Last week we had the pleasure to talk to Hugh Karp, founder of Nexus Mutual, about their insights on how blockchain and smart contracts can be used for building effective insurance mutual. This is Hugh’s second appearance on Insureblocks as he was a guest blogger last September where he penned a post on “Public Blockchains in Insurance: Do incumbents need to worry?”

 

What is Blockchain?

Hugh believes it is more interesting to focus on what the technology enables instead on focusing on the technical description of it. Blockchain gives a shared view on some sort of information, so that everyone can agree on the information and that it can only be changed by playing by the rules.

Examples of such information are account balances and the rules could be a combination of smart contract logic and consensus process to add new information to the blockchain. In Bitcoin that consensus process is mining for example.

Once we have shared information that all parties can agree on, and self enforcing rules, we can coordinate human activity in ways we couldn’t do before. What is key is that this can now be done more efficiently than ever before and without a central regulator.

 

Why Mutualisation?

Mutuals are the original insurance structure. They arose because communities recognised that they had a shared common risk and that they would be more resilient if they spread this risk out within the group. These communities would pool resources together and decide as a group when a claim will be paid. If no claims were made then all the members benefited.

This is a stark difference to traditional insurance companies whose interests aren’t aligned to those of its customers. Shareholders driven by profit by not paying out claims. Mutuals are member led and have a shared goal thus reducing the risks for conflicts of interest.

So what about regulators? Aren’t they meant to reduce those conflicts of interest? Hugh believes that in well developed countries that is the case but it comes at an administrative costs. In developing countries though many people don’t always have a reliable legal and regulatory system on which they can rely on.

 

What is Nexus Mutual?

Nexus Mutual uses the power of Ethereum so people can share risk together without the need for an insurance company... ie bring back the true form of mutuals where individuals contribute to an insurance like entity and group together to protect themselves. Nexus Mutual uses blockchain to reengineer the business model.

 

The role blockchain and smart contracts play in building a mutual?

How does it help to scale trust and capital? Mutuals have traditionally struggled to compete with shareholder insurance companies. Expanding outside of their original community group is challenging for a mutual. Hugh exemplifies this problem with an example of where one village may not trust the elders from another village to pay out their claims. Thus blockchain can be helped to scale out trust because instead of having to trust that other group of people you simply have to trust that the code works as it is intended.

The other, less well-known issue, that mutuals face is the scaling of capital. Due to how they are structured, mutuals can only raise money from their membership base, and have limited access to capital markets.  As insurance is capital intensive it does put limit a mutuals growth.

Hugh believes that due to their decentralised characteristics mutuals can only be built on a public blockchain (e...