Say Goodbye to the $500 Deductible
How to eliminate it with communities and blockchain
This is my third post in a series of articles on the possible use cases of TandaPay. the other two posts are located here and here. This post is less focused on use cases for TandaPay related to social activism and more focused on solving a common practical issue we have all experienced. I’m certain that at some point in the past all of my readers have known the pain of having to pay a $500 deductible. But what if you could purchase coverage to help mitigate this cost?
The Deductible: in an auto insurance policy, a specified amount of money that the insured must pay before an insurance company will pay a claim.
Esurance has a great article on the pros and cons of high deductibles. The article explains that if you want low premiums you can choose a policy with a high deductible or if you are willing to pay higher premiums this will reduce your out-of-pocket expenses later. The most common auto insurance deductible requires the policyholder to pay the first $250 to $500 of a claim. The most common renters and homeowners insurance deductible is somewhere between $500 to $1000.
But 40% of Americans can’t cover a $400 emergency expense, and more than half of Americans have less than $1,000 in savings. This means that even a $500 deductible could potentially put many Americans into a real bind. For most people having the opportunity to pay as little as $10 dollars a month to cover this type of unexpected expense would be a huge benefit.
How TandaPay allows communities to self-insure
TandaPay uses smart contracts to hold premiums and pay claims. It needs smart contract technology to mitigate the liability of any third party holding someone else’s funds. This eliminates the expensive overhead of:
- Using banks to hold premiums
- Using an accounting system to keep track of premiums and claims
- Producing audits to verify the correct use of premiums
- A legal system to impose penalties for breach of contract
With TandaPay, non-performance of a contract is impossible because the contract always performs in a manner dictated by the smart contract code. This doesn’t necessarily imply that a breach of contract is impossible, since some measure of human judgement will always be required for the approval of a claim. It’s the balanced architecture of TandaPay that provides additional guarantees which result in outcomes everyone can agree are fair. Participants expect TandaPay to provide supplemental coverage. They also know in advance that coverage is contingent upon a community’s extension of trust and relative to a community’s solvency. It is a bit difficult to understand this without the proper context, which will require some explanation in future posts. For now, I ask that you accept the assumption that TandaPay has the property of never failing to meet the expectations of participants.
If TandaPay has this property, it means that there is never a need to seek punitive damages imposed by parties outside of the system. The fundamental architecture guarantees that a policyholder’s premium can never be misappropriated. In exchange for this protection, all potential claimants accept the conditional nature of potential claim awards. All parties always have custody over their own funds until they decide to approve the use of their premiums to pay another policyholder’s valid claim. At that time, the funds cease being owned by the policyholder and become the property of the claimant directly. This transfer of ownership never requires a third party to enter into the transaction. This allows any group of individuals to create a group insurance policy where no entity ever assumes the liability associated with being a custodian of another party’s funds.
Using the concept of a Tanda to illustrate how this works
A tanda is a group of individuals who agree to meet at regular intervals for saving and borrowing together. Members gather at the same physical location once or twice a month. Each member contributes the same amount at each meeting. This is placed in the meeting’s pool and is technically never held by a custodian. Since the pool only exists during a time and place where all members are physically present these payments should be viewed as free of intermediaries. Any member has the opportunity to receive the pool exactly once. All members continue to return to make regular contributions until every member receives their portion. Once every member has a chance to take their portion the tanda disbands.
A TandaPay group is similar except that there is a one month interval between the time when people pay their premiums and the time when a list of claims is presented to the group for approval. Rather than trust a third party to hold these funds we could imagine that the group trusts a bulletproof glass safe to guard funds until the end of the month. If no one person owns the safe and if the safe is located in a public space such as a library then the safe is a suitable metaphor for a smart contract.
The community safe is transparent and it allows everyone to see the premiums placed within it. Even though anyone can see these funds it does not permit anyone to take these funds. To open the safe, keys would be required. When using the safe as a metaphor one should imagine that rather than containing a single box, the safe contains multiple safe deposit boxes, all housed within the one community safe. There would be as many deposit boxes as their are policyholders, each policyholder having their own unique key to their own box.
Placing one’s own money into an individual box signals to the group that your intention is to use that money to pay any valid claims the group has at the end of the month. If you disagree with the decisions the group has made regarding the approval of claims, you can take back your premium and walk away from the group. This approval process allows you to finalize your premiums, thereby sending them to the claimants. To have one’s claim eligible for consideration at the end of the month, one must leave one’s money inside the safe for the entirety of the month. Releasing funds to claimants is voluntary to mitigate fraud, but unfairly withholding payments has social consequences, which can mitigate defaults.
The goal is to honor the group’s social contract. Policyholders who fail to do this are seen as betraying the group’s trust, thus their ability to participate in the future will be terminated. The way Tandas work requires the participants to know and trust one another. So long as the group is kept small and local, this condition is a relatively feasible one.
The ideal TandaPay group size
A TandaPay group is composed of people who know one another. In most cases, a single policyholder should view the members of their group as either friends or friends of friends. Even if from any one policyholder’s perspective less than 10% of a group could be labeled as a friend, the remainder should never be removed from a policyholder by more than two degrees of separation.
As an example, groups can be made up of the following communities of individuals:
- Coworkers who all work at the same company
- Students who all live in the same dorm
- Believers who all meet at the same church
- Neighbors who all live in the same neighborhood
- Acquaintances who all go to the same meetup group
The more people a group has, the harder it becomes to familiarize oneself with a claimant who may have a valid claim. Larger groups however are more likely to offer better coverage with lower premiums. The less people a group has, the more likely one is to personally know the claimant. This relationship would make it easier to identify that a claim is valid on the basis of a personal relationship with the claimant. Smaller groups however are more likely to have less coverage and higher premiums.
Dunbar’s number suggests that groups larger than 250 people may suffer from a loss of social cohesion. On average, people have somewhere between 8 to 9 close friends. In general, people have anywhere from 15 to 50 friends which could be counted as regular acquaintances. If a TandaPay group with 50 participants formed, this would provide a minimum number of policyholders to offer reasonable coverage at a modest cost.
The ideal TandaPay premium amount
It’s difficult to find another type of good or service that would have a comparable value to TandaPay. TandaPay is a new type of technology. Before people can trust that the service will benefit them, the initial premiums to participate must be reasonably low. One relevant comparison could be to consider what people usually pledge when supporting causes on sites like GoFundMe. Funding a cause and participating in a Tanda are very similar concepts, except that with a Tanda one expects to be repaid at some point in the future. The most popular pledge on Kickstarter is $25 and Indiegogo reports that $25 perks are the most frequently claimed.
Consider a group of 50 people that formed a tanda to cover the cost of a $500 deductible. Each participant would be paying $20 a month, for a total in expected premiums equal to $1000. With this payment, here’s the type of coverage they could expect:
- The group would pay a total of $1000 every month in premiums.
- This would provide a full payment for up to two $500 deductibles.
- If there is more than two deductibles in a given month, then the recipients each receive a partial payment of $1000 / # of claimants.
- If there is less than two deductibles in a given month, then all remaining funds would be returned to policyholders as rebates.
If after a period of time the group decided that greater coverage was of more value to them, then they could increase the cost of premiums to $30. This would increase the number of deductibles that the group could pay in full each month to a total of three.
This creates a unique dynamic for the group. The less the community trusts one another, or trusts how the app functions, the more the cost of participation can be reduced. This lower cost represents a lower barrier of entry to potential policyholders. The more the community trusts one another, the better the coverage can become. Better coverage means there are stronger guarantees for claimants, that they will receive a full claim payment when they have a deductible.
In the past when being asked what type of fraud protections TandaPay might offer, I would frequently respond to the question rather defensively by asking, “How many of your friends would attempt to trick you into paying a fraudulent insurance claim?” I later found out that this type of reply usually ends up offending people (*shrugs* why you gotta hate cause all your friends are thieves tho srsly). Although I still think this is a valid way of thinking about TandaPay, I admit that when it comes to approving a claim payment there are better fraud protections than merely trusting people.
Every insurance deductible must have a corresponding insurance claim that was approved by a traditional insurance company. Such claims generate a sufficient amount of official paperwork and correspondence between the insurance company and the individual policyholder. If we outsource the task of mitigating fraud to these companies (which are already required to mitigate insurance fraud), we will always have lower rates of fraud than they do. This is because it is impossible to commit soft fraud against a TandaPay group created to cover a deductible.
By definition, soft fraud consists of policyholders exaggerating otherwise-legitimate claims. Since the value of the deductible is determined in advance to be $500 by the underwriting of the policy, there is no need to attempt to measure the extent of a loss. A group merely needs to determine if a loss occurred, and if it did, then the value of a claim award is already known because it was determined ahead of time and priced accordingly. All these details however could be determined by an individual group’s charter.
How can this work for people who don’t use Ethereum?
This topic deserves its own post, but for now I’ll provide a partial answer here. 98% of the group doesn’t need to have a clue what Ethereum is. Only one member of the group (the secretary) needs to know how to purchase, sell, and convert dollars to tokens which rely on the Ethereum platform. TandaPay will be capable of using stablecoins which have a value tied to the US dollar. Policyholders will pay their premiums and receive their claim awards in these tokens. These stablecoins solve the problem of volatility that people usually associate with cryptocurrency.
This is how a secretary can start a group:
- The secretary clearly defines the group’s charter. This allows them to award a claim without their being any ambiguity as to a claims validity. This charter outlines the requirements for membership in the group as well as actions which would disqualify policyholders from participation or disqualify claims from receiving a payment.
- Any secretary that creates a group of 50 friends receives an initial liquidity grant in stablecoins on the Ethereum network.
- This would require a secretary to get 50 people to download and install the android or IOS app, and for all of them to associate themselves with the same group.
- The secretary is responsible for signing people up, getting them familiarized with the app, creating the group, and providing technical support to the policyholders and claimants.
- The secretary would also need to sign up for an account with a crypto exchange allowing them to move between stablecoins and dollars.
This is how a policyholder can pay a premium:
- They meet with the secretary in person or over a webcam session.
- The policyholder produces a QR code on their phone or uses the TandaPay app to direct message their phone’s wallet address to the secretary.
- They show this to the secretary who scans the QR code or receives the direct message.
- The policyholder then pays the secretary in cash, or with Paypal, Chase QuickPay, or some other method worked out between them.
- The secretary sends the equivalent amount of stablecoins to the policyholder’s TandaPay wallet on their phone.
- The policyholder then uses the app to pay their premiums in stablecoins on the Ethereum network.
This is how a claimant can convert a claim award into a cash payment:
- A community approves a claimant to receive a payment.
- The smart contract sends the funds to the address associated with their TandaPay wallet on their phone.
- They meet with the secretary in person or over a webcam session.
- The secretary produces a QR code on their phone or sends a direct message with their address to the claimant.
- The secretary then pays the claimant in cash, or with Paypal, Chase Quickpay, or some other method worked out between them.
- The claimant sends the equivalent amount of stablecoin they received from their claim to the secretary’s TandaPay wallet address.
- The secretary then has the option to convert this stablecoin to cash if needed.
This won’t work because insurance is regulated
TandaPay is not insurance. TandaPay is speech. As protected speech, it cannot be regulated by anyone. I have a blog post coming where I discuss this in greater detail, but policyholders have a clear path to victory on this one. The regulatory agencies and the insurance carriers who lobby them to heavily regulate the insurance industry however, are likely to disagree. Despite what we’ve been told, corporations love regulation. Regulation is after all the ultimate barrier to entry for entrenched corporate interests.
It seems as if corporations hate regulation given how much they complain about it being costly and burdensome. It’s exactly this cost which creates barriers to entry into their market. If the startup costs are high enough for new financial products, who would dare risk their capital to try something new? In this way, these costs serve to eliminate innovators in their space. Corporations who utilize lobbyists to write these regulations are essentially saying, “we’re really dangerous. You need to protect the public from us.” This is why any newcomer who would threaten to undercut an insurer’s business model immediately finds themself at the sharp end of a regulatory stick. In this way regulators become a bulwark to deep-rooted corporate interests who use them to protect their market share. That’s why it’s pitchforks and torches straight to the steps of the Supreme Court.
My belligerent attitude might give some the wrong impression. I have no intention of assuming any unnecessary legal liabilities. I can say with full confidence that it will be consumer groups which will herald the cause and assume the costs of fighting against the corporate interests. Once people realize how much they have to gain from this technology they will fully embrace it. This will require them to be willing to pay a price to retain ownership of it. Realistically, this means that in order to innovate in the insurance space, future court battles will be inevitable. But consumers have little to fear as the insurers and the regulators have zero chance of winning anyway.
Benjamin Franklin described his work at the constitutional convention as producing “a republic,” with the caveat “if you can keep it.” In the same way, TandaPay can give consumers a new platform for digital democracy and self-governance, with the caveat if they can keep it. One day consumers will realize what it’s like to live outside of the cave of corporate control kept in check by costly and burdensome regulations. After emerging, it’s unlikely that they will be eager to return back to their former prison.
Right now TandaPay and the insurers can play nice since TandaPay doesn’t encroach on any traditional forms of insurance, thus it is not a threat (yet). In time, the opposition to TandaPay will be of the same spirit as Edward Blum’s assault on the Voting Rights Act. Meaning there will be “test cases” which decide these matters before insurers realize how serious a threat blockchain protocols really are to their existence. So by the time insurers start to get all defensive and touchy about this subject, it’s going to be too late. The new precedent that will be established by these cases will create a new regulatory framework for blockchain insurance products. Proactive consumers will have already established the necessary path forward for a bright, decentralized future for all without the unnecessary costs of regulatory overhead.
All my friends that have played devil’s advocate on the side of corporate interests, have basically capitulated and come to the conclusion that whether they like it or not I’m right. The government would have to radically curtail 1st amendment freedoms in a way that violates all previous precedent set by cases such as Citizens United v. FEC or the recent case with Janus vs. AFSCME, and they are not going to do that. I have a series of posts coming which seek to demonstrate that TandaPay cannot be regulated. Hopefully these help substantiate some of the claims I make in this post.
The fundamental foundation for the policyholder’s future victory is the fact that the developers bear no liability for how people use the TandaPay software. This emboldens innovators to put the needs of the consumer first, before regulatory or corporate interests. Furthermore, the users themselves bear no liability when they use TandaPay. This is because the users of the software are under no requirement to treat their TandaPay group as an insurance policy. This is similar to how the members of Christian Care Medi-Share are under no requirement to believe that Medi-Share is insurance. In fact, they are told over and over again that “Medi-Share is not insurance,” and neither is TandaPay.
No laws are ever violated because no third party ever takes ownership of someone else’s funds. There is no law on the books anywhere that would treat direct payments between members of a mutual the same way as it would treat payments to an insurance company. Even if the government were compelled by insurers to regulate this sector of the economy, they would likely have about as much success as the movie studios have had trying to get the government to enforce the DMCA as it applies to pirating using P2P protocols. The creators of BitTorrent are not liable for copyright violations when BitTorrent users pirate illegal movies and music. What makes you think that TandaPay is any different?
What makes TandaPay special?
- It has the right blend of incentives and protections for participants.
- It leverages people’s existing social networks and their existing trust relationships with real people in the real world, to mitigate fraud and create communities that truly care for one another.
- Every month one of three things happen:
* Your friend’s deductible gets paid (win for your friend)
* Everyone gets a refund because no one had a claim (win for everyone)
* Your deductible gets paid (win for yourself)
* Not one premium dollar ever goes to an insurance company or to TandaPay developers (loss for “the man”)
- It outsources the cost of fraud mitigation to someone else.
- It also has zero-fraud architecture built into the protocol.
- TandaPay is supplemental coverage only. This sets clear expectations for the participants that are simple to understand. This also allows policies to have limits which never obligate a claim to cover the full value of a loss.
- It has the right price for a premium matched with a known pain point that people can conceptualize.
- Just as $20 dollars is seen as trivial, $500 is seen as valuable, and these are the specific costs and benefits baked into the system.
- People hate deductibles. Hate for something “bad” is typically a better motivator than love for something “good.” Show me one person who doesn’t hate deductibles and I’ll show you 10 who do.
- You only need to convert the secretaries and they do all of the work for you of mobilizing policyholders and supporting them as early adopters.
- I can sell software licenses and this doesn’t create any liability for me.
- TandaPay can be built with less than 300 lines of smart contract code.
- A TandaPay contract on the main Ethereum chain can never hold more than $4,000 USD in stablecoins. This reduces the liability associated with large sums of value locked into smart contracts. Such sums have been huge bounties to hackers, which have incentivized them to make attempts at finding ways to get at these funds.
- TandaPay contracts which operate on a sidechain have further protections, which make their community contracts immune to all known hacking vectors.
- With Ethereum’s current architecture, TandaPay is scalable right now to upwards of 500,000 policyholders using a single sidechain. This sidechain integrates using Bancor currency pegs, which create restrictions to only allow transactions from whitelisted participants. Scaling using this method is a special property of TandaPay that other Ethereum apps do not have. This is because all the participants of TandaPay are known in advance of their participation. TandaPay also has full control over the Bancor pegging contracts to exclude or include participants. Finally, TandaPay can also use timelocks on the movement of any funds off of the sidechain to provide policyholders with the highest levels of financial security.
In my next post I explain how TandaPay’s architecture eliminates insurance fraud by focusing on the role of the secretary, and the function of a community charter. TandaPay’s solution is so simple that no governance mechanism is needed to mitigate insurance fraud. People vote with their premiums, giving them the opportunity of withholding payment for any claims which are being unfairly awarded.
In future posts I will also discuss the product-market fit for this type of platform and why we have yet to see applications like this really take off. With the failure of Yahoo’s Tanda app in 2018 people are right to be skeptical about the value of this type of financial product. Finding the right market for this type of product is critical. If we are not targeting a market that is already familiar with how Tandas work then TandaPay is unlikely to be successful.