Historically, the insurance industry has been limited to the developed world. But blockchain technology facilitates a new microinsurance model that can impart big benefits for businesses, consumers, and traditional insurance providers in both emerging and developed markets throughout the world.
Last week, Managing Director of Chainlink Labs, William Herkelrath, joined Verso CEO Gregor Arn and Ensuro CEO Marco Mirabella on The Human & Machine podcast to discuss how blockchain and decentralized oracle networks are powering explosive growth in the microinsurance market.
Highlights from the conversation provide an essential framework for understanding the current applications of microinsurance and imagining near-limitless future utility.
What is microinsurance?
Microinsurance products are smaller, more affordable policies that, as Arn put it, “offer protection for something that is very valuable but very specific.” Whereas traditional insurance offers annual coverage, microinsurance can be purchased for distinct events.
Blockchain technology makes it possible to extend parametric microinsurance policies at scale by automating much of the traditionally expensive and time-consuming claims process. Self-executing smart contracts use oracles to obtain verified real-world data, which deterministically triggers automatic payouts without brokers taking a cut.
“That cost structure doesn’t work for microinsurance,” Arn explained.
Who needs microinsurance?
“Traditional insurance has sometimes had difficulty reaching people in the economy who aren’t as well connected to traditional institutions,” Mirabella explained. “If they’re unbanked or they’re in the middle of a very rural area, they don’t have infrastructure nearby that they can take advantage of.”
Even if people in the developing world have access to insurance products, they’re often too expensive. However, not only is insurance vital for workers in emerging economies, where livelihoods can be obliterated by one catastrophic weather event; the global unbanked, uninsured population presents a critical growth opportunity for the insurance industry.
“If you want to keep growing, specifically in the insurance industry, you need to look at the new markets,” Arn explained. “You need to create products that come at a lower price point and find the right distribution channel for them.”
How does microinsurance go mainstream?
“It’s a really exciting world that we live in where automated oracles can do so much of the work in these situations,” Mirabella said.
Payout is crucial to the success of scaling microinsurance. “A lot of companies still need humans who manage this,” Arn said. “The cost of claim disbursement into an e-wallet will actually eat up, in most cases, a substantial amount of what you’re paying out.”
Education is another hurdle. People in emerging markets not only need to understand the value of insurance products but the advantages of microinsurance using trust-minimized technology.
“In the old world, you had to basically trust your counterparty that you were buying this insurance plan and it would pay out,” Herkelrath said. “In the world where we have five or six or seven different verifiers (oracle nodes) that an event has occurred, you don’t actually have to trust anybody.”
While initial use cases are being built around events (like weather) with verifiable outcomes, Herkelrath said more nuanced use cases, like determining fault in a car accident, are possible in the future.
“There’s really nothing the technology itself can’t do; it’s just a function of what the market wants and demands,” he said.
From Herkelrath’s perspective, advancing technology, such as satellite imaging and IoT monitoring, are creating so many new data feeds that the microinsurance landscape could be filled with previously unforeseen use cases in just a matter of months.
“You know it’s really fantastic to be part of something where real innovation is happening on literally a daily basis,” he said.
Watch the full panel discussion on The Human & Machine podcast.