The allure of blockchain technology with regard to insurance products can be summed up in just two key points. I would consider these two points as “siren sisters” because their allure has drawn people to become “shipwrecked” upon the “jagged reefs” of reality. Blockchain can do a lot of neato things but in terms of insurance you’ve got to capitalize on both of these two points to score a win:

Unimpeachable record keeping

If blockchain does one thing good its record keeping. This is not something human beings are particularly good at. If a company spends money, the accounting for what the money was used for is completely separate from the money itself. So the chance of their being a discrepancy between the record of what the money was used for, and the actual fact of what the money was used for, is a huge problem. With blockchain, an entity’s money and its accounting can become the same thing and that has never happened in the entire history of money.

Even if you could trust people to honestly create the initial record all non-blockchain records have the same problem. Without blockchain there is no guarantee of data integrity. This means that people can always come along later and change, tweak, improve, fix or massage the items in the record. Doing so would leave no trace of what the original values were. In addition the record can also be destroyed, either willfully or accidentally.

Revocable trusts — During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the beneficiaries. *cough*shellgame*cough*

There is also no way to know for certain who created a record when humans do the record keeping. In technical jargon if you can know for certain who created an entry in a record then the database is said to have the property of non-repudiation. This is a very important property. Did one CEO sign the check or did two? Did one scribble on the second line to make it seem like two people signed the check? Who can understand these things? How can they even tell if that signature is even your signature anyways? What’s to prevent anybody from just stealing a check and scribbling on it? What’s to stop them from cashing it?

It’s when people start to actually look closely at how our financial system works that they realize its all a bunch of smoke and mirrors. That’s why we spend so much money on audits and anti-fraud measures and that’s why they are of so little use in actually deterring fraud.

Immunity from unfavorable regulations

Given that human beings are not particularly good at record keeping, it comes as no surprise that keeping people honest requires frequent audits. Audits are the only way to make sure that an insurance company is wisely investing your premiums and paying valid claims. Audits are expensive because they require an army of auditors, accountants and lawyers. This army of people are to records what security guards are to banks. The only way to make sure that money isn’t being mismanaged is for accountants to constantly patrol an insurer’s records similarly to how security guards patrol a bank’s vaults. Blockchains can do this better than humans can, which allows them to provide financial services which are legally compliant by design. Built-in legal compliance is the magic key that gets decentralized insurance platforms out of regulatory jail.*

The ideal architecture for decentralized insurance is optimized to mitigate regulatory liability and costs required to remain regulatory compliant. Built-in legal compliance is very special because it means that the cost barriers to providing group coverage are eliminated. Previously if a group wanted to form a RRG or a discretionary mutual the initial legal costs involved were tremendous. Just consider the burdensome initial costs of time and money to create a nonprofit and you can see that there is tremendous inefficiency imposed upon our regulatory system.

To mitigate the cost of this liability, groups have attempted to carve out exemptions for themselves in the law. This involved lobbying congress to change the law to create a specific exemption for their industry. Since no small groups can afford these huge up-front costs, this has effectively denied small groups access into insurance markets and removed their right to self-insure. This problem is known as the crushing burden of government regulation.

Solving the problem of costly government regulation provides us with new markets and new opportunities. We are effectively getting insurance coverage for cheaper than we should be paying for it because we don’t have to pay the regulatory expense. This is why regulatory arbitrage is like finding free money. If we can scale this model up in the future, peer-to-peer insurance may someday be able to compete directly with traditional insurers.

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How the technology accomplishes this task