Parametric Forest Fire Insurance

Forest Fire Insurance Market + Climate Change

The global fire insurance market size was valued at $58.49 billion in 2019, and is projected to reach $120.49 billion by 2028, growing at a CAGR of 11.9% from 2021 to 2028. Climate change is causing more floods, heat waves, droughts, wildfires… The Intergovernmental Panel on Climate Change Report ‘Code Red for Humanity’, August 9, 2021 Currently entirely uncaptured market in the parametric insurance space Between 2003 and 2017, a number of large wildfires caused almost CAD 5 billion in insured losses, and even more sizeable economic losses. A number of catastrophic events have led to significant wildfire-driven losses, with cumulative insurance payouts amounting to almost CAD 5 billion between 2003 and 2017 (see Table 1).17 The 2003 fire near Kelowna, British Columbia led to around CAD 250 million of insurance payouts in today’s dollars. In 2011, the Slave Lake wildfire in Alberta destroyed about a third of the town and caused nearly CAD 600 million in insured losses. The 2016 fire near Fort McMurray in Alberta, which led to the evacuation of the entire town of about 88 000, now ranks as the costliest natural disaster in Canada’s history, with insured losses of CAD 3.8 billion. Insured losses from the Elephant Hill and Williams Lake fires in British Columbia together exceeded a further CAD 100 million in 2017

Problems For Users

>The traditional insurance claims process is a time consuming procedure. Clients must manually create a claim with an insurance company, wait weeks/months for an adjuster to come evaluate the damage, which the filer may not approve of, in which case it will go to court, adding to the time/expenses of this system.
>The claims management is a large expense of insurers, and it is an expense passed on to policy buyers
>No guarantees of receiving a payout, only ‘trust’ based agreements. Potential for disputes, thus concatenating more time and expenses to the process
>Unclear, non-disclosed data

Solution: Blockchain & Smart Contracts

Smart contracts allow for an automated claims process due to the data driven parameters used to trigger claims, giving users faster, near instant payouts. Due to the claims management process being eliminated, it allows the issuance of cheaper policies. Smart contracts eradicate fraud, and surpass paper trust based agreements. There is no centralized intermediary that can interfere with the contracts. Blockchains create tamperproof, immutable environments, thus removing potential disputes about damage assessment. The data is verifiable and transparent. A complete audit trail is available which greatly reduces counter-party risk, and conflict of interest.

Technical Solution

The general architecture model and flow of the wind farm insurance app (minus one function shown)… the individual insurance policies are stored\archived.. The smart contract fetches data via Chainlink decentralized oracle network, returns it to the aggregation contract, and stores the result. The contract is then able to react accordingly to the data being received and output the correct result based on the contracts logic and conditions. The insurer interacts with the FactoryContract i.e TurbineInsuranceFactoryPolicy (contract) and creates a policy. When creating a policy the FactoryContract creates another contract i.e TurbineInsure (contract) which stores all the state like windSpeed, amount, client, insurer, months the contract is insured, as well as exact location in the form of latitudes and longitudes.


Etherisc Product

The product is a full end-to-end platform for purchasing insurance. Users can submit their property/identification, receive a quote based on risk profile passed through via RMS, chose an insurance plan, and submit an application for approval. Aquila acts as an insurance company with authority to underwrite policies. The final deliverable for Aquila will be the product launch on Etherisc. The product will include the implementation of all the functionalities needed to complete a full end-to-end parametric insurance contract. There are 3 core aspects of deploying an Etherisc product; technical framework, legal framework, risk transfer market. Part of the technical framework includes oracles i.e Chainlink. Other parts of the product not directly correlated to Etherisc are the risk model provider, data provider(s),investor capital, Aragon. Insurance licenses will be categorized under the legal framework. All of this code will exist within a l1 such as Eth, Xdai, etc


Deploy Etherisc GIF Instance, Risk Transfer Market, Legal Framework, Technical Framework/Generic Insurance Framework (GIF), Integration with Risk Model Provider, Smart Contract Development, User Interface, Payment Module, Managing Liquidity Security.

Policy Enrolment

User interface will present data from the risk model provider (real time interface); allow users to select the policy; trigger creation of a policy, trigger payment collection details, supply obligatory documents (proof of ownership/identity), consent/privacy agreement as part of the contract.. User feature to enable them to check their profile with the status of their current contracts. 
The contract module consumes data from the Risk Model Provider and UI to create the contract resource that is then stored.  May include consent; compliance to privacy law for private data.

Connecting the users information to the risk model provider, receiving the quote, sending back to the user to accept.. if accepted, the confidential data stored privately. Aquila will have to accept or deny each application before underwriting the policy, which would confirm that the information of the users identity, ownership of the property, ect is correct, as part of the policy lifecycle. 

Claim Validation & Payout

The insurance contracts function by taking in 2 parameters; the geolocation of the forest fires from the data providers, and the assigned protected coordinate areas stored in the contract module. Using these 2 data sources the smart contract is able to determine whether the forest fires have burned the protected area, and whether or not to pay out a claim. 
For the area of parametric insurance, oracles act as gateways to the physical world, providing provable and reliable ways to transfer data to smart contracts.
Chainlink is designed to execute data driven inputs that operate within tamperproof, immutable, environments  
The contract combines the data from the API and makes a comparison to the predefined protected area using a turf-js library within a AWS lambda function to see if the areas that are burning are within the defined parameters in the contract. 

Business Model

Through the utilization of the captive model, it allows us to control the pool of funds. If it’s depleted, reinsurance would kick in, there’s not a deductible unless it’s structured that way. Essentially as a captive, we would write our own manuscript policy wordings, the introduction, the insuring agreement and exclusions, general conditions, definitions and claims process which would be the written/paper version of the smart contracts. The captive approach also gives us authority from regulators to underwrite insurance policies. As an advantage of this model, any surplus funds that exceed the expected losses in the 3-5 year range can go 50% towards raising the reinsurance entry point, I.e. the larger the primary pool, the less reinsurance as that comes at a higher premium; and 50% back to policyholders in the form of dividends. In a DeFi protocol like Etherisc it could be in the form of DIP tokens. There’s flexibility to also divide the surplus in many ways: primarily pool, investments, policyholder and service providers, especially to the distribution channels to boost sales. Distribution would be done through an MGA with an already established large user base, in exchange for a transaction fee of premiums. Additionally, capital raised could go towards direct customer acquisition of large business insurance such as wineries, crops, and timberland companies.Reinsurance license is also a requirement.

Chainlink Fall Hackathon 2021