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Smart contract-enabled insurance holds promise, but can it be scaled?



Smart contract-enabled insurance holds promise, but can it be scaled?

A new insurance world is coming where smart contracts replace insurance documents, blockchain “oracles” supplant claim adjusters, and decentralized autonomous organizations (DAOs) take over traditional insurance carriers. Millions of poor farmers in Africa and Asia will be eligible for coverages like crop insurance too, whereas before, they were too poor and too dispersed to justify the cost of underwriting.

That is the vision, anyway, on display in the recent Smartcon 2022, a two-day conference that sought to provide “exclusive insights into the next generation of Web3 innovation.”

Subsistence farms, where families basically live off what they grow and almost nothing is left over, account for as much as two-thirds of the developing world’s three billion rural people, according to the United Nations. They almost never qualify for insurance coverage and most probably wouldn’t know what to do if it were offered.

“In sub-Saharan Africa, for example, where I grew up in Kenya, insurance is basically unavailable. 3% have access to it, but nobody buys it, basically,” Lemonade Foundation’s Roy Confino explained at the two-day New York City event.

The Lemonade Foundation, a nonprofit founded by United States insurer Lemonade, is behind the recent formation of the Lemonade Crypto Climate Coalition, a group that believes “blockchain has the potential to pool that risk together” and “basically solve the core problem that has inhibited the scale of insurance in the developing world for profit services and that is cost,” said Confino at Smartcon 2022. Founding members also include Hanover Re, Avalanche, Chainlink, DAOstack, Etherisc, Pula and Tomorrow.io.

Insurance is problematic in poor nations for many reasons. It can’t be easily distributed because there are hardly any local insurance agents or brokers, and historically insurance is “sold,” not “bought.” Also, insurance claims can’t be validated without great expense because, typically, there aren’t any claims adjusters on the scene to make damage assessments. This renders underwriting un-economic.

But, it need not necessarily remain that way. Parametric insurance models can potentially cut producer costs by automating many traditional insurance processes, making it profitable to underwrite those previously deemed uninsurable. Sometimes called “index insurance,” these models insure a policyholder against a specific event by paying a set amount based on an event’s magnitude rather than the losses incurred.

For example, if rain hasn’t fallen in a certain predetermined region in Kenya for three weeks, a blockchain “oracle” — it could be a local weather station — automatically sends a message to a smart contract that remotely triggers a payout to the policyholding farmer’s smartphone. It bypasses the claims adjustment process entirely. It doesn’t matter whether an individual farmer’s field is damaged. All policyholders in the area are paid. 

Crop insurance is a good use case for parametric models because many of the forces that can damage crops can be objectively measured, such as rainfall, wind speeds, temperatures and others.

Self-executing smart contracts also ensure that payouts for weather disasters and the like are almost immediate, noted Sid Jha, founder and CEO at Arbol — a parametric insurance provider — and this is especially important in the developing world where many farmers live hand to mouth. “You don’t have customers waiting weeks, months who in many cases can go bankrupt waiting for an insurance check,” he said, speaking at a separate Smartcon 2022 session.

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Parametric insurance isn’t entirely new; it has been around for several decades. But, blockchain-enabled parametric insurance has just emerged in the last few years. Most, if not all, its use cases are still in the pilot stage. The Coalition, for instance, isn’t expecting to scale up its programs until next year.

Many believe that legacy insurance systems could stand some substantial improvement. “Traditional indemnity insurance has many disadvantages: it is slow, bureaucratic, constrained to home damages, and comes with significant uncertainty,” wrote Wharton School associate professor Susanna Berkouwer recently. She described a parametric hurricane insurance product that employs blockchain technology in the Commonwealth of Dominica. NASA-generated hurricane alerts touch off automated international bank transfers to policyholders’ bank accounts. Projects like these are worthy of further study in Berkouwer’s view.

Hindrances remain: Will farmers sign up?

Supplying the world’s subsistence farmers with affordable crop insurance and possibly other protections via chain-based parametric insurance faces some daunting obstacles, however. One is educating farmers in the complexities of insurance. There is really no way at present that this can be done easily by technology or automation alone. 

Tinka Koster and her colleagues at the Netherlands’ Wageningen University, for example, recently completed a review of the World Bank Group’s Global Index Insurance Facility’s (GIIF) engagement in Kenya. To increase index insurance take-up rates among African subsistence farmers, GIIF and others would need to boost “awareness, knowledge and understanding by the farmers about the insurance,” said Koster.

“The last-mile outreach is a key challenge for many services to smallholder farmers, including index insurance,” Koster told Cointelegraph in emailed responses coordinated with team colleagues Marcel van Asseldonk, Cor Wattel and Haki Pamuk. “Technology can help bridge part of this gap, but technology alone is insufficient.”

“Sales and product understanding are huge costs in often remote and difficult to reach places,” Leigh Johnson, assistant professor in the department of geography at the University of Oregon, told Cointelegraph. “Renewal rates are notoriously bad.”

“Many farmers need to see that insurance is a tool for managing risk and not for gambling on a certain outcome,” said Jha, who agreed that educating farmers on the need for risk management tools like insurance is critical. As Jha told Cointelegraph:

“When farmers are able to get access to some type of subsidized insurance provided by the government or an NGO, they become much more familiar and comfortable with the concept, and that education process becomes easier in terms of providing specialized coverage products that meet the unique needs of farmers.”

In GIIF’s Bima Pima product for Kenyan farmers, the World Bank Group program used village-based advisors (VBAs) to help distribute the insurance product — essentially taking the place of traditional insurance agents. The VBAs were paid monthly for their efforts. According to the Wageningen report, these advisers were “happy with the SMS messages and the direct premium payment. But they find it hard to convince farmers and are uncertain about the insurance pay-out because the product is so new.”

Does parametric insurance even need DLT technology?

If parametric insurance is going to succeed in emerging markets, does it even need blockchain technology? The World Bank Group’s GIIF parametric insurance projects in Africa, for instance, did not use blockchain technology. What exactly does index insurance lose if it doesn’t employ a decentralized digital ledger? 

“Blockchain is simply a tool,” Jha told Cointelegraph, and one can use many tools to get the same outcome. Still, the digital ledger’s immutability and auditability can build credibility for the program:

“What DLT’s do provide is trust in areas that generally tend to lack trust, and allow for possibly a more efficient micro payment system than what currently exists in some of these countries in terms of disbursing and collecting funds.” 

Johnson, on the other hand, comes down “squarely on the ‘no smart contracts’ camp, precisely because parametric contracts go wrong so often, and there is an important case for correcting these retroactively” in the interests of fairness and equity. 

In a 2021 article, Johnson noted that environmental estimates made by parametric market devices used to commodify risk “are frequently wrong, sometimes grossly so.” In the first season of R4’s Ethiopian program, “one of the most globally renowned programs insuring smallholder farmers against weather risk using parametric indices,” wrote Johnson, R4 made an ex gratia “voluntary donation” to teff farmers “following rain shortfalls that did not trigger the contract.” Such transfers later became “fairly routine.”

“I’m not sure how much information farmers would require re smart contracts/blockchain at the time of enrollment,” Johnson told Cointelegraph, “but one can imagine them being extremely skeptical of unknown monetary technologies and firms.”

If blockchain technology could raise farmers’ awareness and knowledge about insurance, added Koster, “then it would also help for further upscaling the index [parametric] insurance in African context.”

Still, this all might take some time. Jha was asked how long it might be before agricultural insurance can achieve widespread usage among subsistence farmers in the developing world in places like Southeast Asia or Africa — two years? Five years? Ten years?

“Probably ten years,” Jha told Cointelegraph, citing the challenges of education, cost and lack of data, i.e., “everything from a lack of weather stations, crop yield history, and lack of data on farming practices.”

Many farmers need to see that insurance is a viable tool for managing risk, and this is where self-executing smart contracts could provide a powerful example. If farmers see their neighbors being reimbursed immediately during an extreme weather event, they might consider purchasing an index policy themselves.

Government subsidies could help. “There is a lot of work that is needed in terms of making insurance more affordable so that underserved stakeholders who need these tools can access them,” said Jha, while Johnson added, “I think the best progress will come from wider state adoption of safety net programs using parametric solutions — that’s how you get coverage at scale.”

In terms of scaling, the World Bank’s GIIF has already made some progress. “The milestone of one million farmers insured has already been reached in Zambia, with the index insurance bundled with the subsidized fertilizer programme,” Koster said, while in Senegal, GIIF is currently reaching half a million farmers, with a similar number in Kenya with a government-supported program.

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“This shows that it is possible to reach significant numbers of smallholder farmers,” Koster told Cointelegraph, “but not without significant government support.” 

In sum, while parametric insurance models might enable insurance underwriters to pool risks, making it profitable to insure the previously uninsurable, and blockchain-enabled smart contracts can ensure that cash-strapped farmers received payouts during disasters almost immediately, much work still needs to be done in convincing financially unsophisticated and often distrustful farmers to sign up for such programs. Technology alone won’t do the trick, and state entities may need to get involved.

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Bitcoin (BTC) Price Slips as US Labor Market Figures Hotter Than Expected



Bitcoin (BTC) Price Slips as US Labor Market Figures Hotter Than Expected

Bitcoin fell 2% to around $16,800 after the Nov. 2022 U.S. jobs report revealed a strong labor market, despite the Federal Reserve’s six consecutive interest rate hikes in 2022.

Nonfarm payrolls increased by 263,000, beating the Dow Jones estimate of 200,000, while the unemployment rate matched expectations at 3.7%.

Jobs Report Signals Fed Hikes Are Likely to Persist

The gain in nonfarm payrolls came in slightly lower than the revised Oct. 2022 increase of 284,000, while average hourly earnings rose 0.6% compared to estimates of 0.3%.

The U.S. Bureau of Labor Statistics releases the nonfarm payroll and average hourly earnings at 8:30 E.T. on the first Friday of every month as part of the Employment Situation report.

While rising employment rates and wages generally point to a healthy economy, wages that grow too fast, especially in the presence of record levels of inflation, encourage the Fed to continue raising interest rates to ensure that the economy doesn’t run red-hot. 

“To have 263,000 jobs added even after policy rates have been raised by some [375] basis points is no joke,” noted Seema Shah of Principal Asset Management. “The labor market is hot, hot, hot, heaping pressure on the Fed to continue raising policy rates.”

Raising policy or interest rates cools economic expansion, but if done too aggressively, it could significantly curtail employment and pitch the economy into a recession. Recession fears generally create selling pressure on risky assets like cryptos and equities, driving prices into bear territory.

Cryptos ceded gains accrued earlier this week around a lower-than-expected Personal Consumption Expenditure Price Index of 0.2% for Nov. 2022. 

At press time, XRP was down about 2.5%, while DOGE fell 3.78%. Solana also declined by 1.1%. Equities markets also tanked, with the Dow Jones Industrial Average falling 0.9%, the S&P 500 1.2%, and the tech-heavy Nasdaq slid 1.5%. 

Crypto price heatmap
Source: Coin360

Elsewhere, gold is outshining Bitcoin as an inflation hedge and trading back at its price at the beginning of the year, $1,800 per ounce. By comparison, Bitcoin has fallen 63% in the same period.

Jobs Report and Inflation Still Likely to Influence Crypto Prices

The higher-than-expected Nov. 2022 nonfarm payroll number is the lowest jobs gain since April 2021, coming after a revised increase of 284,000 new jobs in Oct. 2022.

Nonfarm payroll increases in 2022
Source: TradingEconomics

The most significant adjusted increases in the nonfarm payroll were noted in the Feb. 2022 and July 2022 jobs report. The Feb. 2022 report revealed that nonfarm payrolls increased by 714,000 in Jan. 2022, prompting the Fed to step in with a 25 basis-point hike in March. 

The following four reports pointed to a cooling down of the labor market, which then picked up again in June 2022, when the Fed introduced its first 75 basis point hike of 2022.

On Nov. 30, Fed chair Jerome Powell noted that less aggressive rate hikes might be a distinct possibility at the next Fed meeting, although most analysts do not expect a drastic fall off from the last four increases of 0.75%. 

They predict that the Fed will increase interest rates by 50 basis points at the next Federal Open Markets Committee meeting in mid-Dec. 2022, taking the federal funds rate above the 4% mark. 

The Fed meeting will likely spark a rally in both cryptos and stocks if analysts’ estimates prove accurate.

For Be[In] Crypto’s latest Bitcoin (BTC) analysis, click here.


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EU Parliament to ‘Vote on Adopting the Regulation on MiCA’ — Expert Says Industry Needs Legal Clarity



EU Parliament to ‘Vote on Adopting the Regulation on MiCA’ — Expert Says Industry Needs Legal Clarity

In a recent statement, the European Parliament said its members would shortly “vote on adopting the regulation on markets in crypto-assets (MiCA).” According to the parliamentary body’s think tank, the envisaged regulations are expected to provide “legal certainty for crypto-assets not covered by existing EU legislation.” A crypto counselor, Paulius Vaitkevicius, said any regulation of crypto is likely to result in more capital and talent coming into the space.

‘Harmonized Rules’ for Crypto-Assets at EU Level

After months of discussions and negotiations which culminated in the June 30 preliminary agreement, the European Parliament (EP) is now set to “vote on adopting the regulation on markets in crypto-assets (MiCA).” The vote is set to take place during the legislative body’s plenary session. European leaders assert that the adoption of MiCA will lead to the creation of “harmonized rules for crypto-assets at [the] E.U. level.”

According to a Nov. 29 briefing by the parliament’s think tank, the harmonized crypto rules are expected to provide “legal certainty for crypto-assets not covered by existing EU legislation.” In the briefing, the EP also argues that the rules will not only enhance the protection of consumers and investors but will also “promote innovation and use of crypto-assets.”

Through MICA, European authorities also hope “to regulate [the] issuance and trading of crypto-assets as well as the management of the underlying assets.”

While European leaders like European Central Bank president Christine Largade are pushing for tougher regulation — MiCA II — some critics of the proposed legislation argue that the envisaged regulations in their current form may stifle innovation.

Legal Clarity Attracts Mature Players

Commenting on the European Union’s drive to regulate cryptocurrencies, Paulius Vaitkevicius, founder and crypto counselor at the law firm VILP Solutions, said the prevailing “Wild West environment” is not helpful to all parties. He also told Bitcoin.com News that without guidelines or regulatory frameworks “and with a number of situations where industry players collapse, we might end up in a situation where we will have only a handful of investors left in the industry.”

EU Parliament to 'Vote on Adopting the Regulation on MiCA' — Expert Says Industry Needs Legal Clarity

Therefore, to stop this from happening the crypto industry needs legal clarity, which according to Vaitkevicius, “bring[s] in more mature players to the industry from both project and investor sides.” Explaining why he is in favor of regulating the industry, Vaitkevicius said:

From my personal experience, such players have been seeking regulations and clarity already for some time and waiting for the right moment to step in properly. With regulations, we will see these firm steps and as a result additional capital and talent coming to the industry space.

Meanwhile, some crypto opponents have said if appropriate regulatory frameworks were already in place, Sam Bankman-Fried’s shenanigans would have been exposed much earlier. However, when asked about the validity of this argument, Vaitkevicius said the opinion that on paper FTX itself was “one of the most regulated players in the industry” undermines this theory. He added:

“Regulation is a good step forward, but [this] needs to be followed by other elements to be functional in real-life situations and achieve the pursued goals.”

What are your thoughts on this story? Let us know what you think in the comments section below.

Terence Zimwara

Terence Zimwara is a Zimbabwe award-winning journalist, author and writer. He has written extensively about the economic troubles of some African countries as well as how digital currencies can provide Africans with an escape route.

Image Credits: Shutterstock, Pixabay, Wiki Commons

Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.

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Uzbekistan Approves Rules for Issuance and Circulation of Crypto Assets



Uzbekistan Approves Rules for Issuance and Circulation of Crypto Assets

Uzbekistan Approves Rules for Issuance and Circulation of Crypto Assets

The authority responsible for crypto oversight in Uzbekistan has determined the order of issuing and circulating digital assets in the country. The main reason behind the move is to establish a mechanism that would allow local companies to attract capital through coins and tokens.

Uzbekistan Government Sets Out to Regulate Digital Asset Investments

The National Agency of Perspective Projects (NAPP), under the President of Uzbekistan, has released a new regulation on the procedures for the issue, registration, and release in circulation of crypto assets in the Central Asian Nation.

The document provides basic legal definitions for crypto assets and makes distinction between the different types. It introduces requirements for crypto issuers, depositaries and custodians and determines their obligations, including those concerning relations with customers.

The authority has also approved rules for the establishment and maintaining of an electronic register of crypto assets and adopted accounting standards for the rights associated with them and those of their holders.

Crypto depositories will be responsible for providing services for the issuance, registration, circulation, and storage of crypto assets. Issuers can use them or other electronic platforms, the NAPP said, pointing out that the nominal value of the coins must be expressed only in the national fiat, the Uzbekistani som.

The agency emphasized that the issuance of unsecured tokens is prohibited. Using words such as “state,” “state-secured,” “state-supported,” “Uzbekistan,” “Uzbek,” “national,” and “som” in the names of the cryptos is banned. The regulator also clarified:

The main purpose of the adoption of this document is to create a new mechanism for business entities to attract investments and develop their activities by issuing and registering the issue of secured tokens.

The NAPP further warned against any unauthorized activities related to the circulation of crypto assets in the country or the use of services by providers that have not obtained a license to offer them. The same applies to firms involved in the mining of cryptocurrency.

Uzbekistan has been taking steps towards the comprehensive regulation of its crypto sector with several decrees signed by President Shavkat Mirziyoyev and resolutions by the National Agency of Perspective Projects. The country recently licensed two companies to provide exchange services.

Do you think Uzbekistanis will benefit from the new regulations adopted by the country’s crypto watchdog? Tell us in the comments section below.

Lubomir Tassev

Lubomir Tassev is a journalist from tech-savvy Eastern Europe who likes Hitchens’s quote: “Being a writer is what I am, rather than what I do.” Besides crypto, blockchain and fintech, international politics and economics are two other sources of inspiration.

Image Credits: Shutterstock, Pixabay, Wiki Commons

Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.

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