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PaperclipPerfector  10d ago (text post)   2619 thread views

Small-Scale Question Sunday for December 8, 2024

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Is there some clever way that someone could make blockchain insurance? Like, a decentralized, transparent, nonprofit system where everyone pools money (probably in the form of some cryptocurrency) together, and then when someone makes a claim there's an algorithm to decide whether it's legitimate and how much money it should pay out (possibly variable depending on how much free money is in the system due to the frequency of past claims).

Legally and practically I don't think you could do this with health insurance due to patient confidentiality issues. But maybe for auto-insurance or homeowners insurance or something? Or if there's a mechanism to anonymize medical records prior to submission. And I've pretty much handwaved away the hard part which would be deciding which claims are legitimate to prevent bad-faith exploitation. But is that solvable? And would this actually be usable if it worked? The goal would be to remove the profit motive from insurance companies taking a cut as middlemen, as well as the adversarial relationship between them and both healthcare providers and patients. I suppose a mostly traditionally run but non-profit insurance company would have some of the benefits, but even those have some potential for corruption, and I'm wondering if a transparent and user-run blockchain thing would clear that.

I think this is an actual Chainlink use-case. They're all over smart contracts.

The hard part is getting oracles to verify the information but that's what Chainlink is for. I'm not an expert in this area, most of the technical stuff goes over my head. But people are certainly trying!

makes a claim there's an algorithm to decide whether it's legitimate

That's how somebody breaks in and drains the system. They figure how to produce plausible claims and clean you out.

The goal would be to remove the profit motive from insurance companies

So, you create the system where nobody (human) has an incentive to keep it running well (even if you're a subscriber, if the system collapses you could just move your monthly premium payment to another system, so your loss is microscopic) but a lot of humans have a big incentive to break it. How long do you think such system will stand?

This whole "profit motive is bad" thing is stupid. Profit motive is the only thing that makes people design resilient systems. Well, maybe some people have huge egos and want to design systems just to stroke it and become even more narcissistic. But there's not a lot of people which are both this way and actually smart, and most of them will run out of steam eventually. Usually it's some kind of material motive involved. It doesn't have to be cash - could be other benefits, such as fame, power, recognition, etc. But money has been invented for a reason - it's the easiest way to incentivize people. If you start with excluding it, you probably will lose to people who do not.

have some potential for corruption, and I'm wondering if a transparent and user-run blockchain thing would clear that.

What kind of corruption are you fighting? Failing to pay out valid claims? But somebody would have to code which claims are valid, how would you ensure that person (or sets of persons) are not playing the system? Syphoning funds out of insurance pool into different investments and losing it? IIRC this is already pretty illegal for an insurance business, and usually not the first worry if you're dealing with a respectable provider. Obstructing your claims with bad service and arcane rules? Not sure how making it automatic would make it easier - AI chat bot can give you a run-around no less than a human can. Misleading people about what the rules are coming it, and then it's too late to complain when they already paid? Blockchain is an ideal vehicle for this kind of fraud, see a myriad of rugpull schemes around, with new ones born (and die) every day.

there's an algorithm to decide whether it's legitimate and how much money it should pay out

Maybe something like 'jury duty' for pool members? 12 random members get a claim package to look at from time to time, and vote on it?

So, 12 random people from the internet would decide whether I go bankrupt or suffer life-altering financial damage, or not? From everything I know about random people from the internet, I am not sure it's the thing I'd pay money for. For literal jury, there's a judge and several level of appeal courts to mitigate the damage, how would you deal with it here?

To be clear I think the whole idea is kind of dumb -- but how else would you do it? Somebody needs to decide -- you could hire freelancers I guess?

Well, there's an obvious solution to this conundrum - scrap the whole scheme :)

You're not going to scam sell valuable business opportunities to any VCs with that attitude!

where everyone pools money

there's an algorithm to decide whether it's legitimate and how much money it should pay out

I think we can take out the blockchain and focus on two pretty load-bearing elements of this scheme: you want to automate insurance underwriting and claims adjustment.

Both are possible (and interesting) in idealized conditions (i.e. derivative markets), but completely non-trivial in all real-world insurance markets. This "algorithm" would probably be considered at least weak AGI.

The main advantage of a blockchain is that it makes it extremely difficult to rewrite history. It doesn't really do anything to prevent writing lies into a new record, especially when it's about claims that require real-world evidence to verify.

I thought a bit about this (more in the sense of "what's the leanest insurance company you could build" and "could you create an insurance marketplace with the least amount of intermediation"). I'd say you came to a similar conclusion that this:

And I've pretty much handwaved away the hard part which would be deciding which claims are legitimate to prevent bad-faith exploitation.

is the biggest issue. My thought was that the best product you could try this with is regular term life insurance, because there is a mostly pretty clean way of determining the validity of claims (a death certificate) and because people's desire not to die goes a long way to prevent fraud. You still have the problem with underwriting and adverse selection.

On the other hand, another problem is the matter of counterparty solvency, as an insurer you rely on the law of large numbers to smooth out premiums and claims, if someone in this decentralized network faces claims way in excess of the premiums they have collected, do policyholders get paid less in proportion of how much of their risk did this specific node assumed? You could have everyone put up capital for some sort of compensation pool, but the more things you stack over, the more you end up looking like just regular insurance.

The goal would be to remove the profit motive from insurance companies taking a cut as middlemen

Mutual insurance already exists! Some of the biggest insurance companies of today started as mutuals, I think Liberty still is one.

Mutual insurance already exists! Some of the biggest insurance companies of today started as mutuals, I think Liberty still is one.

I am immediately suspicious. Because if so why do they have so many ads? If they're not profit-driven, that seems negative sum.

The incentives facing executives at for-profits and executives at commercially managed non-profits (including large mutuals, and also fee-charging charities like university hospital systems) are more similar than they probably should be given the difference in mission.

Wouldn’t having a large userbase be useful for smoothing out the statistics? As Norman mentions above.

In the United States, Liberty Mutual remains a mutual company in which policyholders holding contracts for insurance are considered shareholders in the company. However, Liberty Mutual Group's brand usually operates as a separate entity outside the United States, where a subsidiary is often created in countries where legally recognized mutual-company benefits cannot be enjoyed.

So it’s also possible brand awareness in America is intended to fuel operations outside of the mutual umbrella.

Why doesnt this already exist without the blockchain? Youve made some argument how blockchain would be helpful, but it seems more like the idea of using blockchain came first, rather than being something that came up as you tried to make the business model work.

The general answer to "Why isnt this a co-op, thereby removing the adversarial profit motive?" is that the people who want to buy the good dont want to tie up their capital in the co-op.

There are various co-op and mutual insurance schemes, including in healthcare fields. Many of them rely on some kind of affiliation networks to lower the risks.

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