DeFi Insurance Protocols

Why DeFi is the Future of Insurance

For centuries, insurance has existed as a simple way to spread risk. Overtime, the model has culminated into the largest cash cow for both investment and power. Every day, you hear people bitching and moaning about premium prices, with shitty delivery- and yet, the model has literally never changed. How could this be?

I would argue that insurance has become one of the largest example of schlep blindness of all the industries, because of how simple the math is behind risk mitigation in insurance. The fact that we pay extreme fees for something that may or may not happen, mainly to the benefit of the company, where oftentimes they don't have to pay anything, or argue with you to pay for a claim to save their own ass.

Here are some reasons why insurance companies are ngmi:

• Their internal frictions are passed onto consumers in the form of increased pricing

• Unaligned incentives- the insurer wants higher premiums, with lower claim payouts

• Lack of clarity from the consumer- if an agency, like an insurer, needs laws to adhere to to benefit the consumer, that product is not in the consumers best interest

Enter DeFi.

Peer to peer insurance was the norm before businesses saw it as an opportunity for consolidated cash flow. Overtime, agency made it easier to reduce premium prices, but eventually it overdeveloped to where only 65% of premiums were paid out as claims. 35% remained as OPEX. A company called Nexus Mutual believes they can cut up to 18% off of these OPEX expenses.

DeFi allows us to return to a peer to peer market, one the existed before agencies brokered the backend investments and customer premiums. This time around, however, we have computers, blockchain networks, and instant interaction via the internet. It is one of those practices that is so obvious in hindsight, that it requires second guessing to participate in.

How to get insurance the old way:

• You apply
• they quote you premiums based on the data that you provide
• you pay premiums, they reinvest
• you reach out to them about claims, they need to make sure it falls in their guidelines

How to get insurance the defi way: 

• sign up
• pay standardized premium
• if your claim matches the code, you get paid

ROI on consolidated capital.

With the efficiency of DeFi, you are seeing an absurd increase in interest accrued over time. A savings account at a bank will get you 0.5%, but a savings account at BlockFi will get you 8%. And that's at the very low end of the available returns.

Insurance companies have two forms of cash flow- one is from the premiums collected, the other is from investments of those premiums on the backend. An insurance company looks for safer assets to invest their premiums in, usually bonds. The typical yield is low, though right now it is very low (-1.10%).

In DeFi, assuming you build on the DeFi lego bricks, you can integrate with whatever protocols you want- which can range yields between 10-20%, but I have seen far higher.

This means that an insurance company can both spread its risk across more network participants, and earn more backend yield from premium reinvestment, and automate claim payouts for customers.

Reduced bias in acquiring insurance.

Perhaps the greatest benefit to DeFi is the fact that protocols don't give a shit who you are- as long as you meet the conditions specified in code, you can use their platform. This alone would be cause for celebration. But with protocols cutting off up to 47-61% of normal insurance OPEX, there is a massive financial burden that is lifted and passed onto the consumer.

Now, the only case I could see friction is in insurance fraud. Though in a different industry, there are solutions being proposed.