There have been many discussions about Insurance, but today I spent time designing a workable DAC that will enable auto insurance, health insurance, life insurance, mudslide insurance, or even insurance against being caught committing a victimless crime. This system works by separating roles and responsibilities found in current insurance companies... current companies do the following tasks:
1) Price the risk (either over charging, or under covering) they never get it right.
2) Store the insurance funds ( they invest other peoples money, often poorly, to make up for miss pricing of risk)
3) They judge their own claims or make it hard to get payouts.
In other words, Insurance companies operate on fractional reserves just like they banks and make money selling insurance they are unable to make good on.
A DAC on the other hand must not make promises it cannot keep. Therefore, a DAC that implements an insurance system must only promise to pay claims to the extent supported by the market and no more.
Before signing up for the Insurance DAC it is important to understand exactly what you will receive for your money. What follows is a detailed explanation of how and when funds are distributed.Defined Risk
Every insurance plan is based on the existance of some ratio of payout. If on any given month, 1 in 100 drivers may be in a car accident and the average accident cost $10,000 then the insurance premium would need to be $100 / month in order for the insurance company to break even.
Insurance companies are essentially gamblers who estimate the risk and make bets. They charge more for premiums than they estimate the risks warrant and keep the difference as their profit. Unfortunately, sometimes they gamble wrong and they can lose money. When you purchase a premium with an insurance company you have what is known as 'counter party risk' and in the event the insurance company bets wrong, you could be left holding the bag.
With the Insurance DAC, we do not attempt to estimate what the risk is nor do we make money by overcharging based on our estimate of the risk. We do not build up large pools of funds. Instead we operate on a Pay-as-You-Go basis.Pay As You Go
In a perfectly balanced insurance system, the average total monthly payout should equal the average total monthly premiums paid by all customers. If this were not true the fund would either grow forever or become insolvant. Large pools of money are only necessary if claims are allowed to occur in lump sums that excede the monthly revenue. In the case of the Insurance DAC, large claims are paid out in installments up to the defined limit equal to total funds contributed divided by the risk. Risk can be calculated as the number of shares with a valid claim as a percentage of total shares times the average claim per share.
Each month a certain number of shares are owned by individuals whom have a qualifying claim. The revenue from contributions and collections for that month is divided evenly among the qualifying shares. Individuals who need more coverage can buy more shares.
If a particular individual has already received the maximum cumulative payout given their shares and the actual risks, then their 'shares' no longer qualify for additional monthly payments. If, over time, the average risk falls then they may resume receiving payments until their claim is paid off.
Only shares owned at the time the event (as determined by insurance adjuster) are considered when paying out a claim. If you purchase more shares after an incident, those shares only apply to future events. This is necessary to prevent people from loading up on shares after they are assured payout.Insurance Adjustor
An insurance Adjuster is an individual who is granted authority by the market to award claims. They become licensed by the DAC by creating a BitAsset that tracks the total amount of outstanding awards they are allowed to grant. If the market trusts the adjustor, then they will increase their limits. Any awards made by the adjustor have a 30 day waiting period before they are paid out. If during the waiting period the market determines they have gone bad, then their limits will shrink and their most recent awards will be automatically canceled. An Insurance Adjustor makes money charging people fees (like a deductible) for hearing their claim. If the Adjustor considers the claim to be a fraud, they can simply reject it and keep the fees. The adjustor is also interested in minimizing the awards they issue so they can service as many people as possible (and thus collect more fees). If they payout a larger than necessary award they lose the opportunity to award other users. On the other hand, if they get a reputation for underpaying they will lose trust with the market participants who will simultainously switch to a more generous adjustor and reduce the total amount of awards that may be issued. In a sense, market forces will compel an Insurance Adjustor to be honest and fair in order to grow their business.
All Insurance premiums, awards, and payouts will be denominated in BitUSD or similar unit of account.
I recorded a 20 minute white board presentation on this idea which we will release soon. After significant review, we believe that this particular DAC has more potential than the other 5 DACs we have presented post-BitShares X. Just a heads up that we will be refining this DAC with a more detailed white paper and technical approach over the next year. It will have just as big an impact as BitShares X