The Lemonade Foundation, a nonprofit organization founded by the Israeli digital insurance company Lemonade, announced last week its first project: agricultural insurance for subsistence farmers in developing countries. The fund will allow farmers to protect themselves against losses incurred due to drought, flooding and other risks associated with climate change. The project will be rolled out over the course of the year, in cooperation with other organizations operating in the fields of insurance, cryptocurrency and blockchain technology and climate change.
The Lemonade Foundation was established prior to the company's massive initial public offering, explains Shai Wininger, co-founder and co-CEO of Lemonade. "We transferred company shares valued at $20 million [to the foundation], and the goal is to have a meaningful impact through technology over time. We are now announcing the first project – the Lemonade Crypto Climate Coalition, which will build a platform to develop and distribute parametric weather insurance coverage at cost in emerging markets," Wininger says.
Parametric weather insurance is a type of contract in which claims are automatically triggered in the event of a predefined event – such as a specific amount of rain or lack thereof – that is liable to cause irreversible damage to farmers. Lemonade's founding partners in the coalition include insurance, cryptocurrency and weather forecasting organizations such as DAOstack, Avalanche and Tomorrow.io.
"We thought a lot about how to create an impact through the foundation, trying to find ways where we have a real relative advantage, and if there's something that we've specialized in over the past few years and really understand is insurance, technology and automation. Crypto is an infrastructure that we've been very interested in lately," Wininger adds.
Smart insurance contracts
When asked why crypto and blockchain can help in this context, Wininger explains that, "Existing projects today – of traditional or innovative insurance companies working to improve the situation of farmers in developing places have an availability problem: They exist in very specific places.
“The second problem is a price problem: The cost of selling, distributing and handling claims for a traditional insurance company is very high," he says.
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"When you try to address an entire massive area like the continent of Africa you have to examine a claim that someone has filed because their field flooded, for example, the cost of bringing people there to assess the damage and handling the claim manually is very high, so this [type of] insurance is expensive.
"Crypto enables several things: full automation - no human contact is needed, because smart contracts are used that connect the use of advanced weather forecasting models to operations that will be done on the blockchain network, which will significantly lower the cost of claims processing.
"The same goes for pricing – it happens entirely on the blockchain. It doesn't involve any human interaction or discretion, and there'll be no need to send people to the area, which makes the insurance very expensive.”
However, there is also another reason. Wininger explains that the “third and significant thing is the financial backing: When you want to provide insurance of any kind you need an economic infrastructure that will enable the system to exist and pay out claims. And these are things crypto can do really well: 'Liquidity pool' is something that exists very widely in various crypto products, and in this respect crypto is an efficient and inexpensive way to provide liquidity for insurance."
The question that remains is how farmers in developing nations will manage to carry out operations in cryptocurrency. Though this is not a field that is particularly accessible, that’s not really a problem, Wininger says.
"The end customer will not necessarily be exposed to the fact that it is crypto, since it will be done behind the scenes. These farmers have an existing way of consuming services: They use their phone, mostly regular text messaging; most don't have smartphones, and our system will be based on the same infrastructure that they're accustomed to."
Africa will be the coalition's first market. "In Africa there are 300 million smallholder farmers who face climate risks that could affect their livelihoods. Traditional insurance does not exist in most of these places, and the products currently on the market are in a very limited range."
Wininger adds that "It's impossible to ignore crypto today. It's an area that we are examining and researching a great deal. At the moment the right opportunity for us is the foundation."