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Andres Franzetti is the CEO of Risk Cooperative, a coverholder at Lloyd’s and a consultancy firm specializing in strategy, risk and insurance. In this role, he leads the company’s overall operations and strategy execution. Franzetti specializes in helping multinational organizations address complex risks to increase their overall resilience and mitigate downside exposures. Considered an industry leader in program development and innovation, he has worked closely with organizations such as the United Nations, Volvo and other Fortune 500 companies, as well as leading academic institutions in corporate risk management and mitigation.
The global COVID-19 pandemic has caused enormous damage, causing millions of deaths and devastating the global economy.
While companies have adopted multiple technology solutions to combat business disruption, their overall financial resilience remains particularly vulnerable.
Companies are not alone in their situation; the average family faces headwinds to the economy in the wake of the pandemic.
The World Bank estimates that up to 150 million people will be pushed into extreme poverty by 2021 due to COVID-19 and its economic impact.
With a third of adults worldwide left without banks and a growing protection gap (which is the part of economic losses not covered by insurance), building financial resilience in our global economy is more critical than ever.
Breaking the cycle of generational poverty for large segments of the world population requires greater access to advanced financial tools, such as insurance. A recent study by SwissRe’s Sigma research group estimates the current protection gap at $ 1.2 trillion, a record high.
When you consider the growing number of extreme weather events and global economic upheavals such as COVID, even the largest economies in the world will not be spared. Those in emerging economies, with no access to financial instruments such as insurance or savings, will be the most vulnerable demographics affected when these events occur.
Small-scale farmers, who rely on natural resources and their agricultural efforts as their primary source of food and income, are a prime example.
This lack of protection increases the likelihood of permanent displacement or voluntary resettlement due to lack of barren land and crop due to the absence of viable financial protection available for reconstruction and recovery. Technologies such as blockchain can facilitate the creation of greater financial inclusion while providing insurance companies with the efficiencies and verifications necessary to take advantage of risk transfer solutions to these segments.
Blockchain adoptions
To date, insurers have simply skimmed the surface in terms of blockchain applications, however use cases are gaining momentum.
Applications of blockchain technology have the potential to drive radical change in the insurance industry by improving transparency and outcomes across the entire value chain. The trust and transparency the blockchain offers to all parties in an insurance transaction is also critical to entice buyers of these new services that there is more than a promise.
Insurers have increased their adoption of technology to help underwrite and manage risk better, as well as maximize the efficiency of operating margins.
However, only a select few have planned beyond standard applications and studied how these innovative platforms can facilitate new market expansion efforts. This was easier to do in emerging and developing markets like blue oceans.
Micro-insurance and parametric solutions have been developed to provide cost-effective products to emerging markets.
One such effort was recently launched between Oxfam and Insurtech Etherisc, providing blockchain-based insurance for smallholder farmers in Sri Lanka. This program insures against extreme weather events by using weather data as a parametric trigger, along with smart contracts. This means complaints can be paid automatically via the blockchain platform based on pre-set coverage triggers and weather data on farmers’ phones. Similar solutions have been developed to assist smallholder farmers in South America and Africa.
While farmers initially hesitated to buy insurance, either due to cost prohibitive factors or simply a lack of understanding, these blockchain-based platforms are helping to overcome any uncertainty.
Access to these types of financial instruments helps farmers to withstand unforeseen financial shocks due to extreme weather events, thereby reducing the likelihood of falling back into poverty. It also establishes a more resilient global agricultural segment within these emerging economies, ultimately leading to upward financial mobility.
Challenges and opportunities
For some insurers, accessing these small policyholders is not the only obstacle.
As many emerging economies are plagued by corruption, insurers take a cautious approach when exploring new market entrances for their services. Applying blockchain solutions also creates more traceability and trust, as previously mentioned, which helps eliminate concerns about fraudulent or other nefarious activity.
This further improves the rigorous compliance and regulatory aspects that financial services firms such as insurers must adhere to.
These applications of insurance and blockchain technology in the agricultural sector highlight only part of the opportunities to foster greater financial inclusion and reduce the protection gap.
While the insurance industry has grown largely through consolidation in recent years, it will face further constraints, with markets hardening and capacity for large traditional risk classes becoming scarcer.
This is another area where blockchain applied to the insurance sector can provide underwriters with the comfort they need to underwrite emerging risk classes by reducing the operational friction that would normally price the lower level of the market.
Reducing this friction while increasing customer visibility (and therefore trust) can help eliminate underinsurance scenarios or risks that would otherwise have been deemed uninsurable. This has been demonstrated through research, where a 1% increase in insurance adoption translated into a 13% reduction in uninsured losses and a 2% increase in GDP.
Insurers need to embrace blockchain not only to operate more effectively, but to underwrite more broadly. COVID-19 will have long-lasting implications on how the company operates and how business is done.
While technologies will allow us to work remotely and hopefully vaccines will eliminate this virus, the financial implications for the most vulnerable members of our society will last for generations to come.
As the protection gap highlights, the world has become more susceptible to economic shocks largely due to our highly interconnected trade. Insurance and blockchain applications can be a powerful and underutilized resource for fostering financial inclusion, building resilience and protecting those who are most vulnerable. &
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