TL:DR - we should add a requirement that for valid claims proof-of-loss be required.
At present Smart Contract Cover conceptually acts like a credit default swap where cover can be bought without any actual exposure to the underlying protocol. This was done for simplicity reasons as there were lots of items to build initially and we were trying to cut down the initial scope.
Given the recent success it’s now time to revisit this aspect and add in more sustainable product features.
I strongly suggest the following broad terms are added to the Smart Contract Cover wording document:
A valid claim should only be paid if in addition to all the other requirements;
- a cryptographically signed message from an account who directly lost funds is provided, or
- where the cover holder is directly related to the team or individual who built and/or deployed the contracts, a cryptographically signed message from the address that deployed the contracts or otherwise sufficient evidence that the cover has been purchased by the team or individual behind the contracts.
(wording to be refined)
This means that the cover holder must effectively prove personal loss greater than 20% of the cover amount before a claim is paid.
The main purpose here is to align interests between cover holders and the mutual more closely, as well as protect the mutual from paying out very large sums when the total loss incurred by the hack could be much lower. From personal experience of shutting down many products, business lines and involvement in insurance company mergers due to large losses, I’m quite certain this type of feature is required for long term sustainability.
- This clause should only be applicable to cover purchased after the date it is implemented. Existing cover will continue to operate on the current terms until it expires.
- This method isn’t full-proof but it is quite strong, relatively easy to implement and does create significant friction to abuse. It also prevents payouts exceeding total loss incurred.
- All information would be provided off-chain and assessed by claims assessors.