White Paper


Traditional Insurance does not work for Catastrophic Risk

Kenichi Nogami, now CEO of inSharerance, participated in volunteer activities in Tohoku after the Great East Japan earthquake in 2011. We were utterly overwhelmed by the magnitude of devastation of earthquake and tsunami and desolation in the aftermath of the nuclear reactor accident.

Later, we were shocked again to find out that traditional insurance contributed almost nothing to help people to recover from the disaster covering only 17% of damage caused by tsunami and earthquake and mere 0.6% of that from the nuclear meltdown at Fukushima.

Catastrophic Risk in 21st Century

Catastrophic risks in the 21st century include not only such traditional risks as those which arise from earthquakes, tsunami and volcanic eruptions, but also new risks caused by human beings from nuclear meltdown, global pandemics, global warming and global IT breakdown, all of which are all too large in their impact and too low in probability for traditional insurers to cover at reasonable prices.

Enter inSharerance – we are here to help solve this problem. There are three moon shots for its break through:

Capital Cost of Insurance

In insurance, there are two counterparties, the insured and the insurer, where one, the insured, pays premium and the other, the insurer, pays benefit. This is a win-or-lose relationship -- the insured gets more/less profit as the insurer keeps less/more of premium. For the insured, premium shall be equal to the amount of benefit to be paid, multiplied by the probability of the risk event covered by the policy. In short, insurance is a risk transfer mechanism from the insured to the insurer. As such probability is not predictable or stable, the insurer charges so called risk margin as a buffer for profit, or not losing money. If the insurer is a going concern and owned by shareholders, who has limited liabilities to the extent of their capital in the company, risk margin shall generally be wider in order to keep return on shareholders’ equity high enough.

In the case of catastrophic risk, this structure causes a serious problem. For the insured, the formula above, potential loss weighted by probability, gives a reasonable premium amount. Catastrophic risk probability, however, is too small and potential loss is too large and, as such, insurer's shareholders, as well as its regulator, demand enough capital to be in place for paying off eventual significant loss. Low probability means that the insurer needs to keep this huge capital for many years.

Additionally, scale of losses and risk probability are very difficult to estimate because of general scarcity of catastrophic risk experience and statistics. Lastly, there is no predicting global climate change risk, new pandemic risk or global IT risk.

This huge capital requires very high return and that high ROE must be financed by a very fat margin built into the premium, which the insured are unwilling to pay.

Minimum Viable Service of Catastrophic Risk Sharing

This demand and supply gap between the insured and the insurer is caused by the very structure of separating the insured and the insurer and its ultimate risk taker share holders. Even at Lloyd's of London, the insured and the insurer, or underwriters, are counterparties. Underwriters demand huge margin in exchange for taking on unlimited liabilities.

One of the origins of insurance is joint venture investment in overseas trading ships around 700 years ago. Many people invested money in ships for trading goods between continents. If they returned safely with many goods from other continents, all investors shared profits by selling the goods. If some ships failed to return, they lose money or, in other words, all investors shared losses. This is also the origin of a stock company. These joint venture ships are the origin of both marine insurance and a stock company. In the case of overseas trading ships, investors were both the insured and the insurer. Compared with the case where a sole investor owns ships, this joint venture structure shares risk and profit by allowing the investors/insured/insurer to invest less money for less profit.

The basic concept of inSharerance is to re-discover a catastrophic risk sharing method by revisiting this original structure.

All participants in inSharerance are both the insured and the insurer at the beginning of a risk sharing period. inSharerance is not a mechanism for transferring risk from the insured to the insurer, but it is a "risk sharing" mechanism as was the case with investors in overseas trading ships. In inSharerance, participants pays premium at the beginning of a risk sharing period. At this point, all participants are both the insured and the insurer. Premium is not paid to insurer but to risk pool owned by all participants. The invested money to overseas trading ships are used for purchasing ships, which is owned by all investors.

If a risk event should occur to part of participants, they will become the insured, and others become the insurer. This is a stochastic process. At the end of a risk sharing period, a risk pool, which is equal to the premium accumulated over the period less charges for administrator, will be shared equally by participants who were affected by the risk event.

Comparison with other Peer to Peer Insurance

Ant Financial provides peer to peer cancer insurance in China. Benefit is fixed, premium is variable, which is paid after a risk sharing period. Ant Financial guarantees maximum premium to be paid per policy. If benefit payment exceeds the sum of maximum premium collected, Ant Financial will pay the difference from its capital. Because cancer risk is relatively small and stable, this maximum premium can be set at a level which is reasonable for both participants and Ant Financial. This structure does not work well for catastrophic risk, because the possibility of capital usage is very high due to unstable probability of catastrophic events.

Lemonade provides peer to peer home insurance with fixed premium and fixed/pre-defined benefit. If premium income exceeds benefit payment, the difference will be 100% donated to social causes. If benefit payment exceeds premium income, the company’s capital will pays for the deficit. Lemonade’s model is similar to traditional mutual insurance. Difference between Lemonade and mutual insurance is full donation of profit. As traditional mutual insurance has not worked for covering catastrophic risk, this structure does not work for catastrophic risk, either.

inSharerance is the only peer to peer insurance that can provide catastrophic risk sharing. inSharerance has started from providing guaranteed issue life coverage for Covid-19 pandemic. Premium is fixed, but benefit is variable with minimum guarantee and premium is due monthly. inSharerance can provide risk sharing for big earthquakes.

Fair Risk Sharing

In earthquake inSharerance, premium is calculated based upon scientific probability of an earthquake of magnitude 7 or higher. Below world heat map is colored by probability of earthquake by calculate the probability of an earthquake occurring for each pixel. By this pricing method, a universal risk pool for all participants can be considered as a fair risk sharing method. An earthquake of magnitude 7 or higher occurs 13.4 times per year on the globe. The big number law is applicable here and inSharerance can provide minimum benefit guarantee through Retrocession Insurance/CAT bond financing with block chain technology.

Life inSharerance is a risk sharing service for people who cannot take out traditional life insurance due to their health condition. In normal times, it is a field that can be dealt with by traditional life insurance methods, but when an unknown pandemic such as Covid-19, it is required to share the so-called unknown risk. Especially in countries where medical collapse has occurred, it will be impossible to control the case fatality rate with medical technology, so it will be difficult to deal with it with traditional insurance methods. Life inSharerance can set premiums according to age-specific risks to ensure fairness, and share the mortality risk.

Insurance and inSharerance can complement each other

Automobiles will be increasingly controlled by AI, instead of being driven by human beings, probability of car accidents will go lower and auto insurance premium should decrease. Once premium gets low enough, it will no longer meaningful for insurance companies to collect or for consumers to provide private data, e.g. GPS data and driving skills. Because such difference will account for only so small in premium calculation, premium will mostly be determined by automatic driving AI. In such a world, a failure of driving AI could cause a wide-spread, potentially global catastrophic risk event, which is small in probability but significant in loss. Insurance can provide guaranteed minimum inSharerance benefit as additional option.

Life and health insurance and inSharerance are in a similar relationship – the more advanced medical science and AI and connected technologies becomes, the lower insurance premium goes. Medical science will be able to provide the probability of death. Additionally, there is a very sensitive privacy issue here. Individual privacy protection policy may prohibit or limit insurers to access and use personal medical and health information for policy underwriting. The traditional insurers' determinants of mortality, such as age, sex, blood pressure and cholesterol, are becoming less important. Instead, how frequently these medical indexes are monitored and controlled by medical technology will be decisive factors. And, when control fails by collapse of IT or increase of patients by pandemic, the health condition deteriorates and, in the worst case, death. We want to cover these risk caused by failure of medical system by inSharerance. Insurance can provide guaranteed minimum inSharerance benefit as additional option.

Chicken-and-egg problem

All peer to peer projects inherently share a chicken-and-egg problem. Many participants are needed to make peer to peer service attractive but, at the beginning, only so few people will participate in the project and the service do not work properly. A great number of people are exposed to catastrophic risk. If a catastrophe occurs, it will certainly cause huge losses. But a vast majority of people fail to recognize the necessity to prepare for catastrophic risk, because its probability is very low. It is this very problem that inSharerance faces.

A great number of people are exposed to catastrophic risk. If a catastrophe occurs, it will certainly cause huge losses. But a vast majority of people fail to recognize the necessity to prepare for catastrophic risk, because its probability is very low. It is this very problem that inSharerance faces.

A chicken-and-egg problem is most always solved by targeting marketing effort at first in segments with relatively strong demand. In the case of Life inSharerance, we target Covid-19, which is the catastrophic risk currently exist and can be recognized by all people.

Regulation on inSharerance

Definition: Insurance is generally defined as risk transfer mechanism from the insured to the insurer by means of reciprocal payment of premium and benefit. inSharerance, however, is not based on the such risk transfer from the insured to the insurer for its functioning. As long as all other articles (minimum capital etc.) depends on this risk transfer structure insurance law should not be applied to inSharerance.

Risk Capital Requirement: we believe that inSharerance is not subject to the existing capital requirement and other many regulations to strengthen balance sheet of insurance company. In this context it is not rational to apply these regulations to inSharerance.

Global Risk Pool: Regulators in some countries may not be so receptive to the concept of global risk pool, with a possible intention to protect their domestic insurance industry and players there. As global pooling of catastrophic risk by inSharerance and pooling of common risk by traditional insurers are not substitutive but complementary, we will hold sincere talks with those regulators to promote their understanding. We believe that, in the long run, inSharerance and traditional insurance companies can co-exist in many countries.

Scope of Law: The current insurance law does not preclude inSharerance. But inSharerance has more original risk sharing structure than insurance. When inSharerance becomes substantially larger in scale, the definition of insurance will likely need to be amended and capital requirements will be reworked, accordingly. This will be a significant and welcome evolution of the insurance industry. Then the name of the law must be changed from insurance law to “risk sharing law”.

Risk Sharing and Community

Last but most challenging moon shot is to change people’s mind. If people do not accept global community, they never accept global risk pool. Risk sharing means riding on the same boat ignoring minor difference to other people. Global community is necessary condition to establish global risk sharing. The reverse is also true. The experience of sharing risks can create a sense of companionship and strengthen the community.

We have a vision that we will bring the world together so that all the people in the world care each other and help each other. We are in the era of digital and social network powered by artificial intelligence and block chain technologies. An old village has expanded to the globe, and we all can connect each other no matter where we are. By this global community more people accept the necessity of global risk pool for 21st century catastrophic risk. We want to be the place where we come together and support each other by sharing our risks. You can support somebody on the earth, and as somebody does for you. Through this mutual help inSharerance will strengthen our Global Community.