4 ms·

How can Ethereum-based insurance products ever be competitive? For an insurance smart contract to work, all the money must be tied up in the contract (otherwise

How can Ethereum-based insurance products ever be competitive? For an insurance smart contract to work, all the money must be tied up in the contract (otherwise, there would be no way to guarantee that you could be paid out). But in the real world, insurers don't just leave their money sitting uselessly in a pot, they put it to work, investing it. So the smart-contract based insurance is always going to be less efficient...

jtchang 10y ago
Maybe the lower premiums would cancel out the amount that real world insurers can make. Though I kind of agree with you that having a bunch of money sitting there doing nothing is bad.
- richmarr 10y ago
  > ... cancel out... This assumes that investments made with premiums are precisely equal with the margin kept by the insurer. Considering the variety of insurers, insurance products, seasonal variation, etc. this is a pretty wild assumption. That said, insurers do make a profit on their income and make a profit on their investments. They may tell you that they have a negative combined ratio, but it's a misrepresentation, mainly for lobbying reasons. They only include base premiums in that calculation, not all the extras they sell (alloy wheel insurance, key/fob insurance, no-claims protection, etc). Again though, it's worth pointing out that smart contracts aren't going to get regulator approval any time soon... and will probably never have access to re-insurance markets. Customers are also going to have a hard time trusting smart-contract based systems them after recent events. The value of optimising for decentralisation over optimising for disruption* seems negligible in this case. If you can create a crowd-sourced insurance pool there are tons of real tangible benefits, mainly coming from the fact that the customers and "insurer" are economically aligned (unlike a conventional insurer) so the incremental value (and cost) of making it decentralised doesn't seem worth it to me. (source/disclaimer: I founded a p2p insurance startup) Edit: added asterix and list of genuine benefits - Since the "insurer" isn't on the hook for paying it doesn't need whitelists of "permitted" tradespeople, or price lists. - It can share information freely about crime hotspots, health issues, etc. It can act on the customers behalf in order to keep them safe, and a happy customer. - Customers in a pool can work together to solve problems - A pool of safe (and lucky) drivers might see premiums drop to 25% of market rate, which mainly covers re-insurance costs - Knowing the repurcussions of your actions will affect you and your pool group fairly directly may change some types of risky behaviour - Lower incidence of fraud ( * By disruption I mean the proper sense of the word. It's an entirely different business model rather than just being an innovation. )
  - joosters 10y ago
    (source: I founded a p2p insurance startup) Interesting! What is its name / website?
    - richmarr 10y ago
      Guevara (heyguevara.com). UK motor insurance. We started after Friendsurance in Germany but before Lemonade in the US.
  - kpi 10y ago
    I am a big fan of heyguevara, and happily disagree with you on regulatory approval and access to re-insurance markets: these need to be addressed, and we are happy to have discussions with insurance brokers and regulatory bodies to do that. as soon as those risks are reduced and some examples established, smart contracts will make it very easy for any group of people to start their own p2p insurance with their own parameters and rulesets instead of relying on less flexible central platforms.
    - richmarr 10y ago
      Appreciate it, thanks. Don't misunderstand I totally respect anyone willing to get stuck into this stuff... I just think you're making a rod for your own back by adding this "distributed" requirement. I don't see customers caring about distribution, whereas it would make several areas more difficult to manage... fraud for one. It's cool and all, but it's a walled-enough-garden even without that constraint... a constraint that regulators, reinsurers, etc will find alien and confusing.
usgroup 10y ago
That isn't necessarily true. You could buy "shares" in a contract. The contract then uses share capital to underwrite many insurance claims, and you're paid a monthly interest for owning the share capital. I.e. the money then wouldn't be sitting idly, it could be used again and again to underwrite more contracts, up to the risk limit.
- joosters 10y ago
  It's still less efficient than 'real world' insurance, which also pays out, but does not need the money to be locked away.
  - mbrock 10y ago
    I don't see why Ethereum-based insurance contracts necessarily lock money. For example, the contract could give another address the authority to take risks with some percentage of the deposits, or pretty much any other arbitrarily complicated setup.
    - joosters 10y ago
      If the money isn't available (i.e. locked up in some way by the contact), then the contract cannot guarantee to pay out, making its promises worthless. If you have to rely on a human being to decide to pay out, then the smart contract part of the deal is pointless.
      - richmarr 10y ago
        >...pointless Pointless and unacceptable to financial regulators, meaning nobody will be able to use it for anything worthwhile.
      - mbrock 10y ago
        The address given authority to invest the insurance float doesn't have to be controlled by a human—it can represent some other arrangement, for example a stake-voting investment scheme.
max_ 10y ago
You can add a feature that offers investments in DAO's
kpi 10y ago
thanks, very good point. this is great feedback and a really valuable discussion for us. we need to have more experiments with decentralized applications and insurance markets to explore that. we are looking forward to address these questions with insurance and financial service providers.
j15t 10y ago
Just to be clear, most insurance companies have very strict risk management policies and almost exclusively invest capital in government bonds. As you are probably aware, these bonds have had very low rates of return in recent years - getting close to 0℅ yield (or even negative yield in some regions) So I don't think the difference in efficiency will always be a significant factor. In addition it is possible to create bond tokens on Ethereum, which might provide opportunities to invest the capital from premiums - provided that the bonds have sufficiently low risk.
dpc_pw 10y ago
With public "willing" (ignorant enough) to subsidise that "investements" (google: AIG bailout), every time they inevitably fail, nothing really can compete in short term. Rich get richer with guaranteed profits. Despite what neo-cons/keynsians acolytes proclaiming, saving money is an investment (low yield, but quite safe), and it should be yielding profit (in form of deflation). As money tied in such a p2p contract will be deflationary, it will be competitive (as long as the Ethereum/currency it uses does OK).

jtchang 10y ago

Maybe the lower premiums would cancel out the amount that real world insurers can make. Though I kind of agree with you that having a bunch of money sitting there doing nothing is bad.

richmarr 10y ago
> ... cancel out... This assumes that investments made with premiums are precisely equal with the margin kept by the insurer. Considering the variety of insurers, insurance products, seasonal variation, etc. this is a pretty wild assumption. That said, insurers do make a profit on their income and make a profit on their investments. They may tell you that they have a negative combined ratio, but it's a misrepresentation, mainly for lobbying reasons. They only include base premiums in that calculation, not all the extras they sell (alloy wheel insurance, key/fob insurance, no-claims protection, etc). Again though, it's worth pointing out that smart contracts aren't going to get regulator approval any time soon... and will probably never have access to re-insurance markets. Customers are also going to have a hard time trusting smart-contract based systems them after recent events. The value of optimising for decentralisation over optimising for disruption* seems negligible in this case. If you can create a crowd-sourced insurance pool there are tons of real tangible benefits, mainly coming from the fact that the customers and "insurer" are economically aligned (unlike a conventional insurer) so the incremental value (and cost) of making it decentralised doesn't seem worth it to me. (source/disclaimer: I founded a p2p insurance startup) Edit: added asterix and list of genuine benefits - Since the "insurer" isn't on the hook for paying it doesn't need whitelists of "permitted" tradespeople, or price lists. - It can share information freely about crime hotspots, health issues, etc. It can act on the customers behalf in order to keep them safe, and a happy customer. - Customers in a pool can work together to solve problems - A pool of safe (and lucky) drivers might see premiums drop to 25% of market rate, which mainly covers re-insurance costs - Knowing the repurcussions of your actions will affect you and your pool group fairly directly may change some types of risky behaviour - Lower incidence of fraud ( * By disruption I mean the proper sense of the word. It's an entirely different business model rather than just being an innovation. )
- joosters 10y ago
  (source: I founded a p2p insurance startup) Interesting! What is its name / website?
  - richmarr 10y ago
    Guevara (heyguevara.com). UK motor insurance. We started after Friendsurance in Germany but before Lemonade in the US.
- kpi 10y ago
  I am a big fan of heyguevara, and happily disagree with you on regulatory approval and access to re-insurance markets: these need to be addressed, and we are happy to have discussions with insurance brokers and regulatory bodies to do that. as soon as those risks are reduced and some examples established, smart contracts will make it very easy for any group of people to start their own p2p insurance with their own parameters and rulesets instead of relying on less flexible central platforms.
  - richmarr 10y ago
    Appreciate it, thanks. Don't misunderstand I totally respect anyone willing to get stuck into this stuff... I just think you're making a rod for your own back by adding this "distributed" requirement. I don't see customers caring about distribution, whereas it would make several areas more difficult to manage... fraud for one. It's cool and all, but it's a walled-enough-garden even without that constraint... a constraint that regulators, reinsurers, etc will find alien and confusing.

usgroup 10y ago

That isn't necessarily true. You could buy "shares" in a contract. The contract then uses share capital to underwrite many insurance claims, and you're paid a monthly interest for owning the share capital. I.e. the money then wouldn't be sitting idly, it could be used again and again to underwrite more contracts, up to the risk limit.

joosters 10y ago
It's still less efficient than 'real world' insurance, which also pays out, but does not need the money to be locked away.
- mbrock 10y ago
  I don't see why Ethereum-based insurance contracts necessarily lock money. For example, the contract could give another address the authority to take risks with some percentage of the deposits, or pretty much any other arbitrarily complicated setup.
  - joosters 10y ago
    If the money isn't available (i.e. locked up in some way by the contact), then the contract cannot guarantee to pay out, making its promises worthless. If you have to rely on a human being to decide to pay out, then the smart contract part of the deal is pointless.
    - richmarr 10y ago
      >...pointless Pointless and unacceptable to financial regulators, meaning nobody will be able to use it for anything worthwhile.
    - mbrock 10y ago
      The address given authority to invest the insurance float doesn't have to be controlled by a human—it can represent some other arrangement, for example a stake-voting investment scheme.

max_ 10y ago

You can add a feature that offers investments in DAO's

kpi 10y ago

thanks, very good point. this is great feedback and a really valuable discussion for us. we need to have more experiments with decentralized applications and insurance markets to explore that. we are looking forward to address these questions with insurance and financial service providers.

j15t 10y ago

Just to be clear, most insurance companies have very strict risk management policies and almost exclusively invest capital in government bonds. As you are probably aware, these bonds have had very low rates of return in recent years - getting close to 0℅ yield (or even negative yield in some regions) So I don't think the difference in efficiency will always be a significant factor. In addition it is possible to create bond tokens on Ethereum, which might provide opportunities to invest the capital from premiums - provided that the bonds have sufficiently low risk.

dpc_pw 10y ago

With public "willing" (ignorant enough) to subsidise that "investements" (google: AIG bailout), every time they inevitably fail, nothing really can compete in short term. Rich get richer with guaranteed profits. Despite what neo-cons/keynsians acolytes proclaiming, saving money is an investment (low yield, but quite safe), and it should be yielding profit (in form of deflation). As money tied in such a p2p contract will be deflationary, it will be competitive (as long as the Ethereum/currency it uses does OK).