Web3 Breakdowns Ep 52 - Jared Klee: Web3 Insurance
Primer: Why do large legacy insurance companies not want to underwrite Crypto/Web3 startups? How does Vouch navigate the dangers within this space and grow from strength to strength? Find out from Jared Klee in this episode of Web3 Breakdowns.
Background
Before 2018, he was leading corporate development for IBM
At that point, IBM was researching blockchain and wrote the code for Hyperledger Fabric, an enterprise blockchain framework
Became director of blockchain. Helped structure consortiums across the world with his team
Enterprise Blockchain
Private permissioned networks with known parties
The working assumption among the parties is that they trust each other
Seen this emerge in the medical sphere among hospitals for clinical research
In the shipping world, the blockchain is used to track the transportation of mangoes from Johannesburg to Newark
Each party involved needs particular aspects of the data. They verify it and commit it to the network
The 27-28 parties involved are not incentivized to share data but would know about the parties that came before them and get strong guarantees from their sign-off before passing it to the next party
“All of a sudden, blockchain is not just a tool looking for a use case. It's the de facto thing to go use. It's really hard to get those guarantees without it.”
- Jared Klee
Vouch
What Is Vouch?
Most big legacy insurers do not know how to underwrite startups. It’s paper-intensive and there’s a high cost to underwrite startups
Vouch started out underwriting startups for general liability
Started to write more specific risks that bigger companies have
There’s a gap in the structure for corporations that directors can get personally named in lawsuits. Their underwriting protects both the corporation and the directors
Errors and omissions are another things to consider (e.g. stock trading app going down and the market moving in the opposite direction)
What Is Vouch Doing Differently?
Insurance is focused on loss risk
Loss risk can be differentiated into:
Admitted market
Non-admitted market
Admitted market: Insurance regulated at the state level (e.g. auto, personal lines for homeowners)
Non-admitted market (AKA surplus market): Risks that we don’t quite understand, but need insurance for them
Vouch writes both types of insurance
In Web3, they are writing surplus lines. Each coverage they provide is unique
How Do They Know They Write At A Profit?
Have strong underwriting practices
Their Web3 policies are invite-only
They go deep with clients and spend an enormous amount of time understanding the nuances of their businesses
Have a robust partner network to get a signal of what their clients are doing
Is Vouch Taking On The Risk On Their Balance Sheet?
Have a panel of reinsurers behind them
Have a brokerage arm:
Have a balance sheet at-risk
Balance sheet for risks that they don’t want to/can’t underwrite, which they bring out to the market
How Does He Think About Underwriting Risk?
Have to understand the companies at a very deep level
Have to take a portfolio approach
Bluntest tool is the limits you put in place (i.e. amount insured)
Does Their Model Work?
They are de-risking their clients
Some of their clients fail, but the ones that remained have grown so much that they more than made up for the former
How Does A Founder Work Through The Coverage And The Terms?
Their role is to walk the founder through the journey of what could go wrong
They are the preferred insurance partner for Y Combinator and Silicon Valley Bank
Have been doing it successfully for multiple years
Why Does Vouch Consider Web3 As An Opportunity?
Are going where founders go
~$40 billion has flowed into Web3/crypto startups in the past 18 months
Web3 founders need help protecting the downside loss
The Recent Downturn And Its Impact On The Underwriting Cycle
They and their clients have zero exposure to FTX
They only take on people building long-term companies, shipping real products to real users, providing real value
Managing Future Uncertainties
Speak with founders and look for their character
Have partnerships with a number of VC firms
They structure the policies to grow with the client
If clients move in an entirely different direction, they speak with them that the clients are taking on risks that the policy was not meant to cover
Base Level Of Insurance That Startups Should Have
Have published a set of resources to help founders go through this question
If you are a napkin sketch, 2 folks in mom’s garage, coverage is as low as $200
Premiums go up as the companies grow
Greatest Mistakes From Founders
Founders are primed to think about the upside and not the downside
First-time founders fail to imagine the low probability, long-tail event that could undermine all their work
Founder stage agnostic-wise, he has seen founders failing to understand the growing risk surface as the company grows
Insurance Payouts From Smart Contract Exploits
On-chain projects have begun to insure against specific types of risks
Most insurance policies are not insurance in the traditional sense
People deposit assets into a pool that generates yield. When losses happen, a governance structure/DAO decides whether it meets the criteria for a payout
Will take a long time for payouts to calibrate and mature
Vouch first launched Web3 policies on Sep
Will There Be More Insurers Entering The Space?
Want to see more insurers coming into the space
Don’t have a robust market for smart contract insurance yet
Examples Of Risks They Would Not Take On
Can’t insure fraud
Algorithmic stablecoins
Bridges
Most Excited To Build
Over the next 6 months: Focused on getting more good founders/companies properly insured
Over the next 6 years: Seeing more insurance companies in the crypto space
All information presented above is for educational purposes only and should not be taken as investment advice. Summaries are prepared by The Reading Ape. While reasonable efforts are made to provide accurate content, any errors in interpreting and summarizing the source material are ours alone. We disclaim any liability associated with the use of our content.