021 249 views

What does it mean for economies, governments and communities when “once in a lifetime” weather events begin to occur on an annual basis?

We are witnessing an entirely new scale of natural disasters across the world. Previously, emerging economies bore the brunt of induced climate disasters, but it’s now impossible to ignore the catastrophic impacts of our changing climate, no matter what corner of the globe you reside in.

Wildfires in California are adding to thousands of deaths reported annually due to poor air quality, while in Germany, hundreds have lost their lives this year as a result of record flooding. Preparation for such extreme and hazardous weather conditions is now a priority for us all.

One of many questions that emerges from the increase in such extreme weather events is this: Who will foot the bill? A report from AON found that total economic losses from natural disasters in the first half of 2021 are estimated to be around $93 billion. As we approach the 2021 United Nations Climate Change Conference(COP26), the economic implications of climate change loom heavily among the litany of issues to be resolved.

Climate change has been cited as the biggest risk to the global economy, with fears of an estimated 10% drop in total economic value by 2050. As always, the case is more challenging for emerging economies, with countries including Malaysia, Thailand, India, the Philippines and Indonesia standing to be the most negatively impacted economically, with the global economy facing up to an 18% loss in GDP by 2050.

It is high time to assess alternative approaches to alleviating the effects of climate change. How are billions of financially excluded people in emerging economies to cope with these devastating impacts?

Blockchain for good

Cryptocurrencies and non-fungible tokens (NFTs) have received a fair share of scrutiny when it comes to energy consumption, and many outstanding areas still require attention and resolutions. However, looking beyond these use cases, we are seeing more blockchain-based solutions emerge that are specifically designed to protect those unfairly impacted by climate change.

Blockchain is already playing a positive role, from facilitating regenerative agriculture to encouraging conscious consumption. Another quickly emerging area of growth is decentralized parametric insurance — recognized by the World Economic Forum as a means to provide a lifeline for traditionally underserved communities that are facing ever-increasing disruption due to extreme weather.

The beauty of decentralized parametric insurance is its simplicity: It can be understood as an “if/then” equation, which is automatically executed via a smart contract. For example, if in a given area it rains 5 inches within 24 hours, the insured farmer immediately receives a payout according to the agreed contract for flood-related damages. Very simple.

By removing expensive insurance assessment processes and coupling this with significant innovations in an automated payout process, parametric insurance greatly reduces transaction costs and claim cycles. Parametric insurance claims can be made via a basic phone with a network connection, enabling those in remote locations and — perhaps surprisingly — with access to only basic technology to avail themselves of blockchain-backed insurance policies.

Protecting the global food chain

Climate change will almost certainly raise food prices and erode many people’s ability to afford select foods in the near term. In the case of crop protection against weather risks, parametric insurance provides an extra layer of protection for farmers who are typically unable to access traditional insurance products.

The fate of their crop yield is intertwined with increasing carbon emissions through no fault of their own. This poses a significant threat to global food security, as well as job security for smallholder farmers. Given smallholder farmers with landholdings under 5 hectares are responsible for an average of 50% of global food production, putting protections in place is a necessity for the sake of the global food supply.

In emerging economies today, as many as 270 million smallholder farmers are underinsured, with only 20% having access to agricultural insurance coverage. This number falls to a paltry 3% in sub-Saharan Africa.

With the global population forecast to reach nearly 10 billion by 2050, coupled with the crisis faced by farmers in emerging economies, the smallholder agricultural industry is in desperate need of new ideas for enhanced protection. Blockchain-enabled, data-driven innovations, such as decentralized parametric insurance, can serve as a multipronged solution, providing relief for those afflicted by severe weather conditions and incentivizing conscious consumption while at the same time driving capital, at scale, into climate adaption to benefit smallholder farmers and global food production.

Expanding use cases and investors

As our planet’s climate undergoes further destabilization, technological innovations can play a growing role in our efforts to manage destructive events and reduce the scale of their impact.

Countries such as the U.K. have already commissioned reports on the need for greater protection for those at risk of flooding due to rising sea levels. There is an opportunity to rethink and reshape how flood risks are evaluated and premiums calculated: Parametric contracts can equip insurers with well-founded data to report flood depth and produce accurate and timely payouts.

Decentralized insurance is not just more inclusive for those benefiting from coverage, but also opens up insurance opportunities to an entirely new class of investor who could redefine the definition of risk capital. This form of insurance is far more open, allowing a wider group of investors to get involved, not just the closed shop of high-capital investors in traditional markets.

Furthermore, blockchain has the potential to act as a medium for crowdfunding and insurance to intersect in the name of benevolent social and environmental impact. There is a huge appetite for investment in CSR (corporate social responsibility) and ESG (environmental, social and governance) initiatives.

ESG funds captured over $50 billion worth of new money during 2020 — more than double the prior year. Additionally, the number of ESG funds in the U.S. grew to almost 400 last year — a rise of 30% from 2019.

Act now, talk later

As world leaders gather for COP26 to decide their long-term strategies and approaches to tackle climate change at a national and international level, millions of people across the globe are currently suffering the consequences of years of inaction and delays to real change.

Right now, blockchain solutions such as decentralized parametric insurance are making tangible headway to relieve pressure on those most affected by climate change. While we await political consensus on a cohesive global approach, blockchain offers easy-to-implement solutions to help those most in need.

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