Exploring the basement of insurance

Insurance is one of those areas that hasn’t changed fundamentally in the last — well, several hundred years. It isn’t an industry that tolerates change well, with insurers amongst the most regulated companies in the world. This is easily justified — we want insurance systems to be persistent and functional under a range of economic conditions, and there is a survivorship bias amongst the major insurers in the world today: Insurance favors two-hundred year old companies with large capital bases who are able to tolerate systemic economic risks; but how did it all begin? And, can we go back to the beginning again?

The earliest insurance contract known goes back to 1343 with Italian merchants looking to insure maritime cargo; the risk of having a ship not return was easier to bear amongst the merchant class as opposed to any single merchant. Several hundred years later, Lloyd’s coffeehouse in London — Lloyd’s of London became an eminent insurance marketplace for maritime trade in the eighteenth century. No surprises here, Lloyd’s is still around today; as is Aviva (one of our partners) who started off with stagecoach insurance as Norwich Union, and now has $450B in assets under management.

Here is insurance contracting 101 — there is a party, the insurer that offers a contract to exchange risks to a counterparty, the policyholder. The policyholder takes on the risk that the insurer will not pay out in the event of an emergency, while the insurer takes on the risk that they are unable to cover the losses generated by the emergencies of their policyholders. In there, somewhere is a regulator that ensures that the parties stick to the contract, and an oracle that is able to declare — “this ship was lost at sea”.

For better or worse, this mechanism has worked for a long time. It’s been useful to many people and while most people have some gripe about paying insurance, the peace of mind of being insured is quite liberating. But how can we change it? In order to change things with regard to insurance, one has to go either into the technology (the means used to support the contracting and product system) or into the design (the way that the contract is designed) or both!

At Plural we’ve developed insurance models from the ground up: Our models leverage decentralized technology in order to provide insurance services for Web3 users. We segregate the functions of insurance: capital, policies (policy-holding and policy-creation) and claims into different roles within our system. Actors are incentivized by the embedded rules in smart contracts to behave in a way that is fair; and this moves the regulatory problem from an external one to an internal one.

Are we correct? Time will tell. At the very least Web3 gives us a way to remodel the basement, so that it can be a nice new digs.