What is Decentralized Insurance? How does it work? What are the use cases of decentralized insurance? Find answers to all these questions in the detailed guide below.

The insurance sector has been one of the steadiest aspects in the domain of financial services, offering the assurance of safety to many users worldwide. However, technology has been changing financial services, and insurance could not be an exception. As DeFi and web3 solutions define new precedents for systems, solutions, and processes across different sectors, the applications of blockchain in insurance have also been gaining considerable momentum. 

Therefore, curiosity about decentralized insurance has been increasing profoundly in recent times. What does decentralized insurance mean? From the looks of it, the application of blockchain in insurance could help in creating decentralized insurance solutions. You can find a simpler explanation for decentralized insurance in DeFi, which enables decentralized access to traditional financial services. 

What are the benefits of decentralized access to a legacy financial service such as insurance? In addition, you might have doubts regarding the way in which insurance works in a decentralized manner and the benefits it provides. The following post offers an introductory guide to decentralized insurance and how it resolves prominent concerns in the insurance sector. Most important of all, you can also learn about top projects in the field of decentralized insurance with promising potential.

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What is Decentralized Insurance?

Before you go looking for a decentralized insurance company, it is important to understand the definition of decentralized insurance. As of 2021, around 40 million people in the US had been investing, using, or trading in cryptocurrencies. Therefore, the number of threats for the blockchain and DeFi sector has been piling up alongside the inherent volatility risks. 

Most people would assume that decentralized insurance works through the use of blockchain for delivering traditional insurance services in a decentralized manner. However, decentralized finance not only focuses on blockchain-based insurance models as a replacement for conventional insurance policies but also on insurance models for mitigating DeFi risks

The scope of a decentralized insurance platform emphasizes decentralized access to traditional insurance policies. At the same time, it should also aim at safeguarding crypto investors from attacks on DeFi protocols or smart contract vulnerabilities.

Working of the Decentralized Insurance

The most prominent highlight in any discussion on DeFi insurance explained in detail would focus on its working. Insurance works through a pooling of risk. People seek insurance to cover the risk of financial penalties due to potential events in their life. Now, insurance companies work by pooling the risk by asking each user to pay premiums for the insurance coverage. The premium of every customer is significantly lesser than the amount required to pay for claims. 

In the traditional insurance market, the insurance provider pools the risk of consumers while also establishing a centralized process for claims payment. Policyholders have to show valid proof of loss and justification for the claims, and insurance companies would verify the claims before determining the payout. As you can notice, the claims process imposes a huge burden of expenses on the insurance industry. 

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Examples of How DeFi Insurance Works

The problems in conventional insurance service provider institutions, particularly in the claims process, can find a reliable solution with blockchain. How? A decentralized approach to claims management might be a good place to start. However, you should try taking a look at parametric insurance, which removes the process of claims. 

Rather than checking the damages for determining payouts, parameter-based insurance in a decentralized insurance company could offer significant value advantages for speeding up the claims payout process. Parametric insurance could finalize payout by checking compliance with the parameters defined in an insurance policy. 

Let us assume the example of farming insurance to understand the working of decentralized insurance in detail. A farmer could purchase parametric insurance for drought, which specifies the exact conditions for drought. The policy would have to pay insurance claims according to the predefined stipulation when drought conditions have been satisfied. It does not matter whether the farmer incurred any losses due to the drought. On top of it, there is no need for any claims adjuster to determine the final payout with the parametric insurance policy. 

DeFi could serve important contributions to transforming insurance as parametric insurance contracts can use smart contracts. The use of smart contracts in DeFi insurance protocols could offer significant value advantages in cost-effectiveness. At the same time, consumers are more interested in decentralized insurance through smart contracts owing to the assurance of trust alongside lower premiums.

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The Efficiency of Decentralized Insurance

The applications of decentralized insurance ensure that the policy offers descriptions of the oracle or oracles, which are external sources of information. The external information sources help in confirming compliance with parameters for payout. Smart contracts are an integral highlight in answers to decentralized insurance explanations and they could offer prominent value advantages.

The self-executing contracts could help in the efficient management of policy imperatives. For example, in the parametric drought insurance policy, smart contracts can rely on internet-connected rain gauges as oracles. The efficiency of decentralized insurance is evident in the reduction of fees and conflicts from the insurance and claims management process. 

Most important of all, DeFi insurance protocols stand out in terms of security owing to the immutable nature of blockchain. Decentralized insurance improves not only the accessibility of insurance services but also the speed and reliability of the insurance process. 

Benefits of Decentralized Insurance

The applications of decentralized insurance have been consistently subject to speculation and uncertainty. Moving blockchain beyond the realm of cryptocurrencies into the transformation of the larger financial services industry is an imperative requirement. The best way to understand how a decentralized insurance company can be useful for transforming the future of insurance would be a clear overview of its use cases. Here are some of the notable use cases of decentralized insurance with respect to the health and life insurance sector.

Benefits and Use Cases of Decentralized Insurance

  • Introduction of Interoperable and Comprehensive Health Records

The fragmentation of patient health records across multiple organizations results in the inadequacy of patient information for insurance. In addition, sharing sensitive health information with insurers is also a prominent concern for patients in the existing health and life insurance services. 

Decentralized insurance could help in accessing patient-related data stored on the blockchain with their consent. Blockchain could facilitate the power of automated data verification for resolving concerns of trust for information exchange. In addition, secure data storage and access with blockchain also prevent unwanted exploits of patient data.

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  • Powering Administrative and Strategic Goals with Information 

The information serves as an integral component in the operations of an insurance company. Proper acquisition, processing, sharing, security, and utilization of information in a timely manner is critical in the domain of insurance. However, conventional claims systems and outdated technologies not only hamper user experience but also impose additional burdens of maintenance costs. 

The basics of DeFi insurance explained briefly would suggest how it can help insurers adapt to new value-based payment strategies. Decentralized insurance can help in changing the approaches for developing insurance provider networks alongside the mechanisms for contracting and payments. 

Blockchain could help in accessing and managing millions of transactions between customers and insurance companies. It could support the automatic collection of different records of agreements and transactions alongside other reliable information sets. In addition, a decentralized insurance platform could link information from different sources as inputs for smart contracts to make credible decisions.

  • Effective Fraud Detection

The next prominent use case of decentralized insurance would focus on the resolution of the problems due to insurance fraud. Apparently, insurance fraud costs the industry almost $80 billion every year. For example, healthcare insurance frauds involve providers submitting claims for services that were never provided. In addition, life insurance fraud could also be evident in cases where applicants hide key medical information from the insurer.

Blockchain technology could use smart contracts in DeFi insurance protocols to verify the authenticity of claims by referring to different public records. Decentralized insurance protocols could utilize employment records to verify the legitimacy of the information provided by life insurance applicants. 

At the same time, the power of blockchain for secure and flexible sourcing of data from multiple points for data analysis helps insurers with prolific advantages. Insurers could use the power of data for effective detection, identification, and mitigation of fraudulent activity.         

  • Better Customer Experiences

The problems in the insurance application process have also been one of the prominent concerns for the insurance sector. Insurers can rely on the blockchain through DeFi insurance to offer an easily accessible and comprehensive set of records for the application process. For example, a complete and interoperable health data record could help in improving customer experiences. 

The life insurance underwriting and application process can be completed within a few minutes rather than days. In addition, the decentralized insurance company could also obtain secure and verified information about policyholders, thereby updating insurer records.

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Use Cases of Decentralized Insurance in Different Sectors

The generalized impression of the use cases of decentralized insurance in the healthcare sector offers a glimpse of its potential. Interestingly, you can also explore other use cases of decentralized insurance in other prominent sectors. Here is an outline of how decentralized insurance works for different industries. 

  • Travel Insurance

Decentralized insurance could introduce more transparency in travel insurance with better clarity for travelers regarding coverage benefits. Most important of all, the use of a decentralized insurance platform in travel insurance could help in near real-time settlement of disputes and claims due to erratic flight schedules or travel restrictions.

  • Automobile Insurance

Motor insurance companies can rely on decentralized insurance as a credible tool for reducing fraud in the claims process. Blockchain applications could help in tracking smart tags for vehicle spare parts alongside driving behavior for determining premiums. 

  • Agriculture Insurance

The implications of decentralized insurance are also significant for the domain of agriculture. Blockchain could help in speeding up the claims payout process through the automation of claims verification through smart contracts. In addition, agriculture insurance could shift focus towards the assessment of weather-related parameters for determining payouts.

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Popular Decentralized Insurance Protocols

The value advantages of decentralized insurance have proved that it can transform the future of insurance. However, it is also important to check whether consumers can find decentralized insurance protocols readily at their disposal. Here are some of the popular DeFi insurance projects you should watch out for.

  • Bridge Mutual

One of the first examples of a popular decentralized insurance company would refer to Bridge Mutual, which features a versatile mix of insurance products related to the domain of crypto. The claims on Bridge Mutual follow a two-step process of verification followed by voting to check the authenticity of claims. Users could also rely on Bridge Mutual for the effective safety of insurance funds. 

  • Nexus 

The list of decentralized insurance protocols would also include Nexus, a DeFi protocol for safeguards against exchange hacks and smart contract failure. The community takes all the decisions for the operation and maintenance of the protocol. Most important of all, Nexus protocol has successfully achieved exposure in the domain of DeFi insurance. It also plans to introduce new insurance offerings, such as crypto wallet insurance, in the future.

  • Cover

Another popular entry among DeFi insurance protocols would refer to the Cover protocol. It is a promising DeFi project which wants to improve the decentralization and utility of insurance services. The cover protocol relies on a peer-to-peer model, with dynamics of pricing influenced by supply and demand, thereby establishing a flexible market. The most striking highlight of Cover is that people can use its services without disclosing their identities or personal information. 

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Bottom Line

The guide to decentralized insurance showed how it could introduce revolutionary changes for the future of finance. As the pitfalls in conventional insurance models become more prominent, decentralization emerges as a necessity in the insurance sector. The use cases of DeFi insurance explained in detail reflect on the potential of decentralized insurance to resolve issues with the customer experience and insurance fraud. 

In addition, the emphasis of decentralized insurance on safeguarding investors in the crypto and DeFi space also validates its prospects for the future. How will DeFi incorporate insurance services, and what are the challenges for decentralized insurance? Learn more about decentralized finance and discover its impact on the transformation of the insurance industry now.


*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!