Decentralized Insurance

Abstract

Traditional insurance is based on a centralized approach of risk transfer from the insureds to an insurer. A traditional insurance contract is a bilateral contract between an insured and an insurer. As the same contract is sold to millions of insureds, the insurer serves as a central service provider to all insureds. In contrast, decentralized insurance is organized in a community of participants where risks are transferred and shared with each other. A decentralized insurance scheme can be treated as a multilateral agreement among all participants. Instead of a central authority that sets the terms and conditions of financial arrangements, decentralized insurance is formed on the basis of mutual support. In this chapter, we introduce and examine the basic mechanisms for a range of decentralized insurance schemes developed in different parts of the world, including online mutual aid in China, peer-to-peer insurance in the West, takaful in the Middle East, and catastrophe risk pooling in Caribbean countries. To further illustrate the variety of innovations in the market, we shall also briefly touch upon other business models that can be broadly considered under the framework of decentralized insurance.