Providing Decentralized Insurance Services Worldwide with Hybrid Smart Contracts

In the presentation below, Mattias Zimmerman, CTO of Etherisc, provides an overview of the central role that hybrid smart contracts and oracles play in enabling the provision of parametric insurance products on-chain, and the benefits they bring.

Below are some highlights from his talk.

Etherisc Overview

Etherisc is a decentralized insurance protocol that provides parametric insurance products across the world. From buying a policy to making a claim – Etherisc uses hybrid smart contracts. As opposed to ordinary smart contracts, hybrid smart contracts combine on-chain data with external real-world data. This allows Etherisc to offer insurance against real-world scenarios including the destruction of crops, flight delays, hurricanes, and more. Most recently, Etherisc was deployed on Polygon and Avalanche.

Parametric Insurance – Differences from Classical Insurance

Parametric insurance refers to insurance policies that cover objectively measurable events based on a predefined index or set of “parameters”. The payout would also be a predetermined amount based on the magnitude of the event being covered. For example, a parametric flight insurance policy would payout a certain amount if a specific flight is canceled, diverted, or delayed by more than 1 hour. The amount paid out would increase if the same flight is delayed for more than 3 hours. All these parameters would be set at the time of purchase. While parametric insurance has been around since the 1800s, decentralized parametric insurance has gained traction very recently, with the advancement of blockchain technology and smart contracts. Another example of a decentralized insurance provider would be Nexus Mutual.

With blockchain-based parametric insurance and its potential for 100% process automation, claims and payouts are executed much more efficiently. Compensation payouts are immediately processed when these predefined parameters have been triggered – operating like a smart contract. On top of the time saved, decentralized insurance allows users to get coverage without providing sensitive information to a third-party insurance provider.

The pricing for these insurance products is based on the respective indexes’ historical data. Some examples of such indexes include rainfall and the magnitude of an earthquake. “Sufficient” historical data must exist for more accurate pricing of these parametric insurance products. These indexes must be continuously monitored and updated, pointing to the relevance and importance of blockchain oracles being used to bring the off-chain real-world data on chain.

Oracles are Central for Parametric Insurance.

Oracles play an integral role in parametric insurance. This is because hybrid smart contracts require real-world information, like flight delay alerts, to trigger it. Oracles act as the information provider between real-world updates and on-chain smart contracts, therefore allowing for the predefined parameters governed by the smart contract to be triggered in real-time.

Impact Insurance

Impact insurance, also known as micro-insurance, is another product of Etherisc – an example of which is crop insurance. Traditional farmers are susceptible to experiencing multiple seasons of drought, leading to poor crop cultivation, which results in financial instability. Currently, their only respite is purchasing insurance from traditional insurance companies. However, the extortionate prices and premiums, and complicated claims processes pose an obstacle to these farmers. This results in them viewing these traditional insurance companies with a lack of trust and understanding, creating a disconnect.

The recent advances in mobile money have allowed for more financial inclusivity – even “feature phones” like old Nokias can access this. This allows many farmers to engage with mobile money services despite not even having a bank account.

A decentralized impact or micro-insurance product also provides a much-needed alternative to traditional insurance products.

Flight Insurance Overview

To provide a high-level overview of the above-discussed points, Matthias Zimmermann gave a run-through of the end-to-end process of a decentralized parametric insurance policy contract. In particular, he describes the claims monitoring process that utilizes oracles.

Firstly, the user purchases a flight delay insurance policy from the Etherisc platform. Once the flight has taken off, the policy contract requests an update from the oracle. This request occurs on-chain. Then, the oracle proceeds to acquire the flight data off-chain, and this piece of data or information is processed. The oracle proceeds to provide this information to the smart contract in question. The policy contract is then updated with whether the flight was delayed or not, and decides whether to pay the claim to the policy buyer.

Etherisc’s Generalized Insurance Framework (GIF)

Etherisc is building an end-to-end platform for decentralized insurance. The goal for this end-to-end platform is to be an ecosystem of policy buyers, product owners, oracle providers, and risk-capital providers. This framework is product agnostic and is not restricted to only parametric insurance. Product owners can build their own insurance products using this platform. Risk-capital providers are the ones who provide the risk capital that ensures there is enough capital to pay out the insurance claim. The platform is EVM based. EVM or Ethereum Virtual Machine compatible chains are blockchains that are compatible with Ethereum. Smart contracts can be easily migrated from Ethereum to other EVM-compatible blockchains, and vice versa. Therefore, this framework will provide multi-chain support. It is open-sourced, so the framework’s source code is freely available to anyone and may be redistributed and improved on. In 2020, Etherisc, in collaboration with Chainlink, started developing a parametric crop insurance product on top of their GIF for ACRE Africa to provide insurance services to Kenyan farmers.

Current Limitations with the Crop Insurance Product

In its current state, there are still several issues with the crop insurance product that Etherisc has built for ACRE. According to Matthias, there is currently only a single proprietary raw data source, which means the data is owned by an individual or an entity and is not truly decentralized. Etherisc is also currently utilizing a single oracle node, which reintroduces a central point of failure into the system.

While some of Etherisc’s insurance services are not fully decentralized yet, leveraging hybrid smart contracts greatly helps to achieve more transparency and faster payouts for customers, prevent insurance fraud, and reduce organizational overheads. As the oracle space continues to grow, more data providers and oracle node operators will enter the ecosystem, eventually providing a much larger pool of data for future users and applications to take advantage of.

The Blockchain Oracle Summit was the world’s first conference to focus solely on the role that oracles play in the various use cases of smart contract technology. Leading speakers from across the industry gathered in Berlin to discuss their work and the challenges faced.

Also published here.