Insurance versus “insurance”

Was recently talking to a close friend who has been working on an insurance-focused technology company the past couple of years.

I gave him this list of projects and asked him how he would categorize them:

  1. Nexus Mutual
  2. Cover Protocol
  3. Tidal Finance
  4. Etherisc
  5. Armor Finance
  6. Nayms
  7. Unslashed Finance
  8. Protekt Protocol
  9. Risk Harbor
  10. Soteria Finance

At first glance he thought there were roughly two buckets: protection against loss, theft, and smart contract failure versus DeFi insurance platforms and parametric risks. But then Nayms is a platform and marketplace so what are other nuances?

According to him, a lot of “insurance” above is really just a derivative product so in practice most of these are basically just prediction or options markets: you are betting a contract will not fail and hoping the pseudonymous claims committee rules in your favor.

A counter-argument is that all insurance is like that conceptually. But in reality, insurers try to underwrite the risk which then leads to a pricing exercise, but the prices are grounded first and foremost in risk and then market forces adjust pricing. As opposed to a pricing exercise which seems a bit divorced from the risk but mainly driven by the price action of a coin.

Other categories

  • Parametric risks (such as Etherisc)
  • Centralized Insurance (only a handful of stealth providers)
  • DeFi Insurance (theft, loss, smart contract failure)
  • DeFi “Insurance” (similar to an option: if this thing doesn’t work I pay you monies, but it’s not designed as an insurance product…a subtle but important difference)

What are some other projects and categories to add in the future?

For more context, I highly recommend this thread on “DeFi insurance” from Lucius Fang (who is a trained actuary).

Lastly, I reached out to Stephen Palley, a cryptocurrency-nerd / attorney who specializes in suing insurance companies. According to him:

So the big issue for me — and I am planning on doing a long form piece on this — is that people who sell insurance are subject to a maze of state level regulatory and licensing requirements that they so far have seemed happy to ignore. If/when/as this gets bigger, people will go to prison.

It’s a huge opportunity for people who want to do things the right way. But as is typical, you have a lot of people who are jumping in who don’t actually know eff all about the foundations they are building on.

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