"My premise is that you can use blockchain essentially to trust people you do not know – trust the code."
While that statement by Hugh Karp may seem a standard line in crypto-land, his startup, Nexus Mutual, is actually building a product for those who do not trust the code.
Or, at least, do not trust completely.
With Nexus, Karp is trying to revive mutual insurance, a model that dates back to 17th century and, many argue, aligns the interests of the participants better than today's insurance companies that maximize the profits. Nexus is one of the few blockchain startups, at various stages of development, with the goal of using technology for this purpose.
But the first insurance product that Nexus intends to offer will cover an ultra-modern type of risk: security failures of smart contracts on the blockchain ethereum.
Think of the DAO hack of 2016, where about 3.6 million ethers (valued at about $ 50 million at the time) were emptied of an intelligent contract by an attacker. Or the Parity Multisig Wallet attack last year, where just over 150,000 ethers were stolen (worth about $ 30 million).
Starting next year, Nexus will offer customers the financial losses resulting from such "unforeseen use of the code".
Yet Nexus himself will function as an intelligent contract on top of ethereum. This is what Karp means when he speaks of trust in the code. For him, blockchain is a way to overcome one of the limitations of old mutuals while retaining their benefits.
His thesis is that users will trust the rules of an intelligent contract supported by the immutable public ethereum blockchain. In this way, members who do not know each other can trust one another, allowing reciprocal scalability. In the end, consulting the members, the plan is to explore other areas of catastrophe coverage beyond cryptography.
Karp stands out in the insurtech space thanks to his deep knowledge of the sector and technology. He began his career as an actuary and became the chief financial officer of Munich Re, one of the world's major reinsurers. He became fascinated by bitcoin and then by ethereum relatively soon, in 2014.
Stephen D. Palley, a member of the law firm Anderson Kill of Washington, with extensive experience in the insurance industry, is a skeptical blockchain, however he was unusually bullish on Karp and Nexus.
"People who really understand both technology and vertical insurance are lacking," said Palley. "I also like the idea of the mutualisation Nexus, it's almost like going back to the future for insurance."
He added that Nexus "offers something like an old-fashioned vision of insurance, a community-based model, as opposed to the antagonistic one."
Back to the Future
More generally, it is easy to see the appeal of the old mutual insurance model that Nexus and some similar start-ups want to recreate using current technology at the forefront.
Historically an important part of life and life and property insurance, mutuals are centered on the client, as opposed to companies that maximize profits that have largely replaced them and that are likely to pose the interests of shareholders first the benefits of the insured.
The number of mortgage conversions to share holders has grown steadily since the 1960s onwards, with the pace of demutualisation increasing significantly in the 1990s, while in Europe legislation has removed some of the barriers between insurance companies and banks.
"In the last decades, statistical advantages, network effects and efficiency gains have led to a massive concentration of power and capital in the insurance space and pushed mortgage systems into a niche in most markets", said Stephan Karpischek, co-founder and CEO of Etherisc.
Like Nexus, Etherisc wants to use blockchain to counteract the long-term demutualization. The Karpischek startup has already used ethereum to create parametric insurance products (in which payments are automatically activated in an event like a hurricane, without the need to complain) and has explored the decentralized risk pools for to expand the Access to insurance for previously excluded populations, such as small farmers in Africa
Peer-to-peer structures are more stable and less prone to design failures such as hacks, loss of information, corruption, mismanagement or abuse of power, Karpischek argued.
common denominator in the case of Nexus and Etherisc is the blockchain ethereum. But it is not just ethereum; this type of innovation is also explored on other public chains.
The blockchain Zilliqa in Singapore will soon be the headquarters of Inmediate, a partnership between Deloitte, the pan-Asian insurance group FWD and four phases still under the name of insurance partners.
Intermediate CEO Otbert de Jong has decided to start with a small group of insurers, but maintains a high goal. "In fact, we can report insurance to what it should be, or take care of one another in times of adversity," said de Jong.
Another back-to-the-future insurance model based on blockchain is pursued by Layer 2 Labs. Headquartered in New York, this fledgling startup is revisiting the risky unions introduced for the first time in Edward Lloyd's coffee shop in London in the late 1600s – which evolved into one of the world's best known insurance markets .
"What we are building is a decentralized platform for insurers to issue and purchase risks, like at the beginning of Lloyd's in London," said Jonathan Mohan, co-founder of Layer 2 Labs.
Similar to Nexus, Level 2 will also focus on covering the specific risks of the blockchain, which Mohan said is analogous to the way the Lloyd's formed a pre-legal commercial framework before regulation .
In addition to allowing mutual societies to climb trust via code, another part of the blockchain appeal to insurtech companies like Nexus is that tokenization opens up 39; access to a more flexible collection of capital.
Nexus plans to tokenise early next year, but not the typical fashion to raise capital through an initial supply of coins (ICO) with a promise to build some solutions later. Instead, Nexus, who completed a £ 184,000 ($ 241,000) grant round in April, plans to build the platform and launch a fully functioning real-time contract protection product.
In the days and weeks immediately Following this launch, Nexus will disclose the membership rights (in what Karp calls "reverse ICO") to finance the risk pool.
"In some ways it is like an ICO, but the big difference is that money goes into the pool: it is the money of the members to support the cover that the mutual scriptures, for which they will get tokens that represent the rights of belonging", Karp said.
To begin with, Nexus is exploiting an unregulated pocket within the British insurance industry, a model called "discretionary mortgage", in which members have no contractual obligation to pay claims. Being unlicensed, it means that Nexus can move easily in the otherwise highly regulated insurance world.
Once Nexus is funded, it will function as a decentralized autonomous organization (DAO) that will promote a governance process led by members who will vote for updates and proposals over time. The prizes will be paid in ether or in a stable cryptocurrency at the prices denominated by the; the payment of the requests will be subject to the votes of the members.
In case you were wondering how to protect Nexus's risk capital from a possible breach of the security of the smart contract, Karp said that in addition to all the usual security and auditing tests, it will also be started with a button emergency break.
This will initially be controlled by the Nexus commission (founders of the company), but each member can replace an existing board member through a proposal (provided it is voted by members) that can not be interrupted by the current council.  And just as large insurance companies invest their capital in assets such as bonds and commercial mortgages, the DAE Nexus will make the risk pool funds available, even if it chooses more contemporary investment tastes.
"We can invest in any ERC-20 token," Karp said, referring to assets created on ethereum. Nexus also "automated all operations using the protocol 0x", a decentralized exchange platform.
"The membership base can also update the list of resources to invest in and the pool automatically rebalances, we plan to" invest "a substantial part of the capital at stake," he added, speaking to a plan to change the way the second blockchain in the world is validated.
In the insurance world of insurance, the greatest innovation you might expect would be the distribution of private blockchains. But the insurtech supporters of the public chain like Karp have no doubts about where the true power of transformation lies.
"I think private chains will have a great benefit for insurance companies, especially by connecting them, but public chains are where my energy and charm are."
Image via Lloyd & # 39; s of London