DAOs, Smart Contracts, and the Insurance Industry
Do you know what a very good use for a DAO and smart contracts would be? In the Insurance Industry. It is very much possible to create a whole insurance company with a few well-crafted smart contracts. Smart contracts are pretty much just code that if simplified is “if this then that”. Imagine if you could write a smart contract like “if Farmer Joe pays two thousand dollars and it rains continuously for three days in Farmer Joe’s hometown of Fresno, California, and then pay Farmer Joe fifty thousand dollars as crop insurance”. Farmer Joe can be sure that if his crops die from a rainstorm, the smart contract will know that it happened based on real-world information and then pay out Farmer Joe his fifty thousand dollar insurance. How does a piece of code know if it rained in Fresno, California, that it kills Farmer Joe’s crops, you ask? There are helpful things called Oracles that act as trusted sources for smart contracts. They give real-world and real-time information to anything in the blockchain that requests it. In this case, the amount of rainfall depth during a given period of three days.
In order to get the initial money for the insurance, investors in the DAO would first have to pool their own money for the company upfront. This is actually reminiscent of how the insurance industry first started. Businessmen of old would meet up in coffee shops to discuss which endeavors would be worthy of insuring. They then vote on projects or sign up for projects they wanted to participate in. After agreeing, syndicates are formed to ensure the smooth sailing of the project and keep them safe. Members are then compensated with premiums and shares of profits from successful expeditions. After realizing that it was better and safer to diversify the risk among the investors, policyholders also became company owners and had governing rights.
If we use a DAO in place of traditional insurance companies, overall it would still be the same structure. Customers become members of the insurance DAO by regularly paying a premium and in exchange, you receive a token for every pay period. That token is your membership and can be used to file your claim to receive your insurance payout. The smart contract, using oracles, would validate claims and automatically process them, thereby paying the customer. If Investors made profits, they share the gains as issued tokens.
One advantage of using DAOs in the insurance industry is they would bring down the cost. There is no centralized for-profit institution. All excess premiums can be returned to shareholders as dividends. By returning the profits to customers, and by keeping operating expenses low with smart contracts, the cost of insurance can be kept low. Of course, the ultimate goal is to ensure good insurance outcomes for everyone, and part of making that come to fruition is to bring down insurance costs all across the board.
DAOs today are people with similar interests coming together and organizing themselves, sharing a bank account, pooling their money, and voting on how to help make their smart contracts better and more secure. DAOs and smart contracts will undoubtedly change the current landscape of the insurance industry.