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More than 30% of small businesses were uninsured in 2020, according to AdvisorSmith, despite 75% of business owners reporting having experienced an insurable event that year. One pivotal reason why is that navigating the traditional market can be challenging for small businesses, which can face long and complicated claims processes, and that’s if they’re able to secure insurance in the first place. Niche companies may struggle to find packages that suit their needs (and budgets), while some of the smallest and most vulnerable (like independent farmers) may not have access to coverage of any kind.
Parametric insurance, which issues payouts triggered by predetermined events (rather than through a claims adjustment process), can help fill in some of these gaps. However, a traditional parametric insurance contract still presents significant costs for providers, who must delve deeply into highly specific and potentially unfamiliar markets while hiring individuals to monitor for the qualifying event, verify that it occurred and authorize the payout. Traditionally, these costs are passed on to policyholders, but developments in blockchain technology are making insurance from specialized providers cheaper, faster and more accessible.
The logic of parametric insurance easily transfers to smart contracts, which are digital agreements on blockchains with conditions attached to their execution (if X occurs, execute action Y). Oracle networks like Chainlink provide the necessary 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. Claims are then paid automatically in line with the smart contract’s predefined logic. The combination of blockchains, smart contracts and oracle networks makes parametric insurance more accessible to small businesses, as specialized providers can lower operating costs and secure the assurance they need to underwrite policies with automatic payouts. Blockchains also 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.
Using smart contracts to provide insurance allows participants to bypass the claims process and receive funds more quickly because providers know that claims are paid out based on predetermined, verifiable and objective metrics. Here are four blockchain-based parametric insurance products that small businesses can use to maximize their operational security and minimize risk.
1. Crop insurance
According to parametric crop insurance provider Arbol, $1 trillion of agricultural risk is not insured, much of it in developing nations, where many farmers do not have access to insurance at all. Smaller operations, or those facing highly variable weather conditions, may also struggle to receive the coverage they need, and climate change will exacerbate need for this type of coverage as weather patterns become less predictable and extreme weather events more frequent.
Parametric crop insurance can help farmers secure economic protection regardless of the options in their home countries. These products are already live, with markets like Arbol making crop insurance available to anybody with a smartphone. Arbol uses Chainlink to create parametric insurance contracts around weather data from the National Oceanic and Atmospheric Administration. 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 this coverage prevents farmers from needing to uproot their families and abandon farmland in times of unfavorable weather conditions. They also can rest easy in the knowledge that aid will be disbursed quickly, as 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.
2. Flight and travel delay coverage
Anybody who travels knows the slow dread that accompanies the realization that a flight will not leave on time. Though airlines will compensate fliers for cancellations, delays may cause them to miss important events or connecting flights, and so they have little recourse other than booking new and expensive last-minute tickets. Insurtechs (new technologies in the insurance industry), however, are emerging to meet these needs, and providers leveraging blockchain technology, like Etherisc, will help the space advance further.
With parametric flight insurance, business owners can be confident that a $1,000 investment in airfare to attend a critical meeting will not balloon in a last-minute scramble for new tickets. Parametric insurance would automatically pay out policyholders once the decision to cancel is reached or when it becomes clear the flight will not depart on time, allowing a company representative to quickly repurpose the funds to purchase a new ticket. If linked to the right incoming flight data, parametric insurance provides passengers more time and flexibility to make alternate travel plans, as airlines often hesitate to alert them of known upcoming delays.
3. Logistics and supply chain insurance
Businesses are often uninsured for very low-probability events that nonetheless have the potential to be catastrophic. For example, prior to the Covid-19 pandemic, precious few businesses had purchased (or had the choice of purchasing) pandemic insurance, leading to a last-minute surge in demand. Parametric insurance can cover highly variable and rare events, from pandemics to extreme weather. Additionally, using oracle networks to connect Internet-of-things (IoT) sensor data to blockchains, supply chain companies can purchase coverage 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, for example, but parametric insurance policy can source NOAA data about ice accumulation in a 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 (like PingNET, which plans to leverage Chainlink to automate supply chain payments), would trigger the payouts. With these contracts, payouts are much faster (typically, quality tests are required for claims processes for spoiled goods), and there’s also the added benefit of knowing that if a shipment arrives, it’s in good condition, as safety issues would be recorded on-chain prior to delivery.
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4. Live events coverage
Events like concerts and sports are sensitive to inclement weather (as well as, it turns out, rare and catastrophic events like pandemics). Parametric insurance can help, as niche events in these spaces are not likely to secure coverage through traditional brokers. Event organizers can use it to absorb cancellation losses, helping them mitigate risk and smooth out the impact of canceled dates. It would likewise protect organizers in the case of event cancellations that require refunding all attendees, or in the need for rescheduling (which creates additional logistical challenges). Parametric insurance can also help if event attendance is simply suppressed (for instance, if icy conditions prompt 20% of attendees to skip an event because they don’t want to drive). Variability can be built into the coverage contract, allowing event organizers to secure the exact amount 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 (of which he’s the owner) could benefit from this type of weather insurance.
Parametric insurance is less expensive, faster, more transparent and more flexible than traditional insurance contracts. Small businesses can secure the exact coverage they need without having to navigate claims processes that slow down access to aid. Blockchain-enabled coverage stands to revolutionize the insurance landscape, lowering risk exposure, freeing up critical resources and securing unprecedented operational stability.