Insurtech Lemonade has launched a parametric climate risk transfer initiative that will utilise the blockchain and cryptocurrency technology to deliver affordable climate insurance to the world’s most vulnerable farmers.
Launched by its foundation, Lemonade Foundation, the Lemonade Crypto Climate Coalition has been constituted using a crypto feature as a Decentralized Autonomous Organization (DAO).
The initiative is dedicated to bringing affordable parametric climate and weather insurance to subsistence farmers and livestock keepers in emerging markets.
Joining the Coalition are founding members Avalanche, Chainlink, DAOstack, Etherisc, Hannover Re, Pula, and Tomorrow.io, with global reinsurance firm Hannover Re perhaps the most notable inclusion there.
The climate insurance is being architected as a stablecoin-denominated, decentralized application (or dApp) on Avalanche, which is explained as an eco-friendly proof-of-stake blockchain.
Farmers can buy parametric climate or weather insurance using their phones, in global stablecoins or local currencies, while payments will also be sent back to the farmers through their mobiles as well.
An initial rollout of the crypto supported parametric insurance product in Africa is expected within the year.
“The Lemonade Foundation was established to build exponentially-impactful technologies,” explained Daniel Schreiber, Director at the Lemonade Foundation. “By using a DAO instead of a traditional insurance company, smart contracts instead of insurance policies, and oracles instead of claims professionals, we expect to harness the communal and decentralized aspects of web3 and real-time weather data to deliver affordable and instantaneous climate insurance to the people who need it most.”
The Lemonade Foundation is providing the initial capital to backstop the DAO’s smart contracts, the announcement said.
But more interesting perhaps, is the fact Lemonade will welcome other crypto investors to fund the DAO’s liquidity pool in future.
DAO’s can be used to construct financial market plumbing and with smart contracts able to be securitized, while stablecoins are being used to remove the inevitable volatility of crypto currencies, it begs the question whether other types of investors could allocate capital to support the premiums written, or to reinsure the pool.
DAO’s can be architected to deliver functionality similar to a special purpose vehicle, which suggests this crypto supported insurance venture could, if it wanted, welcome insurance-linked securities (ILS) or capital market funding to support its growth.
The DAO has potential as a digital company structure that could support insurance and reinsurance business in future, like a special purpose insurer (SPI) or protected cell company, but with the ability to encode business rules, triggers, cash-flows and other important concepts within them.
It is perhaps the most interesting piece of the crypto-stack when it comes to considerations for how technology could construct efficient ways to bring in third-party capital to new concepts of insurance like this.
As more of these tech-focused ventures into insurance explore the potential use-cases for DAO’s and related architecture, it will be interesting to see how these can be applied to the ILS market in time to come.
“Africa has an estimated 300 million smallholder farmers. The majority 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 Kenya-based insurtech that specializes in digital and agricultural insurance to de-risk millions of smallholder farmers across Africa. “This is where the power of the Lemonade Crypto Climate Coalition comes in: 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.”
“We’ve been helping developers and institutions usher in a new age of economic fairness and transparency with web3. The Lemonade Crypto Climate Coalition is a prime example of how innovative solutions built on the blockchain can drive global financial inclusion previously unavailable,” said Sergey Nazarov, co-founder of Chainlink, the market-leading blockchain oracle solution. “We plan to make the Chainlink team and platform available to L3C in an effort to protect the millions of farmers who depend on what they grow from the devastation of climate change.”