In its early days, the insurance industry was based on the principles of mutuality. However, those principles brought along certain limits. Has anything changed since then?

The limits of insurance

Insurance started as small mutuals that came together realizing this would make them stronger. Sharing the risks, they were still limited by their small group, as they couldn’t expand a membership base or access further capital. With this brief historical into, Hugh Karp of Nexus Mutual started his session at #D1Conf in Cancun, Mexico. He presented a solution his company is developing to bring mutuality back to insurance, while addressing the limits imposed.

“Imagine a man kneeling down with a bundle of sticks resting on his leg, and he’s trying to break them, and that actually typifies what insurance is about. You pick up one stick — it’s very easy to break it. Put it in a bundle, wrap them together — it’s next to impossible. It’s about the community coming together.” — Hugh Karp, Nexus Mutual

Insurance companies connect capital markets with the members and the consumers thus making the whole process much more efficient. Still, it comes at a cost, which also introduces a conflict of interest. The shareholder company’s goal is profit, while members and customers want claims to get paid. To ease the tension, the regulators are put in place to safeguard that insurance companies protect the customers. However, this adds additional cost to the system.

According to Hugh, rough estimates amount to 30–35% of premiums lost in the system as a tax, so the customer only gets 70% of a premium back as claims.

Blockchain can come as a solution to this problem by essentially transferring the trust to code. By using tokens, the blockchain technology can scale capital and remove at least 50% of the expenses.

The solution to overcome the limits

Hugh detailed how the system they are working on keeps to the very essence of mutuality and aims at resolving the current limits.

So, there’s a bunch of members, and they put money into the insurance pool as a membership contribution. In return, they get some tokens. According to Hugh, using a continuous token model is primarily critical for capital efficiency, as it allows for calibrating the price of the token to the capital demands of the insurance pool.

“If we just had like a one-month period, where you rise a whole bunch of funds, then you have to over-raise, so that you’ve got capacity to grow into. But that’s really inefficient to start with. Also, if you need more capital than five years down the track or whatever, what happens? How do you get it?” — Hugh Karp, Nexus Mutual

Then, you burn the tokens for cover. So, the pricing model will be off-chain to start with, and to put data on-chain, the system will use Oraclize.

Under-the-hood mechanisms of Nexus Mutual’s system

One can lock the tokens from transfer to participate as a bond in the claim assessment (the mining aspect of the mutual).

“An insurance company needs various functions or services to operate. And what we’re doing is creating a token that binds everyone together, alliances incentives of a relatively high level, and then allows you to earn income or use these tokens in a certain way to provide the services to the mutual. So, what we’ve done is we’ve taken an insurance entity, broken it into its component parts, and commoditized each function. That’s a lot more efficient.” — Hugh Karp, Nexus Mutual

Another thing what the system does is locking funds for transfer, and then if there’s a surplus distribution in this period, one can get a proportional share of it.

When it gets to 180% of the minimum capital level as defined by the model, the surplus is automatically distributed. If the capital levels drop, the token model drops the price of a token, thus encouraging more capital supply demand.

Another critical aspect of the system built by Nexus Mutual is that all the funds in the insurance pool belong to the members and, according to Hugh, “no funds can get out of the pool.” Well, actually, it can happen in some scenarios. For instance, as claims voted on by members triggered by the surplus, which is agreed to by members it is the code that operates, or as a vote to do a product development and new deployment pay for operational expenses.

In insurance, regulation is a must to guarantee your investments are used properly to be paid back as claims if needed. In the model proposed by Hugh, regulation is provisioned through this very notion of “no funds can get out” unless it’s decided so by the members or defined by the code.

In general, the idea behind the project is to bind different aspects of the insurance value chain and the services it needs. Furthermore, the project aims at connecting members or customers directly with capital markets.

“We’ve got code that anyone can interact with. If you want to be a claims service provider, you can buy tokens and just do claims services. If you want to provide capital, you can buy tokens and just do the surplus distribution. Or you can be a customer. Or you can do all of it. It’s a mechanism to bring one end of the value chain with the other.” — Hugh Karp, Nexus Mutual

At the moment, the system is still under development and is expected to go live in Q3 2018 with membership open to those interested.

For details, watch the video from the conference.

You can also check out Hugh’s slides.