Smart contracts: the potential next wave of defi, crypto and digital assets to impact the insurance industry

The combination of a relatively unregulated financial technology (fintech) market experiencing explosive growth, a hyper focus on customer experience and the availability of tech-enabled solutions has given rise to new entrants to the insurance marketplace; offering both insurance and derivatives that function like insurance utilizing smart contracts. Using smart contracts, all new entrants need is a problem to solve, a data source to serve as a source of truth for automated decisioning and to create awareness of the problem. Some of these new products are being offered more efficiently, some are being offered to previously untapped markets or simply being offered to customers in a different way, providing a new customer experience. Other products, as it seems, are taking the big-tech approach of creating a solution to a problem then creating awareness of the problem. Simply put, companies are targeting these tech-enabled solutions to either access new markets or to facilitate efficient operations.

In its simplest form, a smart contract is an “if” “then” equation. If a certain condition is met, then something happens. The “if” is determined by an oracle, an independent trusted third party. Think of oracles as a bridge between real world events and the digital world, making data actionable. Oracles are the inflection point regarding the efficacy of smart contracts, as they either create or aggregate the data needed to execute the smart contract. The attributes which impact smart contract efficacy are the availability, usability and reliability of the data.

Considering the above, there are many examples of how smart contracts either have been deployed or how they have been discussed as potential implementation tools for the insurance industry. One is parametric weather products – there over 180,000 weather monitoring stations in the US, monitoring key climate data points such as temperature, wind speed, rainfall, etc. Collectively, these data points tell a story of climate impact in a specific geography over a period of time. The accessibility of this data on the blockchain has enabled companies to create parametric insurance products (and insurance-like derivatives) to provide crop protection to farmers of any size thus helping to manage their risk. Based on the rainfall, temperature or other weather data point in that geography over that period in time, if the climate data triggers the smart contract parameters, the contract executes without human involvement. This same data is being used to look at the feasibility of parametric catastrophe coverage among other ideas.

Some additional targets either in place or being discussed for smart contracts in the insurance marketplace include: