How blockchain could shield smallholder farmers from climate risk
Blockchain-enabled insurance could take the uncertainty out of climate insurance. Read More
Blockchain wants to bring transparency to regenerative agriculture payouts. Image courtesy of Chainlink.
In March, the Lemonade Foundation, a charity run by the founders of the digital insurance provider Lemonade, announced plans to use “blockchain to protect farmers in Africa from climate change.” I tend to be skeptical of tech companies’ lofty goals to save the world with an app — or, in this case, a blockchain. But I was also curious about the idea because smallholder farmers could greatly benefit from better access to technology and services.
So I dug into the still rather cryptic blockchain insurance world — and emerged more optimistic on the other side. It seems like blockchain-based insurance could indeed be helpful for smallholder farmers.
Smallholder farmers are a vulnerable and underserved group
Rural communities in low-income countries across Africa, Asia and Latin America face an exasperating situation. They contributed little to the climate crisis but bear some of its worst consequences. The Intergovernmental Panel on Climate Change predicted that extreme weather events such as heatwaves and droughts will become more frequent, cutting agricultural productivity by up to 50 percent in Africa. Support is urgently needed to mitigate the risks and enable farmers to adapt to changing weather patterns.
Agricultural insurance can help farmers maintain their operations and protect food security while weather patterns become ever-harder to predict. But today, a minority of smallholder farmers can access such services. In Sub-Saharan Africa, less than 3 percent of farmers buy agricultural insurance. Rates are higher in Asia and Latin America, where 22 and 33 percent of farmers are insured, respectively. But there’s room for improvement everywhere.
The problem? Insurance tends to be too expensive, bureaucratic and unreliable. The age-old strategy of using agents to verify and approve claims case-by-case makes it too costly and opaque. But most insurance companies still rely on it. This is where blockchain aims to make a difference.
Blockchains promise to unlock cost savings and transparency
An evaluation of a blockchain-based agricultural insurance service estimated that such models could reduce costs by up to 41 percent, allowing insurers to reduce premiums for farmers by up to 30 percent. That’s a big difference. Where do the savings occur?
“Smart contracts” make the magic happen. It’s a model that automates insurance payments by basing them on a range of publicly available, verified and credible data connected through a blockchain. The data come from sources such as AccuWeather, NOAA weather and climate data hosted on Google Cloud. As these sources include granular geographic information, insurers can verify remotely whether a farmer experienced a drought, heatwave or storm.
Chainlink Labs, a company providing blockchain infrastructure for several new ag insurance companies, offered a drought insurance example. The scenario: a farm needs at least 20 inches of rain to grow crops and buys insurance that gives a payout if there are less than 20 inches of rain. At the end of the contract term, the insurance automatically checks how much rain the farm received based on weather data and immediately triggers a payout if there were less than 20 inches.
“Because smart contracts are run on decentralized infrastructure, there is no way to tamper or manipulate this prearranged agreement,” Chainlink writes. “Rather, the contract already has all of the parameters defined: the farmer’s location, risk parameters, and the coverage amount. Once set, the insurance payout is deterministically executed based on the pre-set parameters and the weather outcome.”
A growing market powered by trust and speed
These increased levels of trust and transparency are critical in markets where farmers doubt whether traditional insurance companies will fulfill their contractual obligations. The blockchain insurer Arbol perceived this as one of the main obstacles holding back crop insurance adoption in Cambodia, one of the countries where it offers smart contracts to smallholder farmers that wouldn’t be profitable for larger insurers to cover.
And the model is taking off. Siddhartha Jha, founder and CEO of Arbol, told me that the company went from covering about $2 million in risk in 2020 to $300 million in 2021. This year, the startup expects to double that coverage.
There are impactful applications for blockchain tech beyond reducing farmers’ climate risk. It could streamline payments for regenerative farming practices, forest conservation efforts and other environmental initiatives that remote sensing tools could verify.
For example, a project between Chainlink and the non-profit Green World Campaign uses satellite data to automatically trigger payments to people who have successfully regenerated “designated areas of land by improving soil health, contributing to greater carbon sequestration, increasing vegetative/tree cover, enhancing hydrology, and other rehabilitation techniques.” The short payment turnaround will particularly benefit smallholder farmers with little cash reserves.
But there’s no reason why growers in other parts of the world wouldn’t get excited about more money with less paperwork. So I imagine that we’ll see a much broader application of these technologies in the coming years as the implementation of nature-based climate solutions continues to accelerate.