Strategies for applying distributed ledger technologies in index-based crop microinsurance schemes

Abstract

Support for sustainable smallholder farming has long been recognized as a key to healthy and resilient food production. The ideal situation – a global community of geographically dispersed smallholders enmeshed in local economies, thereby reducing waste – is incompatible with the centralizing forces currently dominating development. One need only view the COVID�19 pandemic and associated supply chain breakdowns to see the weakness of an overly connected global food system rife with perverse incentives, namely the centralizing nature of specialization and industrialization. Crop insurance is a form of proactive disaster risk management used to diffuse risks to agricultural production across space and time with other producers. It is a form of support that countries have long endeavored to implement so that farmers avoid turning to suboptimal traditional risk coping mechanisms. Notwithstanding, traditional insurance programs have been plagued by well-documented challenges creating a severe gap in service offerings, especially among smallholders in the developing world. As climate change raises agricultural risks through heightened uncertainty, it is increasingly necessary to augment the security of smallholder farms through closing the coverage gap. Fortunately, recent technological advancements have improved the prospect of overcoming barriers to reaching smallholders. Combining the decreasing cost and increasing sophistication of remote sensing and satellite technology with smart contracts and other innovations enabled by distributed ledger technology has the potential address many of the challenges of traditional insurance provision. Blockchain technology affords this potential through providing architecture to reduce transaction costs, increase trust and access, and deepen opportunities for reinsurance. The transparency and immutability of blockchain engenders a unique coordinating capability that allows for benefits superior to other organizing instruments. Despite limitations concerning the current state and maturity of blockchain technology, the pace and direction of development offer promise for near-term composability with key systems and functionality. This research uses a literature review to trace historical challenges in providing crop insurance and analyzes the opportunity for blockchain to mitigate them. It focuses on evaluating the potential to bolster the provision and uptake of a particular type of crop insurance – index�based microinsurance – through the combination of blockchain technology and public-private partnerships. The aim is to provide an analysis of how blockchain applications can improve existing crop microinsurance schemes and a guideline for how public-private partnerships should be organized to optimize implementation. Furthermore, this research holds in mind the ultimate goal of creating true at cost peer-to-peer index-based crop insurance. That is, after initial investment, coordination, and monitoring by a public-private partnership to overcome startup barriers, it is possible, and optimal, to create new regional smallholder insurance regimes running on decentralized infrastructure.