Decentralized insurance: A community that protects each other

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Decentralized insurance: A community that protects each other

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Decentralized insurance: A community that protects each other

Subheading text
Blockchain technologies and products have given rise to decentralized insurance, where everyone is motivated to protect the community’s assets.
    • Author:
    • Author name
      Quantumrun Foresight
    • May 12, 2023

    Decentralized insurance builds on mutualization, the practice of sharing resources within a community to benefit everyone. This new business model uses telecommunication technologies like smartphones, blockchain, and the Internet of Things (IoT) to allow users to exchange goods and services without expensive intermediaries.

    Decentralized insurance context

    The decentralized insurance model allows individuals to share their underutilized assets and receive financial compensation. Proponents argue that by returning to a community-based mutual support model, decentralized insurance can reduce the role and influence of mediators.

    An early example of decentralized insurance is the online mutual aid developed in China in 2011. It was initially established to provide a crowdfunding channel for cancer patients. Instead of relying only on charity, the platform offered a way for participants, mostly cancer patients, to support each other financially. Each group member not only donated to others’ causes but also received money from other members when they needed it. 

    Disruptive impact

    With the increasing popularity of decentralized finance (DeFi) and blockchain platforms, decentralized insurance has become a game changer in these systems. A decentralized model creates an incentive loop by working with its users to allow claims to flow directly to the business without an intermediary. As a result, companies can remove the friction and time spent during claims processes. 

    Policyholders who purchase decentralized digital asset coverage are, in turn, protecting their participation on the blockchain. This “pool of money” comes from what is typically known as insurance providers. Regarding digital assets, Liquidity Providers (LPs) can be any company or individual who locks their capital into a decentralized risk pool with other LPs, providing coverage for smart contracts and digital wallet risks and price volatility. 

    This method enables users, project backers, and investors to work together for a common goal of stability and security. By building the insurance system on-chain, people can work directly with others with similar goals. An example of a decentralized insurance provider is Nimble on the Algorand blockchain. As of 2022, the company aims to incentivize everyone, from policyholders to investors and insurance professionals, to work together to create efficient risk pools that are also profitable. 

    Implications of decentralized insurance

    Wider implications of decentralized insurance may include: 

    • Some traditional insurance companies transitioning to a decentralized (or a hybrid) model.
    • Digital asset insurance providers offering decentralized insurance to real-world assets like cars and real estate.
    • Blockchain platforms offering built-in insurance to remain competitive and encourage more investments.
    • Some governments partnering with decentralized insurance providers to develop decentralized health insurance. 
    • People viewing decentralized insurance as a collaborative platform upholding transparency and fairness, which may change people’s expectations of the insurance industry.

    Questions to comment on

    • If you have a decentralized insurance plan, what are its benefits?
    • How else do you think this new insurance model will challenge traditional insurance businesses?

    Insight references

    The following popular and institutional links were referenced for this insight: