In a recent blog post https://blog.etherisc.com/staking-as-a-fundamental-building-block-for-insurance-333eb37f42 we already gave a high-level overview on the role of staking in insurance. We have been constantly working on the topic in the last weeks to tackle the core challenges.

• Insurance risks are not homogenous. In a portfolio of risks, e.g. flights insured, or crop parcels insured, or anything else, you typically have individual risks with individual risk parameters. Therefore the relation of premium to payout is typically not uniform. With FlightDelay, each policy has an individual payout based on the specific risk of that flight.

• If you put all these risks in a pool, the total risk will vary over time. This is all the more true if we are not talking about retail risks but about large individual risks.

• Exposure of investors to risks will therefore also vary over time.

• To provide capacity to an insurance product, investors need to lock in their capital for the period of an insurance contract. However, the periods of different insurance contracts can vary or overlap. We need a transparent way to withdraw invested assets, and at the same time, have a guaranteed capacity available to cover potential losses.

• You need a sophisticated system to distribute profits and liabilities in a fair way. (Unfair systems create opportunities for exploits, so actually we are building fair systems not because we are altruistic, but because we don’t want to create honeypots).

All in all, insurance risks have individual traits which can ideally represented by NFTs. Depending on the type of the risk, you could create an individual NFT for each risk or, for efficiency, you bundle homogenous risks. While these NFTs could very accurately represent the parameters of the individual risks, they are not an ideal investment target, because they would be most likely not easily tradeable. To trade such a risk, you would need to find a partner who is interested in exactly this risk.

How would an “ideal” asset look like from the perspective of an investor? Let’s call them “Risk Pool Tokens”. A Risk Pool Token represents insurance risks - to be exact, a risk pool token represents a certain amount of capital which provides capacitiy for an insurance product, and it represents the cash flow connected with this capacities - the inflow of premiums and the outflow of payouts for losses, and the value of this token is the current market value of the capital plus the discounted value of the (expected) cashflow.

The ideal Risk Pool Token would be fungible, with sufficient liquidity available. Investors are typically interested in investment opportunities which protect their liquidity. It’s a huge difference between investing in real estate and investing in shares of a company. The first ist illiquide, the latter is liquide.

Now here comes the challenge: Given all this, how to create a risk pool which will give investors fungible Risk Pool Tokens, if the underlying risks are actually non-fungible?

Our solution is to introduce an intermediary layer which “fractionalizes” the non-fungible risks (which are, of course, represented by NFTs) into fungible Risk Pool Tokens (which are of course represented by ERC-20 tokens and can be traded on any DEX).

While we are still finalizing the conceptual framework, we have already started the implementation in Solidity and we are pretty confident that a first working prototype will be available soon. The first prototype will run on a testnet but we will deploy a live system backing the FlightDelay Product soon afterwards.

This step-by-step rollout minimizes the risk for both investors and our project. In the next essay, I’ll go into more detail on how the fractionalizing actually works. Stay tuned!