Blockchain as a Change-Enabler in Flood Insurance
Finding the proper insurance coverage and going through the trouble of actually having to use it can be a painstaking and costly endeavor. The reasons for this are twofold; on the one hand, there are complicated specifications which must be met in order for an insurance claim to payout and on the other hand, the entities that determine if the factors for a claim payout were met are slow and inefficient. This not only creates an enormous administrative cost for insurance companies and other organizations involved in the disaster relief process but it also, more importantly, creates an enormous human cost when insurees must wait days, months, or even years to receive the benefits they paid so much to receive. This antiquated product of centralization, however, is soon to be replaced as blockchain, smart contract, and oracle technology continues to be developed and adopted. The reduction of fees accrued through the elimination of a centralized insurance processes, ultimately, means lower cost premiums, both less complicated coverage and lower threshold claims, and expedited payouts (possibly coming even before the event occurs, such as coverage that provides preemptive aid).
The Federal Emergency Management Agency (FEMA) in partnership with Tribal nations, States, and communities through the Risk Mapping, Assessment, and Planning (Risk MAP) program identifies flood hazards, assess flood risks, therefore, delivering accurate data, which will guide stakeholders in taking effective mitigation actions that result in safer and more resilient communities. This data is included into flood maps. The latter are called Flood Insurance Rate Maps (FIRMs) that support the National Flood Insurance Program (NFIP) and provide the basis for community floodplain management regulations and flood insurance requirements.
Flood hazards are conditioned by various factors, i.e. weather patterns, erosion, and land development. FEMA’s Risk MAP program cooperates with communities to constantly update the flood maps based on the most recent flood hazard data.
FEMA hurricane and flood relief is a prominent use case for blockchain. Flood and hurricane relief logistics are quite challenging to control for logisticians. The disorder, improper organization, lack of skills for handling ground logistics, and coordination between government agencies and private contractors results in a very chaotic environment since supplies are delivered from across North America and conditions are changing at unprecedented speed. In addition, the urgency of helping people, the impact of politicians, and the contradictory reporting by the media will result in an even more chaotic situation that could be tackled by a blockchain ecosystem.
Let’s closely examine how the flood relief project would be managed by implementing blockchain applications.
How can Blockchain help in funding the relief?
During recent years, insurance companies and disaster relief organizations have been developing blockchain solutions that will tackle fraud and fasten the pay-out process. Although FEMA is not an insurance company, it is nevertheless an appropriation fund for disasters specified by the US Federal Government. FEMA coordinates billions in USD for annual insurance payouts.
Assume FEMA developed a blockchain smart contract that will pay out when flooding occurs and expedite the payment amount on the basis of the scale of flooding. Once the flood occurs, the smart contract would automatically make payments to state and municipal governments, expediting the procedures for funding flood relief. Insurance companies and, most specifically, flood insurance carriers would also gain from blockchain, since property records are able to be recorded and saved on the blockchain.
During a flood, the most severely affected population incurs maximum losses as is opposed to others. In addition, people might also lose vital documents such as those needed for proof of identity. Due to the blockchain, this information can be preserved on a decentralized platform. Orders for flood relief supplies, i.e. water and MRE’s, could also be controlled through smart contracts. In the current, off-chain system, there are delays conditioned by government bureaucracy and institutional checks/balances which delays these vital supplies from moving to affected communities.
In addition, the current system is slow in determining and communicating both the type and quantity of supplies that FEMA, and other agencies, must order. Since the scale of flooding is currently ascertained by several government agencies, a final and official report is slow to be determined. On the contrary, smart contracts could trigger automatic orders on the blockchain for the supplies that are needed while also providing tracking and payment processing.
Insurers evaluating claims many times can not differentiate between wind or water damages and since a different pay-out ratio is assigned to these two forms of damage in an insurance contract, the exact loss amount is both difficult to predict and calculate.
For example, private home owners insurance only covers hurricane damages and does not cover flood damages, which requires a separate policy. As a result, there are many registered cases of homeowners that are not protected by adequate flood insurance coverage; and, unfortunately, this poor coverage is usually revealed after a tragedy has occurred.
Floods are difficult to predict and, when they do occur, create enduring financial and time consuming pains. Unfortunately, insurees many times expect a judgmental claim process rather than easy access to their insurance benefits. This problem can be efficiently solved, however, by implementing blockchain technology which utilizes high quality weather oracles, smart contracts, and provides a financial ecosystem that enables anyone to self-insure their home during flooding season.
Processing insurance claims on-chain will work much differently than the traditional insurance system. Specifically, instead of paying a monthly premium directly to the insurer, blockchain technology will enable customers to gain access to the same coverage with monthly payments made to a decentralized premium wallet. The funds accumulated in that wallet will be used for insurance payouts should a smart contract determine a flood occured.
The insurance premiums paid by insurees to the decentralized ledger will form a pool of premium wallets. Depending on the scale of the pool, there will be less inherited risks and the payouts will be more predictable. As well, the pool is not controlled by the commercial bank or the insurance agency.
Smart contracts can run algorithmic calculations as well as store and receive insurees data; but because every node runs every calculation, it’s simply not feasible to make arbitrary requests for data. Oracles resolve this issue by providing the results of any query to any insurance contract. A primary driver of the value of the blockchain is its decentralization; however, the value-add from a decentralized application is greatly reduced (if it isn’t negated altogether) if there is only a single data source. True trust requires choice and the absence of choices for data extinguishes trust and replaces it with the compulsion of “take it or leave it.”
Oraclize and ChainLink provide services for linking existing APIs to the blockchain, but are limited in that each requires data to pass through a single aggregator. They are acting as oracles, resting on their own reputation and the resulting potential for profit or loss. Zap’s system includes this model in its set of economic incentives, but only as one of several techniques. Ultimately, Oraclize and ChainLink could be individual oracles on the Zap platform. Zap brings together the existing wealth of global data with the diverse capabilities of distributed applications by ensuring the secure creation of oracles. Zap supplies a much-needed fundamental piece of the Ethereum ecosystem and the Web 3.0 paradigm by enabling developers to construct Dapps that simply could not function without it.
The input data for the smart contract would be based on the likes of an areas flood risk probability, its historical weather conditions, and the risk profile of a particular insurees home; as well as incorporating third-party independent weather oracles for real-time data. The pooled resources can be automatically withdrawn from the premium wallets as smart contracts are triggered into executing actions on the blockchain based on information provided by oracles.
Fraud is another serious threat during flooding. People try to steal funds by overestimating their losses or carriers steal the supplies in transit. The introduction of a blockchain ecosystem will ameliorate this fraud. Since all supplies ordered, for instance, will be tracked and recorded on the blockchain, any point of failure in the supply-chain can be immediately uncovered.
What are other use cases of Blockchain?
The other use case of integrating blockchain solutions is to use various flood detection devices with integrated cameras and GPS, which can be installed in your home. The data and images stored on the blockchain and signed by the device’s private key will ensure its safe storage and authenticity; thus establishing “proof-of-flood” protocols.
The is an ideal case of Devices acting as Oracles. The ZAP oracles marketplace can oraclize and monetize any IoT device. Stay tuned and follow ZAP’s IoT uses cases and example devices. That’s what zappening!