Many investors, operators and business owners have exposure to agricultural and other natural assets, both directly and indirectly. These assets are highly sensitive to natural disasters and other weather phenomena, however traditional insurance firms may not allow these investors & operators to fully insure the value of these assets.
One solution here is a decentralised insurance protocol, where users could hedge financial risks around binary-outcome natural events, such as rainfall, windspeed, earthquakes, or temperature. Participants of the protocol could range from insurance providers, to agricultural firms, to other speculative investors or stakeholders.
One key problem here to look out for is collateral. With a typical insurance company, only a small % of the insured file claims are eligible to receive them. Will a decentralised insurance protocol need to hold collateral on a 1:1 basis? If not, how do you determine the right % of capital which must be held in the smart contract?
Another issue to overcome will be the determinant of whether an event occurred or not - for example if a tornado occurred and there was resulting water damage in the area, was the event the tornado, the water damage, or both? Are recipients insured against both? Is there an unambiguous definition for ‘water damage’?
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