The claim process in Decentralized Coverage explained
A hack has taken place. Claims are filed. What’s next?
Let’s assume that a certain protocol has been hacked. The victims of this will be devastated. However, those who have purchased coverage are reassured that they will get refunded by their insurance. You might ask yourself how the claim process in DeFi insurance works as it differs from traditional insurance. Coverage buyers want their refunds fast, so they don’t miss the next investment opportunity. Coverage providers want a fair claims process, which is simple and can be resolved quickly.
This article explains how the claims process in Decentralized Coverage works. For a very detailed, step by step guide for each of our risk partners, Nexus Mutual, Bridge Mutual and InsurAce, read our more in-depth article. This piece will explain the wider implication of the claims process and consider how the underlying principle of sustainability will keep all parties’ incentives aligned.
Background of how mutuals operate
Firstly, in order to understand how and why the claims process is how it is, it is important to understand the background of how a mutual functions. Fundamentally, in decentralized Coverage there are two parties involved — those who want to get coverage and those who want to provide coverage.
Those people who want to buy cover, pay a premium. This premium is given as a ‘reward’ or APY to the party who wants to provide this coverage and take this risk. For this group, the risk is that they will have to pay out if there is a hack or smart contract failure of the protocol. As with any investment, the higher the risk, the higher the reward.
Assumptions
The group of people who have been providing coverage for this specific protocol, will not be quick to accept a claim and say goodbye to their money, even though this is what they originally agreed to. It is likely they will want to explore every option they can to avoid paying fraudulent or unsubstantiated claims.
A fraudulent claim could be, for example, someone who was staking within a protocol that got hacked, but not within the specific pool; or someone who made an error like sharing their private key, and then tries to blame it on a smart contract failure. An unsubstantiated claim is one with no evidence.
Overall, a transparent and democratic process is required to ensure that the right incentives are involved and that fraudulent parties from either side are unable to manipulate the process. For those victims of hacks or smart contract failures who provide evidence of their losses and submit within the correct time period, the process is designed to be simple, transparent and quick.
Exploring the Claims process of our risk partners
Nexus Mutual, Bridge Mutual and InsurAce, all follow a ⅔ step model with a voting mechanism for consensus. However, there are differences in how they each incentivize voters to act honestly.
All the platforms incentivize voters to vote within the majority, with rewards of tokens; and disincentivize voting in the minority.
At Bridge Mutual, voters who are in the minority have their stake burnt (but not in close calls from 45% to 55%). At Nexus Mutual, minority stakes are simply locked for an additional 7 days. This means that this group will be unable to jump on the next investment opportunities very fast if they so wish. InsurAce doesn’t penalise for voting in the minority.
By incentivizing voting in the majority, the risk of individual malicious actors trying to swing the vote decreases significantly (if we assume that this is a very small group). This is why all the platforms, Nexus Mutual, Bridge Mutual and InsurAce take a similar approach.
Claims are assessed by stakers
Votes are done by so-called Claim Assessors and each platform approaches this slightly differently.
All platforms use those who stake as the Claims Assessors. However, Nexus Mutual gives weighted votes. This means that the amount of NXM staked, decides how big their voice is when voting. However, this opens a door potentially allowing for a single actor with a large share of NXM token to influence the voting in a dishonest way. In order to counter this, all claims are overseen by the Nexus Mutual Advisory board.
InsurAce takes a similar approach. Although the intention is for claims to be handled by the Claims Assessor, there exists an Advisory Board, which has the power to accept or reject claims, purely at its own discretion. This board can jump in for multiple reasons not just to counter votes made from self-interest but also scenarios like if not enough votes are cast.
The outcome will be to accept or reject a false/unsubstantiated claim. But this doesn’t mean that the process is over. Both InsurAce and Bridge Mutual have an appeals system for those who feel they have been unfairly judged. Nexus Mutual doesn’t have an appeals process.
InsurAce allows the policy holder to dispute if they believe they have been unfairly rejected at the cost of 1% of the claim amount. The Advisory board handles these appeals and has sole discretion over the outcome.
Bridge Mutual goes a step further, allowing both the policy holder and claims assessors to appeal. In both appeals situations, the final outcome is decided by the ‘trusted stakeholders’. Below you’ll find a step by step claim process for all of our risk partners.
See the step-by-step InsurAce’s claim process
See the step-by-step Brigde Mutual’s claim process
See the step-by-step Nexus Mutual’s claim process
Conclusion
If we take a step back and look through a macroscopic lens, the system is perfectly balanced. In the long term, the sustainability of these platforms is contingent on each party co-operating and acting honestly.
If one party was being treated unfairly, then they would simply stake or buy coverage from somewhere else and consequently the platform would collapse. Fairness is the underlying principle keeping the whole system afloat for buyers and stakers.
In conclusion, the claims process is set up to accept claims which are true and reject claims which are false, by incentivizing stakers to vote in the majority of claims and to allow policy holders who have been unfairly rejected to appeal. These platforms, set up as mutuals, exist to serve their users fairly and efficiently. Both parties’ (stakers and policy holders) continued support is required to keep the whole system running.
About Bright Union
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