According to the research from ISF Advisor (2018), only 20% of smallholder farmers in the developing countries have access to agricultural insurance coverage, and in sub-Saharan Africa this falls further to just 3%.  Blockchain is a transformative Information and Communications Technology (ICT) that have the potential to revolutionize how data is used for agriculture insurance and enable smallholder-inclusive value chain development.

Blockchains are essentially immutable digital ledgers that can be used to securely record all transactions taking place on a given network. Such technological innovation can facilitate innovation in many sectors including insurance.

Consider a modern insurance company: It uses centralized electronic ledgers to track transactions (premium collected and claims paid) and store data such as the policyholders’ personal information (e.g. the insured’s name, address and national id number), risk-related information (e.g. type of crop grown, location, loss history) and policy terms (e.g. risk coverage, deductible and policy limits) in its internal system. With the advancement of technology, new data such as those from satellite, sensors, mobile phone, other digital platforms, and smart networks are seamlessly fed into insurer’s in-house data and systems, providing richer, near real-time update of exposure. In a less digitalized environment, much of data may be manually recorded on paper and kept in physical folders. From all the data collected, the insurers perform due diligence including know-your-customer (KYC) compliance, risk monitoring, fraud detection and disbursement of claims according to the insurance contract agreements. It is the insurer’s responsibility to protect accuracy and confidentiality of the customer information and transaction records through rigorous checks and validation. In the recent decades, insurers have significantly increased its spending on its cybersecurity and IT infrastructure to survive and thrive in the digital environment.

Now, consider distributed ledger technologies i.e., blockchain where the information is recorded in a digital database through cryptography and the data processing and data storage are disintermediated by a distributed network of computers. Cryptography ensures security and data integrity, while privacy remains intact. Without the need of centrally controlled data system, participating computers on the network use algorithms to validate and store the transaction history and information. The entire process is visible to users. The closest metaphor of blockchain may be a read-only “global spreadsheet” where everyone has access to monitor the transactions while the data remains unaltered and indelible (immutability). In this way, greater efficiency, transparency, and traceability to the exchange of value and information are guaranteed. Blockchain infrastructure could not only be used to record economic transactions such as payment but also other types of information such as birth and death certificate, title of ownership, votes, health records or anything that could be coded. 

Central to blockchain application is smart contracts, self-executing programs to allow for timely payments between stakeholders when pre-agreed conditions are met via data changes appearing in the blockchain. This is the space for development in blockchain-enabled agriculture insurance, particularly index insurance. The index insurance products use a proxy, such as rainfall, temperature, area crop yield or other objective indices to pay claims without need for farm-level verification. Smart contract serves as a vital means to automate the trigger-based claim management. Using an example of a simple insurance contract where payment is triggered if cumulative rainfall during the planting season in the covered location falls below 200 mm: the data from verified data sources such as metrological agency is connected with the smart contract on the blockchain platform where the insurance clauses are coded and evaluated without human intervention. Settlements in smart contracts are automatically triggered if the weather data feed is less than 200 mm during the period. This mechanism significantly could speed up the claim payment process of the insurance, potentially leading to more effective contract enforcement.

In terms of application in development setting, the insurtech WorldCover has been deploying blockchain-enabled crop insurance in Ghana. Based in New York, the company has been creating institutional investment opportunities for a previously uninsurable risk. In Kenya, there is a pilot  Blockchain Climate Risk Crop Insurance project to provide affordable weather-index insurance to smallholder farmers using the blockchain technology.  It is made possible through a partnership between insurtech startup Sprout Insurer, GIIF’s implementing partner ACRE Africa and tech firm Etherisc specializing in decentralized insurance. A user interface, designed and managed by Sprout Insure, registers the insurance policies as smart contracts on a private blockchain. Sprout works with Etherisc to roll out a technical implementation of smart contracts on the Ethereum blockchain, including a risk pool on blockchain. This will harmonize farmer data, policy information and payment data that are currently siloed, ultimately reducing transaction costs. According to the plan, once the platform is at a sufficient scale, it has the potential to reduce the cost of issuing contracts by 41%, enabling reduction in premiums up to 30% and a decrease in claim cycles from three months to one week. The pilot, which started in early 2020, is expected to insure  250,000 farmers in Kenya with an option to pay the insurance premiums in small installments as low as 50 cents. It is expected to mobilize $6 to 10 billion in annual premiums upon successful scale up. The success can be replicated in other sub-Saharan African countries such as Burkina Faso, Senegal, and Mali in West Africa and Kenya, Uganda, and Rwanda in East Africa. For more information, please visit here.

In addition to facilitate the use of data-driven innovations for smart index insurance, the records of production, process, storage, and distribution can be registered in the blockchain system, which enables traceability of the agriculture products through supply chains. In this way, each produce can be associated with quality data such as their growth condition, harvest dates and certifications (e.g., fair trade, organic and non-GMOs that are favored by certain consumer segments). According to Xiong, et. al (2020), Wal-Mart, Alibaba, and China’s largest online retailor JD.com are already actively implementing blockchain food traceability projects and using blockchain technology to track the entire process of farm to table. The joint application of Internet of Thing (IoT) such as sensors and GPS tracking with blockchain technology can open more opportunities in transparent supply chain management and smart agriculture. While these developments sound promising, it is important to remove technological barriers to smallholder farmers. Coordinated interventions in a multi-stakeholder approach could enable savings from the supply chain efficiency to trickle down to growers and spread sustainable agriculture practices through affordable ICT in the agrarian communities.

For more information on application of blockchain in the agriculture, please refer to FAO (2019): Blockchain for Agriculture -Opportunities and Challenges – and FAO and ITU (2020): Emerging opportunities for the application of blockchain in the agri-food industry.