DeFi’s Self-Executing Payouts Enable Crop Insurance for Small Farmers in Africa

The vast majority of Africa’s 300 million subsistence farmers find crop insurance, a basic farming financial tool, impossible to get. But a new coalition of insurers and crypto firms are planning to use decentralized finance and blockchain technology to change that.

Along the way, they’re going to make use of blockchain technology to automate payouts without the need for an adjuster — or even waiting for a claim to be filed.

The brainchild of InsurTech firm Lemonade’s nonprofit foundation, the project seeks to build an at-cost insurance offering that provides critical protection from flooding, droughts and other weather-related disasters to farmers too poor to make crop insurance a viable product, the foundation said in a March 22 release.

The majority of Africa’s 300 million smallholder farmers “face real climate risks to their livelihoods, as traditional, indemnity-based insurance is often unaffordable or unavailable to them,” said Rose Goslinga, co-founder of Pula, a Kenyan InsurTech targeting smallholder farmers throughout Africa and Asia. “An on-chain solution that can be immediately impactful at scale will allow farmers to finally get financially protected against the increasingly frequent risks such as drought.”

The insurance and blockchain industries have been booting around the project’s core mechanism of payout without processing for years, but no one has acted on in a big way.

PYMNTS noted in December, for instance, it could be used in the U.S. for crop insurance like paying an orange farmer when the weather drops below freezing when it would damage crops, or automating the payment between two auto insurers, and then to the insured driver, once fault has been established in an accident.

See also: Smart Contracts Get Weather-Savvy With AccuWeather on the Blockchain

DeFi-ing Tradition

The Lemonade Crypto Climate Coalition is building a decentralized autonomous organization (DAO) that will manage the blockchain project via smart contract without human control needed. It will oversee signing up clients, collecting premiums and — using an “oracle” that keeps tabs on satellite-gathered weather data — even automating claims payouts in the wake of a disaster.

Built on the DeFi-friendly Avalanche blockchain, the project will tap DAOstack for managing the smart contracts and Chainlink, a leading oracle services network.

Read more: PYMNTS Blockchain Series: What is Avalanche?

While funding by the Lemonade Foundation will backstop the insurance initially, cryptocurrency investors will be able to invest via a DAO governance token and stake capital in the project’s liquidity pool, potentially earning a share of the premiums. That, the foundation said, will help cut the cost of capital and reinsurance, lowering the smallholder premiums.

Insurers include Hannover Re, the third-largest reinsurer in the world with annual premiums of $30 billion; and Ethersic, an open-source, decentralized protocol aimed at blockchain developers building insurance projects including flight delay, crop and hurricane coverage.

Read also: PYMNTS DeFi Series: What is Staking?

The Lemonade Crypto Climate Coalition plans to begin rolling out products within one year.

Information drought

Aside from funding, the two biggest challenges are accurately quantifying weather risks and automating the claims process, Lemonade said.

The first problem is that in many parts of Africa, not only are the climate events often severe — the amount of weather data available is poor, with far too few ground-based weather monitoring stations.

The actual weather data will be provided by weather oracle Tomorrow.io, a weather and climate security platform with clients including Uber, Delta and Ford, as well as its Tomorrow Now foundation focused on poor communities. It plans to launch an array of weather radar satellites to provide the raw data used for payouts.

By accurately measuring “the amount of rain, or lack thereof, in an insured field of crops, smart contracts will trigger flood or drought claims automatically, paying farmers without them ever needing to file a claim,” Lemonade said. “The use of autonomous smart contracts and highly accurate weather feeds bring the cost of handling claims down to zero.”