It is high time we had someone open up the global risk market!
In the traditional risk management industry, highly capital intensive insurance firms accept premiums from individuals and corporations to buy risk.
This industry has long been associated with the haves.
One could only dream of ever becoming insured in many aspects of life, let alone becoming an insurer.
So how is the GRE changing this equation and bringing almost everyone into the decentralized risk market?
Let us find out!
Background in risk management
Be it personal investment plans, calamity or corporate business uncertainties; humans always encounter risk in their daily engagements.
Will I afford high school for my kids in 10 years time? If I fell sick could I afford medication? If my business starts flourishing, can I get top-up capital to keep up with demand?
All these are scenarios where risk management can come into play.
Individuals will run for insurance premiums where they can sell risk by paying premiums.
Corporates and more sophisticated people will go for derivative markets to hedge their risks.
The global premium market stood at $4.8 trillion in 2017, while the derivatives market hit a staggering $1,500 trillion. But hear this;
The global GDP is $50 trillion, 1/30th of a fraction of the derivatives market!
Some problems with premium markets
Product Homogeneity
The premium market is heavily centralized, and because of the way risk products are structured, there is product homogeneity across the insurance divide, leading to heavy competition with a similar product. This leads to massive expenditure in marketing and awareness creation.
Bloated workforce
Because of the hierarchical nature of centralized entities, insurance firms often have bloated staffing in marketing and other support departments that rarely keep up with the ever-changing market demands, and raises the premiums that insurance seekers have to cough up, hence raising these products out of the reach of many.
Insurance fraud
It is a red sea full of sharks out there in the insurance market. Policy marketers will hide bits and pieces of insurance contracts from insurance seekers in a bid to hook them in.
Information security
When buying insurance products, most of these centralized organizations ask for a lot of highly sensitive personal information that could be leaked or hacked from their databases and used for all manner of illegal purposes, included targeted marketing and extortion.
The derivatives market is not left behind
The problems in derivative markets
Market Panic
Any form of adverse information can cause extreme financial strain on the derivative market due to panic. This panic increases aversion to risk-taking, which in turn decreases market liquidity, increases exposure to risk and exacerbates market volatility. It can lead to a very swift melt-down due to the centralized nature of the market makers.
The OTC effect
Over-the-counter derivatives are rarely included in the calculation of the risk measurements in these markets, and this leads to a serious distortion of the balance sheet.
It could raise the financial portfolio of counter-parties that are not as liquid as stated, and if a whiff of this goes out there, the panic that results can be catastrophic.
Why a blockchain can help
There are three main features of a blockchain that make it attractive to apply to the risk market;
Distributed Ledger: An immutable recording of transaction data on a blockchain ensures that auditable and highly secure transactions are maintained. All information is available to everyone in the network and is verifiable and traceable.
Smart Contracts: The blockchain solution brings with it the use of decentralized smart contracts that execute exactly without the need for human lawyers or notaries. This is important since, with the risk market, the sophisticated network is capable of scrutinizing the smart contract and endorsing it for lesser mortals.
Cryptocurrency; which can be used to effect settlements and payments, instantly, through the use of smart contracts, peer-to-peer.
How the GRE will use the technology
Globalized Insurance
Now, because of the decentralized and highly flexible insurance products, anyone can publish insurance needs. Further, anyone can invest in buying well-calculated risk, and thus it is possible to deconstruct the traditional insurance company and avail the investment model to the masses.
Improved Insurance efficiency
The moment a decentralized platform is optimized to run an insurance function as a decentralized application with several human and automated players, insurance will immediately cease to be a journey through tedium.
It will be possible to efficiently manage resources, personalize insurance hence creating a diversity, reduce costs and ultimately increase accessibility to the uninsured.
Tokenization of reputation and contribution
Blockchains can also hard-code tokenized incentives where participants are rewarded for their participation and contribution in the community. This helps in motivating people to participate and to forge long-term relationships with the community.
Other benefits in the premium market include security of personal information and automatic execution of settlements and payments through smart contracts.
There are many advantages also in the derivatives market, including the elimination of counter-party risks, automatic order matching and assurance of global liquidity of the market.
So what does the GRE Identify with?
It is through the use of these technologies that the GRE intends to disrupt the global risk market. They will do this in several distinct but interwoven ways;
Contract Democratization
Through the use of pre-designed templates and professional contract providers, the platform will allow anyone to define and find matching risk management products on the platform.
Professionals can create and provide more complex smart contracts and earn based on user subscriptions and transactions.
Elimination of intermediaries
Through the elimination of information silos and complete flexibility in matching risk management needs with a global presence of risk buyers, and through automation of contracts, policyholders are empowered to operate in a completely decentralized and efficient environment, picking the best insurance products on the blockchain.
Market-based risk assessment
There will be a decentralized order matching engine that will pool private information of all market participants. So if a player has private information regarding a particular risk, they can trade that information on the platform.
Assured system predictability
The smart contracts will lock tokens based on the nature of the product, and Oracle will issue the verdict of the outcome of each transaction, thereby triggering automatic settlements from the smart contracts and reducing counter-party risks.
The players
The system will work with five categories of players, namely underwriters, the insured, the insurers, the GRE Platform, and the block producers.
The underwriters will provide actuarial expertise to the platform to facilitate pricing of the risk products.
The insured will hedge their risks by buying risk management contracts and will be compensated as and when the risks they are insured against happens.
The insurers will sell the risk management contracts to the insured, thus accepting those risks from the insured.
The GRE Platform will charge a certain transaction fee which will be re-injected into future developments of the platform.
The block producers will do the work of securing the blockchain by witnessing transactions, signing them cryptographically, embedding them onto blocks and broadcasting them to the entire network.
Token Sale
The ICO public sale was successfully completed, having begun on May 20th, 2018. The token (Risk) sold at a value of 0.00001 Eth.
Final Thoughts
The insurance industry was ripe for disruption with an appropriately designed blockchain system, and that is what the GRE is doing.
Through complete decentralization of contract design, risk matching and sale of policies, the GRE is availing insurance products with much greater flexibility in terms of the policy design and pricing structure.
This means that insurance will no longer be a preserve of those who can afford high fees, or who understand the jargon.
Risk management is no longer going to be a painful, centralized and fraudulent affair when the GRE is fully functional.