Risk can be mitigated by reducing factors that contribute to risk.  For example, property insurance premiums are much lower for a building with a sprinkler system vs a building without. 

This is a pretty big flaw in the insurance DAC model.  It doesn't take into consideration the risk factors of the individual policy holder / insured asset.  This essentially encourages participation of higher risk individuals and discourages that of lower risk individuals.

That's what the claims adjusters are for.

One possibility is to engage specialists, as Dan describes in the Insurance/MAS video. Another possibility is to use a consensus market made up of those in the same pool. If the others in the pool feel that one has violated some unstated rule, then they can reduce the payout.

I'm not sure I agree with your argument that risk can't be created nor destroyed.  While of course it can never be truly eliminated it can be lowered by not engaging in risky behavior. 

In a free market the cost to insure against losses from engaging in risky behavior would be so prohibitively expensive that they would have the effect of preventing much of this risky behavior.  Thus reducing risk.

Thank you for pointing this out. I meant the risk of a particular course of action. One can reduce risk by not engaging in risky behavior, like sending sailing ships across uncharted seas in search of exotic treasures. I was referring to the risk involved, once one has decided to commission a sailing ship for such a journey.

[Text above edited to reflect this.]

Some of us are old enough to remember when local television station managers would invite a 'representative of the Internet community' to offer the view from the Information Superhighway. Even now, the idea of a representative of the cryptocurrency or even the Bitcoin community is starting to get a little saggy around the chin.

Not only should this community grow, given the versatility of BitShares ME and BitShares X, it quickly could become more like Coruscant than a village square.

The premium (P) that one pays should be equal to the probability (p) of the event times the cost (c) of the event, plus a share of fixed administrative overhead (π):

P = p(event)*c(event) + π

A DAC eliminates the need to hire administrative staff, such that π→0.

However, since probability of a future event cannot be known, only estimated, the optimal premium cannot be known ex ante. Given that hindsight is 20/20, we can calculate what the premium should have been, ex post, but that is not helpful.

A prediction market seems to be the best way to set the premium, and perhaps to determine the payout. Whether every Tom, Dick, and Harry should be able to participate in the prediction market, or only certified claims adjusters is the question.

Perhaps we need a separate reputation market, such that the opinions or votes of each market participant is weighted by his, her, its, or their reputation scores?

Risk The risk of a particular course of action is like energy or subatomic spin; it cannot be created or destroyed, only transformed or transferred. Like pollution, risk never vanishes, even if it is spread so thinly across the environment that one does not notice it, it is buried in a remote dump, or it is poured into a river to be carried out to the open ocean.

In efficient markets, the party transferring the risk pays a premium to the party that bears the risk, whether it is for an insurance policy, an appliance warranty, a loan guarantee, or any other similar arrangement. Although one is covered, the risk does not cease to exist; someone else has agreed to bear the cost.

When one transfers one's risk to others without compensating them, this creates market inefficiencies, as we see with bailouts of 'too big to fail' firms that do not pay for this coverage during upward phase of the business cycle, with relief payments to property owners in areas prone to natural disasters who pay no premiums to relief agencies, etc.

The same holds true with a mutual aid society (MAS), which is a voluntary association formed by a group of individuals with a common bond to provide mutual aid to its members for relief from sundry difficulties, to which each member pays a fee to compensate the other members for bearing his or her risk.

In other words, in exchange for the expectation of aid in time of need, each member incurs some cost that he or she should consider to be sunk. Participation in the MAS should not be seen as a speculative investment, as the purpose of insurance—most broadly speaking—is to compensate one for one's losses, and not to enable one to profit from them.

We should bear this in mind, when developing the payout scheme.

As Bytemaster points out above, this is not just for the USA and the EU. This kind of thing could work in the international medical tourism field.

Most people will be paid out immediately because even with normal insurance the claims can be paid from revenue on average. 

One way of addressing this is through deductibles. If the MAS is set up to cover members for catastrophic events with high deductibles, then only rare events above a certain cost will be covered, which will give the MAS time to collect member contributions.

Also, once credit DACs become available, injured parties might be able to borrow from them and repay with MAS payouts over subsequent periods.

This topic has been moved to BitShares MAS.

https://bitsharestalk.org/index.php?topic=3561.0