“Insurance can become an invisible architecture that supports people and enables economies to thrive.” —Alpen Sheth, Etherisc

Everyone, we’d like you to meet Alpen Sheth. As a part of disaster recovery teams that came to Haiti’s aid in 2010, Alpen was disillusioned when realizing how few people in the developing world had access to insurance protection and how provisional and biased disaster aid distribution is.

When he came across Etherisc he recognized a new way to help and serve the underserved. Excited with the prospect of using blockchain technology, he joined the team to bring a new palette of truly novel insurance products that will benefit everyone.

In the interview below, he talks about a new product that will soon directly benefit the peoples of Puerto Rico, his background and reasons for joining Etherisc, and how blockchain can help solve troubles of today’s insurance. We hope you’ll enjoy the read.

Hi, Alpen. To start things off, could you give us a little insight into your professional background?

I have a master’s degree in geography with a focus on hazards and a PhD in urban planning with a focus on weather index insurance, risk governance, development economics and public policy. I started out as a consultant with Risk Management Solutions during my graduate years, mapping catastrophe models.

My perspective on the insurance industry and disaster risk were heavily influenced by my time in Port-au-Prince, Haiti, where I had co-founded a research institute, INURED, before the 2010 earthquake. I was part of the disaster recovery efforts, working hand in hand with the government and NGOs. But the experience left me disappointed and angry when I saw how few people had access to insurance and how ineffective and biased disaster aid distribution is.

Later, while doing my PhD at MIT, I landed at the Latin America and Caribbean division of the World Bank as a disaster risk financing consultant. I developed cost-effective approaches to disaster risk financing and wrote my dissertation on the design challenges of weather-based crop insurance programs in developing countries like India. And I’ve been increasingly interested in how smart contracts can transform insurance after I co-founded Economic Space Agency in 2016.

And how did you find out about Etherisc, what stood out for you?

When I read the Etherisc whitepaper I was struck by this sentence: “Etherisc will build an economic space for decentralized insurance”.

There is a community ethic baked into the development of our protocol and insurance products, which anyone can join and contribute to. And, second, Etherisc has evolved sophisticated insights about crypto economics and its real-world implementation. The ability to harness these two aspects for risk transfer, financing, pooling and, ultimately, mitigation is very compelling, especially for the insurance sector that has seen relatively little disruption compared to others.

Most impressively, since its inception almost two years ago, the team has kept an uncompromising focus on delivering innovations and attracting brilliant advisors along the way.

You’re familiar with current insurance models. So, what sets decentralized insurance apart, why is it important?

We currently rely on insurance products and risk transfer from above — or the top down. But, what we actually need is to encourage people to contribute in a distributed way to new and better ways to rapidly secure people’s lives and livelihoods. Etherisc provides the distributed infrastructure and toolbox for people to design highly specialized insurance contracts, at a fraction of what it would cost them today. Until now, these kinds of insurance products were only available to large firms and the super-rich.

Decentralized insurance can help solve a few big problems. If we look at the current insurance market, it’s dominated by centralized, obfuscated, hierarchical incumbents that do not generate better or fairer insurance practices. Much of everything related to insurance (actuarial data, modeling tools, and financing strategies) is a black box.

One of the reasons for this is that the problems of measuring and managing risk are actually very challenging and thus valuable. But, what ends up happening is that, if you can’t just plug into an existing, easily bankable market, many dangerous and widespread risks are left uncovered by reliable insurance. Decentralized insurance lowers some of the biggest costs and open-sources the base level contracts, and in consequence fundamentally transforms the economics of traditional insurance.

Just as importantly, the reinsurance sector is an even more opaque and mostly a exclusive consortium of a few large players. Etherisc has developed a credible path towards opening this sector through risk pool tokens, with lower risks from over-concentration.

What are you currently working on at Etherisc?

Let me start with my immediate focus — a parametric hurricane product for Puerto Ricans. This is a collaboration with Puerto Rican developers and designers to ensure that it will fit their communities, which is the most important part. This is what I mean by insurance from the ground up. The request for this product came to Etherisc in the aftermath of Hurricane Maria in the fall of 2017. Its victims, who had insurance, continue to suffer due to delays and complications from insurance claims processing, while thousands cannot even afford whatever policies exist. That means people cannot even pay for small expenses, keep the power on for storing medication, run their businesses, etc. Unfortunately, this isn’t new at all. I’ve been studying this in Haiti, India and the United States for decades.

What we’re doing is co-designing an insurance contract that will automatically pay out in less than 24 hours after a category 3+ hurricane strikes, based on wind speed data from authorized weather stations and devices on the Island. Etherisc is providing open-source insurance templates for risk pricing, financial forecasting, regulatory approvals, smart contract-oracle integrations, and will work with developers and communities to upgrade the product with more sophisticated human and automated validation oracles.

Our approach to future products is going to be similar: moving from proprietary, narrowly-defined contracts to open, modular, and modifiable templates. We are also developing an array of new insurance products that will focus on risks native to the crypto world, such as crypto-collateral protection for liquidity providers (e.g. Sweetbrige, SALT, Celsius Network, etc) and payment channel risk, which we think can help derisk innovative networks like Plasma, Lightning, Raiden, etc. and also increase adoption.

Based on lessons learned from the 2017 launch of Flight Delay, I’m confident that we’ll have more opportunities to scale our product distribution and product types, especially when more teams and partners from around the world, facing many different risks will start using our protocol.

What opportunities do you see for the builders of insurance products?

Etherisc provides an unprecedented opportunity for people with its open-source production model of insurance. Essentially, anyone can create their own insurance product from templates, or from scratch. They can create stock, mutual or reciprocal, and, using the protocol token, anyone can earn income and capture fair value (a fair share of an insurance company’s revenue) by contributing their idea, skill, code, or time without having to be employed by an insurance company.

What about insurance carriers? Where are the opportunities for them?

Because traceability and transparency are an essential part of blockchain, the Etherisc’s platform makes it possible for insurance carriers to offer insurance licensing as a service. This means that they can offer their license to outside insurance product developers and substantially increase the number of their markets and products. This model even gives carriers the power to request new products on demand for their customers beyond what exists.

What are the main challenges you see for Etherisc to resolve in the next couple of years?

Using smart contracts for insurance makes products work differently, and ultimately, that can make risk transfer look unfamiliar. So I think it’s very important to understand people’s specific expectations and experiences. Our approach is to offer “simple, lovable, complete” products that optimize transparency and provable fairness that are at the core of Etherisc’s philosophy.

Standard index and parametric insurance face unique challenges related to basis risk — the difference between the amount of the payout and the actual loss suffered by the insureds. If the difference is too big, we will face two problems. First, most people will not trust the product and decide to self-insure or stay uninsured. Second, regulators may decide to block such products. I believe Etherisc can resolve these challenges by making payouts of parametric products to be small enough and correlate highly with the actual losses. Second, we can focus on risks where precise loss assessment is currently expensive, hard or impossible (for example by using satellite-provided high-resolution images for quality loss assessment). Etherisc’s protocol incentivizes the creation of more affordable and relevant risk models, customization of insurance around people’s actual needs, and not the insurance company’s balance sheets.

Another important area of opportunity is regulatory innovation and compliance. We have yet to understand the full implications of how much insurance regulation benefits from decentralized insurance protocols. For instance, we are already noticing that smart contracts and the blockchain records provide regulators (and other stakeholders) with direct access to usage data, capital solvency, and pre-audited contracts, among other critical data. This way a lot of the enforcement challenges plaguing traditional insurance disappear. As insurance transforms from products to protocols, we need simple ways for people to understand and use these services for their benefit.

What do you see as important milestones in the future of decentralized insurance?

As Stephan says, insurance should be invisible and it is possible to integrate it as the cost of operations for valuable systems — from small agricultural production to blockchain-based lending protocols to lessen the cost at the margins. Insurance can become an invisible architecture that supports people and enables economies to thrive.