There is a sculpture of a man that sits atop the insurance company offices I used to work at. The man is bending down on one knee, and in his hands, he holds a bundle of sticks. He’s pushing down on these sticks trying to break them across his leg, but he can’t.
This sculpture typifies what insurance is fundamentally about. It shows a community’s strength is in numbers – if one stick represents one person then they are weak by themselves, but banded together they are infinitely stronger. Insurance is driven by the core principles of statistics, but these concepts were well understood by communities 1000’s of years ago. It is how community-based mutual insurance started, a strong purpose backed by solid mathematics.
Communities are networks of people, and as we know, blockchain technology can incentivize the growth of substantial global networks by granting individuals the means to transact directly with each other. In turn, it can create a global community that pools together resources for a specific purpose in an incredibly efficient way. So why hasn’t this happened before? Surely blockchain isn’t the only barrier here. Why do we see huge dominance by shareholder-driven insurance companies rather than global community-based mutuals?
Two main reasons; the first is the ability to grow or scale trust amongst the community. A specific community can trust each other because they personally know each other, this allows community elders to make decisions on claims. Global communities must trust someone, by and large, they have decided to trust a shareholder company plus the underlying legal and regulatory frameworks. Essentially, they have ceded control of their money, or premiums, to a third party on the promise that they will return them as claims. Not an unreasonable decision but one that introduces a fundamental conflict of interest.
The second reason is access to capital. Insurance is a capital-intensive business requiring funds in advance of growth. For a mutual, this means growth is limited to the funding capacity of its members, who usually don’t have deep pockets. Conversely, a shareholder company has access to capital markets to tap for funds when they wish. A lack of flexible access to capital has meant the mutual has largely become uncompetitive when compared with the shareholder insurer.
However, smart contracts can change this. Trust can be shifted to smart contract code, and membership rights can be tokenized, opening up capital flexibility. The very old, very noble, mutual can be revitalized by granting it the fundamental ability to compete with existing shareholder driven insurers, with one substantial difference: All the benefits will accrue to the community members rather than being shared amongst shareholders. In the decentralized context, we can create a DAO that pools funds together that is entirely focussed on protecting its members.
Nexus Mutual aims to be a leading example of how mutuals can be renewed using blockchain technology. The DAO based mutual will run on the public Ethereum chain, pooling Ether and DAI together in a shared fund, with the purpose of providing a community safety net against smart contract hacks or bugs. In the future, the mutual will grow and offer standard products with the ultimate aim of becoming a decentralized alternative to insurance.
Blockchain and decentralization are ultimately about choice. There is nothing wrong with choosing the existing shareholder insurers, they come with legal and regulatory protections. Decentralised mutuals offer an alternative, a more flexible goal-oriented alternative. They are an option to join a community and benefit from the strength it provides.