Continuing the series about DeFi applications in everyday life. In this article, let's explore with FinFan the 4th application of this new financial segment Decentralized Insurance and Risk Management.
Like an insurance company in the Web 2.0 world, in the Web 3.0 world, insurance and risk management companies also exist. However, the only difference between Web 2.0 and Web 3.0 insurance company insurance lies in its decentralization and it’s only for crypto assets.
We can name many forms of insurance in the centralized world such as Life Insurance, Car Insurance, etc. All the above types of insurance have one purpose: to help property owners feel more secure about their assets or their own health when problems occur.
For example, car insurance will be effective if your car is in a collision or has certain parts damaged due to an objective factor. At this time, car insurance agents will pay you part or all the cost of repairing that car.
A similar situation also happens with life insurance when the participant has a health problem that requires hospitalization or if unlucky enough to encounter unforeseen situations, the insurance will pay part of the hospital fee or will send the amount of Insurance for beneficiary relatives stated on the insurance contract (of course within the valid insurance period).
In the decentralized financial market, insurance is created to ensure and prevent risks when errors occur in crypto transactions or activities on this market, leading to users losing money.
In the Centralized Insurance market, an insurance company will collect information, assess risks, and pay the insurance amount on the contract that the customer has participated in.
This will lead to conflicts when the insurance company's appraisal team often performs actions that benefit the insurance company.
Therefore, in the decentralized world, the model will share risks with three parties: buyers, risk assessors, and claims assessors.
A more specific example is that the insurance contract for Uniswap's Smart Contract has a compensation ratio of 1:500 (because it is relatively safe).
Although this is just the beginning of the decentralized insurance market, this market still has a lot of potential. The following statistics will show that in the market:
We can see that although it is only a small niche of the insurance market, online insurance also has a market capitalization of up to 31 billion USD. Furthermore, crypto (or decentralized) insurance is an even smaller niche, but data has shown that, on the NXM platform alone, the capitalization has reached 213 million USD.
The crypto industry in general has not received high trust from participants due to its decentralization (both a strength and a weakness).
The strength of this industry lies in the fact that they will not be controlled by a third party, thereby increasing their security and information processing speed.
Besides, it is also because of this decentralization that the crypto market will raise unnecessary problems such as market manipulation or price manipulation.
Returning to the insurance industry, this industry inherently exists thanks to the trust of customers in insurance service providers. Can crypto insurance companies guarantee this reliability (because some insurance smart contracts will have very high compensation ratios and sometimes up to 1:500).
This is also a weakness of the crypto market in general when the original purpose of the market was created to ensure user information security, so information is sent to insurance companies or insurance buyers. as well as the risk appraiser will also not be clear.
Accordingly, there will be cases where the risk appraiser only receives a notice saying "There has been a system error, and you must pay the insurance compensation amount" even though they do not know the origin and information of the buyer.
In short, the decentralized insurance industry is still a very potential industry and can develop very strongly in the future. In addition, insurance companies need to consider the risks when participating in this market as well as correct the limitations of this segment such as: