Blockchain application: parametric insurance

We may expect to see parametric insurance become the norm in the next few years.

The market size of parametric insurance has great potential because the rapid spread of the epidemic has hurt almost all countries in the world (such as East Asia and the Pacific, North Africa, Latin America, the Middle East, Europe and Central Asia). But we do not have a scalable and effective way to automate insurance, so this has also led to the increasing adoption of parametric insurance by insurance companies.

Parametric insurance, also called index insurance, is a new type of insurance that has emerged in recent years. Its compensation no longer depends on subjective man-made damages, but on the trigger of objective events, such as the level of typhoons, earthquakes, and the occurrence of flight delays. In order to ensure objectivity, the occurrence and level determination of trigger events are generally carried out by an authoritative third party, such as relevant government departments (Meteorological Bureau, Seismological Bureau), etc.

The main components of parameter insurance are:

  1. The terms of a pre-determined contract are negotiated by all parties.
  2. Trigger events, such as natural disasters or weather events.
  3. The contract policies are automatically implemented based on pre-agreed terms.
  4. Payment means immediate and effective settlement.

Blockchain-based parametric insurance

Using the language of the blockchain, the parties in the parametric insurance plan can be regarded as participating in a distributed ledger and peer-to-peer network. For example, the data in this network may include details of insurance policies and records of triggering events. Digital signature and encrypted hash data chain can prevent data rollback. Blockchain algorithms ensure the validity of transactions through consensus among network participants. Then the smart contract is automatically executed based on the verified trigger.

Blockchain background information:

Blockchain is a distributed and usually public digital ledger. Simply put, blockchain is a system for recording information. It makes it difficult or impossible to change, crack or deceive the system through the following key elements:


The blockchain is composed of blocks, timestamps, hashes, and encoded records, which are linked in the chain. On the contrary, this iterative process also confirms the integrity of the previous block. If it is traced back, it will return to the original genesis block.


The blockchain is managed autonomously using a peer-to-peer network and distributed timestamp server.

Public key cryptography is usually used to ensure data security on the network.

Consensus mechanism

Any update to the blockchain record (or data) requires the consensus of the majority of people on the network.

From the incremental modification of the Nakamoto consensus protocol to innovative alternative consensus mechanisms (such as the Byzantine fault-tolerant algorithm), many consensus protocols have been proposed to improve the performance of the blockchain network itself or adapt to other specific application requirements.

The market potential of parametric insurance based on blockchain


  1. Parametric insurance can help make up for losses outside of federal government assistance.
  2. Compared with indemnity insurance, the time between catastrophic event and payment is usually much shorter when using parametric insurance.
  3. Parametric insurance can help pay for deductible expenses or damages that exceed the traditional indemnity insurance limit, or indemnify the sub-limit or excluded items specified in the insurance policy (for example, indemnity insurance does not cover losses other than damage to tangible assets).
  4. If the government’s reserves are insufficient, parametric insurance can act as a “safety net” and it is more resistant to political pressure to spend premiums on other areas.
  5. Parametric insurance has a potential impact on the entire value chain of insurance (as shown in the figure below)-in terms of product development and distribution, pricing/underwriting, payment and collection, claims, administration and risk management, the insurance market has begun to favor it.

How to improve flight delays through parameter insurance?


Digital technology is increasingly changing the behavior of customers. In view of this trend, advanced technologies such as blockchain and machine learning have brought new opportunities to various industries. Different industries are now racing to become early adopters of digital technology.

In particular, the parametric insurance used by the blockchain has shown obvious advantages over traditional methods and has increased customer engagement. Most of the expected value of blockchain in the insurance industry is to reduce operating costs. This is mainly by simplifying claims and underwriting, especially in emergency situations, where the increase in customer liquidity will have the greatest impact. However, data maintenance is essential because the blockchain will not verify the accuracy of the data from external sources; therefore, it is essential to avoid the “garbage in, garbage out” scenario.

Compared with traditional insurance, parametric insurance that supports blockchain has a series of advantages, especially in catastrophic events. Specifically, the added value of parametric insurance is: reducing management and operating costs, realizing the automation of claims and underwriting processing, providing quantitative indicators for traditional insurance and the uncovered aspects of traditional insurance, and accelerating payment, which will lead to customer satisfaction The rapid improvement.

Traditional industry

Several use cases in the financial industry show the obvious potential of blockchain applications, and parametric insurance is believed to contribute to the future of the insurance industry. For example, Sweden’s leading insurance companies are increasingly interested in adopting digital strategies.

On the other hand, young insurance companies are slowly adopting technology. In Russia, the focus of blockchain and machine learning deployment is claims settlement, rate setting and actuarial calculations. In terms of distribution channels, young insurance agents use Facebook and LinkedIn the most. Independent consultants and brokers are the two main channels for most claims.

From the perspective of market segments, corporate customers are more interested in parametric insurance models than individuals. However, consumers in Russia and the United States lack awareness of digital insurance solutions. Therefore, despite the increase in digital behavior, parametric insurance has not yet reached a mature level.

Compared with traditional insurance, other specific advantages of parametric insurance lies in overcoming challenges that traditional insurance cannot solve. When there is a lack of centralized trust authority with the insurer, as well as the use of all blockchains with competitive incentives.

It is always important to consider the challenges associated with the adoption of blockchain in the future-scalability, data security, operating costs, regulations and standardization. The scalability of blockchain utilization, the maturity of the rules, and the current standards. Data privacy and security, as well as operating costs, are issues that need to be resolved in the further application of blockchain in the insurance industry and other industries.

In general, parametric insurance in the context of blockchain has demonstrated significant value. However, it is still in its early stages, and being an early adopter will bring clear advantages. In this regard, the following four problem areas are particularly noteworthy, namely scenario planning, technology investment, standard setting, and risk assessment.


Let us talk in detail about a use case of parametric insurance success-flight delay insurance. SwissRe, the world’s second largest reinsurance company, provides a real-time flight delay insurance platform. If a flight is cancelled or delayed, passengers can get compensation.


First, the customer downloads an application called “up in the air” and then selects their departure airport and destination airport. Then, depending on the length of the delay, there are several flight delay insurance options related to the compensation plan. Customers buy at least 36 hours before departure. Second, the uncertainty of the flight will be given by a trusted third party, such as FlightGlobal. Third, payment pricing will be based on a series of factors, including longer flight durations, flight delays, flight diversions and flight cancellations; pricing algorithms will be used to learn and explore patterns in the data. Finally, the risk of the flight will be managed and reflected in the pricing.

The future of parametric insurance

Chainlink and Ethereum classic (ETC) have been exploring parametric insurance. Due to the pandemic, the exploration of parametric insurance has accelerated. The time is ripe for the insurance industry to disrupt, and cryptocurrency will change financial technology forever.

We may expect to see parametric insurance become the norm in the next few years.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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