In March, the Lemonade Foundation, a charity run by the founders of the digital insurance provider Lemonade, announced plans to make use of “blockchain to guard farmers in Africa from climate change.” I are inclined to be skeptical of tech corporations’ lofty goals to save lots of the world with an app — or, on this case, a blockchain. But I used to be also interested in the concept because smallholder farmers could greatly profit from higher access to technology and services.
So I dug into the still quite cryptic blockchain insurance world — and emerged more optimistic on the opposite side. It looks like blockchain-based insurance could indeed be helpful for smallholder farmers.
Smallholder farmers are a vulnerable and underserved group
Rural communities in low-income countries across Africa, Asia and Latin America face an exasperating situation. They contributed little to the climate crisis but bear a few of its worst consequences. The Intergovernmental Panel on Climate Change predicted that extreme weather events comparable to heatwaves and droughts will develop into more frequent, cutting agricultural productivity by as much as 50 percent in Africa. Support is urgently needed to mitigate the risks and enable farmers to adapt to changing weather patterns.
Agricultural insurance will help farmers maintain their operations and protect food security while weather patterns develop into ever-harder to predict. But today, a minority of smallholder farmers can access such services. In Sub-Saharan Africa, lower than 3 percent of farmers buy agricultural insurance. Rates are higher in Asia and Latin America, where 22 and 33 percent of farmers are insured, respectively. But there’s room for improvement in every single place.
The issue? Insurance tends to be too expensive, bureaucratic and unreliable. The age-old strategy of using agents to confirm and approve claims case-by-case makes it too costly and opaque. But most insurance firms still depend on it. That is where blockchain goals to make a difference.
Blockchains promise to unlock cost savings and transparency
An evaluation of a blockchain-based agricultural insurance service estimated that such models could reduce costs by as much as 41 percent, allowing insurers to scale back premiums for farmers by as much as 30 percent. That’s a giant difference. Where do the savings occur?
“Smart contracts” make the magic occur. It’s a model that automates insurance payments by basing them on a spread of publicly available, verified and credible data connected through a blockchain. The info come from sources comparable to AccuWeather, NOAA weather and climate data hosted on Google Cloud. As these sources include granular geographic information, insurers can confirm remotely whether a farmer experienced a drought, heatwave or storm.
Chainlink Labs, an organization providing blockchain infrastructure for several recent ag insurance firms, offered a drought insurance example. The scenario: a farm needs no less than 20 inches of rain to grow crops and buys insurance that provides a payout if there are lower than 20 inches of rain. At the tip of the contract term, the insurance routinely checks how much rain the farm received based on weather data and immediately triggers a payout if there have been lower than 20 inches.
“Because smart contracts are run on decentralized infrastructure, there isn’t a method to tamper or manipulate this prearranged agreement,” Chainlink writes. “Moderately, the contract already has all the parameters defined: the farmer’s location, risk parameters, and the coverage amount. Once set, the insurance payout is deterministically executed based on the pre-set parameters and the weather end result.”
A growing market powered by trust and speed
These increased levels of trust and transparency are critical in markets where farmers doubt whether traditional insurance firms will fulfill their contractual obligations. The blockchain insurer Arbol perceived this as one among the essential obstacles holding back crop insurance adoption in Cambodia, one among the countries where it offers smart contracts to smallholder farmers that wouldn’t be profitable for larger insurers to cover.
Insurance tends to be too expensive, bureaucratic and unreliable. That is where blockchain goals to make a difference.
And the model is taking off. Siddhartha Jha, founder and CEO of Arbol, told me that the corporate went from covering about $2 million in risk in 2020 to $300 million in 2021. This 12 months, the startup expects to double that coverage.
There are impactful applications for blockchain tech beyond reducing farmers’ climate risk. It could streamline payments for regenerative farming practices, forest conservation efforts and other environmental initiatives that distant sensing tools could confirm.
For instance, a project between Chainlink and the non-profit Green World Campaign uses satellite data to routinely trigger payments to individuals who have successfully regenerated “designated areas of land by improving soil health, contributing to greater carbon sequestration, increasing vegetative/tree cover, enhancing hydrology, and other rehabilitation techniques.” The short payment turnaround will particularly profit smallholder farmers with little money reserves.
But there’s no reason why growers in other parts of the world wouldn’t get enthusiastic about extra money with less paperwork. So I imagine that we’ll see a much wider application of those technologies in the approaching years because the implementation of nature-based climate solutions continues to speed up.