What is Index?

The Custom Risk Index consists of different individual insurance pools.

Liquidity provider can select any index to deposit their funds based on their risk appetite. Any theme index can be created, such as index for risky protocol and vice versa.

Furthermore, All index pools leverage their staked liquidity and provide them to their underlying pools as the image below, increasing the underwriter’s fee earnings while lowering insurance premiums.

Here's a simple example!

Alice provides liquidity of $600 into the index A, which consists of 3 different individual pools. When the leverage rate is 2x, this provided liquidity is regarded as $1,200 and will be distributed to the underlying pools equally ($400 for each pool). She will get premium fees from the underlying individual pools.

As a provided liquidity is regarded as 2x amount of actual liquidity, more insurances can be sold and underwriters have chance to earn more premium returns than providing liquidity directly into a certain individual pool.

Moreover, this leveraged supply contributes to lower the insurance premium according to the dynamic pricing mechanism. Therefore, it may be beneficial for insurance buyer as well.

From the perspective of the risk for losing deposited funds, if a certain protocol covered by any of the underlying pools got hacked, your providing funds would decrease in result of paying out to insurance holder.

On the other hand, Bob provides liquidity of $ 6000 directly into the individual pool for the protocol A'. He can limit their liability for coverage to only the protocol A'. However, he gets premium return for non-leveraged liquidity of $ 600 and he may loose entire funds when the protocol A' got hacked.

The solution for solvency risk

Since the index leverages its liquidity, there would be a chance that the amount of insurance payment might surpass the actual liquidity if several protocols got hacked at once.

InsureDAO introduces InsureDAO Reserve Pool for solvency risks as the above case.