Blockchain technology may simplify the process for farmers to access insurance payouts for loss and damage from climate events.
Parties have only a few days remaining to make decisions about which way Article 6, the Green Climate Fund (GCF), the Warsaw International Mechanism for Loss and Damages (WIM), and other topics will turn. With these critical negotiations come days of “boom and bust.” Negotiations will go well into the night one day, and the Co-Chairs will work throughout the night to come up with a more agreeable draft. This process takes time and comes in waves.
Meanwhile, side events on the periphery of the negotiations offer new and innovative solutions from the private sector. At one such event, “How blockchain-based parametric insurance can tackle the financial impact of climate disasters,” the idea of paying for loss and damage from climate disasters was explored in greater detail, with a particular focus on the agricultural sector.
Poor and underprivileged farmers bear the brunt of economic losses from climate events due to climate change (costing the “Vulnerable 20” $62 billion in interest payments alone over the last 10 years), but they emit almost no greenhouse gases relative to developed countries. Unfortunately, farmers cannot afford to pay the high insurance premiums to protect their crops, so they are stuck with the economic losses. To combat the underlying drivers of high insurance premiums (e.g., overhead, lawyers’ fees, paperwork), the private sector is turning to an innovative solution involving blockchain technology and “smart contracts.”
Blockchain is essentially an immutable online ledger that can complete secure transactions instantly. Smart contracts are contracts between insurance companies and farmers that would provide payouts once certain parameters are met (e.g. a hurricane with winds reaching a certain speed, a drought lasting a specific amount of time). This is known as “parametric insurance.” Once those parameters are met and verified by existing weather monitoring instruments, the insurance companies can instantly payout small-scale farmers by depositing money in their digital wallet. No adjustors, no lawyers, no paperwork.
Providing farmers with that type of security, they can safely grow more valuable crops that they would not otherwise risk losing due to weather events. This allows farmers to better serve their community and make more money all while paying insurance premiums at least an order of magnitude less than traditional insurance.
Like all new innovations, blockchain, smart contracts, and parametric insurance have their drawbacks and are not yet ready to be implemented at scale. For example, blockchain can only work effectively if provided with accurate data, without which it is useless. Additionally, it remains to be seen whether smart contracts are truly enforceable.
Finally, and perhaps most fundamentally, the parameters must be accurate for parametric insurance to work, or else famers will not be paid out when their crops might actually be damaged. Despite the uncertainties associated with this novel idea, it provides hope that streamlined processes may create conditions for which someone is willing to reach for the bill.
Back inside the negotiating room, parties have been focused on three main areas of disagreement reflected in the draft decision for the Warsaw Implementation Mechanism (WIM), which aims to address loss and damage associated with the impacts of climate change, including both extreme events (e.g., hurricanes) and slow onset events (e.g., desertification) in developing countries. Reaching consensus has been challenging because of three main issues: (1) provisions for the mobilization of financial support, (2) options to strengthen the workstream, and (3) options for technical support. Various parties have expressed a range of views on an acceptable way forward, ranging from minimal ambition to significant ambition.
With less than 72 hours to go on the loss and damage issues under negotiation, the promise of a more “simplified” future, using blockchain, smart contracts and parametric insurance, is quite appealing. Regardless, if there is one common theme stemming from the narratives of both the negotiations and the side event, it is that the process is both evolving and unpredictable. Whether a lawyer, a farmer, a negotiator, or an adjustor, in an era of dynamic, unprecedented change, we must become more familiar with what may, at first, be uncomfortable.