How does InsureDAO manage the solvency risks?

Since providing liquidity to an index is leveraged, there is a risk of insolvency if more than the underlying assets are paid out. To prevent it, InsureDAO has several mechanisms.

• Maximum allocation limit to one pool InsureDAO sets the maximum allocation limit to one pool so that the underlying asset remains solvent even if all the allocated credit to one pool is paid out.

• Leverage rate control operation When the underlying asset of a pool is paid out, the leverage rate becomes higher. In such cases, InsureDAO would conduct deleverage operations, which forcibly deallocate credit from pools to lower the leverage rate. Also, those who provided liquidity become unable to withdraw until the leverage rate gets back to the safe rate. Other than de-leverage operation, leverage rate can be lower when 1) new liquidity is added or 2) an index earned premium, which will be compounded as the underlying asset.

Moreover, when InsureDAO faces the solvency problem despite of above mechanisms, the following meta-insurance mechanisms will work to guarantee the solvency of the system.

InsureDAO Reserve Pool

InsureDAO introduces InsureDAO Reserve Pool as one of the solutions for solvency risks.

Each time an insurance purchase occurs, a certain percent of protocol fee is accumulated in the InsureDAO Reserve Pool for reserve. If any index pool become insolvent, the accumulated liquidity in the reserve pool will be used to pay out surpassed amount.

Minting INSURE tokens

Even if the InsureDAO Reserve Pool is insufficient to compensate for the payment, InsureDAO will be able to finance the payment through printing additional INSURE tokens and selling them on the market.