Takadao dynamic underwriting: A closer look

Note: The following sections are based on underwriting for life insurance. Life insurance is chosen as a starting point because it is the easiest risk to underwrite and hence easy to explain.

Conventional life insurance underwriting starts from the “sum assured”. The insured is guaranteed a fixed amount of money upon a successful claim. The insurance company guarantees that this money is paid regardless of the solvency of the fund, this represents a transfer of risk from the insured to the insurance company. As a result, the insurance company gets to keep 100% of the insurance premiums regardless of how much is actually spent on claims payouts.

Working from the starting point of the sum assured, underwriting seeks to price insurance policies correctly based on the risk of each individual. If the policies and risk are priced correctly, the premiums collected should more than cover the claims, resulting in an underwriting surplus. Additionally, even more surplus can be generated by investing part of the premiums that are collected. The underwriting surplus is then the profit of the insurance company who shares it with their investors (external capital providers) and reinsurers.

To say that this model benefits the insurance company is an understatement; insurance companies control vast amounts of wealth globally. In 2021, the assets of insurance companies globally amounted to approximately 40.6 trillion U.S. dollars - an increase of almost two trillion U.S. dollars from the previous year and almost double the annual GDP of the United States.

Based on the sum assured, the insured pays a defined premium for his insurance coverage. If the insured defaults on his payment, he may be charged a late fee and eventually his policy is canceled, regardless of how much he had already paid in premiums previously. In this risk transfer model, the insured receives nothing if a claim is not made or is unsuccessful. Additionally, the insured would have lost all of the premiums that were paid to the insurance company.

In Takadao’s dynamic underwriting model, the benefit payout is not strictly defined. It is not a “sum assured”. Instead the model starts by determining a targeted and underwriting surplus and works backwards to determine the benefit amount based on the amount that was contributed by the insured and his individual risk. Recall that the underwriting surplus is then redistributed back to tDAO members who have not received a payout.

In this risk sharing model, the ultimate goal is continued fund solvency and maximizing the well-being of the group. The worst thing that can happen to a risk sharing insurance fund is that the fund runs out of money and is discontinued. This would mean a total loss for all members who would lose their protection and all their contributions as well. Hence, dynamic underwriting is applied to prevent this scenario by adjusting benefit amounts to maintain fund solvency.

The following table highlights the key differences between Takasure and conventional underwriting.

	Takadao Dynamic Underwriting (Life)	Conventional Underwriting (Life)
Benefit (Claim payout)	Not predefined, benefit multiplier	Predefined, sum assured
Contributions/Premiums	Determined by member	Determined by company
Defaults by member/customer	Protection not renewed, member still entitled to surplus distribution subject to a penalty for early cancellation	Results in late fees and policy cancellation.
Underwriting Surplus (US) (i.e. contributions/premiums exceed payouts)	US>0 is a key goal of the model. Is redistributed among participants/insured	Variable. Is profit for insurance company and shared with shareholders and reinsurers
Underwriting Deficit (UD) (i.e. contributions/premiums less than payouts)	UD=0 is a key goal of the model and deficits should only occur in extreme cases. Is shared among participants/insured	Variable. Is loss for insurance company and shared with reinsurers. Excessive UD may result in fund insolvency and company bankruptcy.
Loss ratios exceed expectations (i.e. more claims than expected)	Benefit Multiplier Adjuster reduced for all claims, maintaining the targeted underwriting surplus for participants	No change in sum assured, reduces underwriting surplus/profit of insurance company
Loss ratios lower than expectations (i.e. fewer claims than expected)	Benefit Multiplier Adjuster increased for all claims up to 1.0, after which underwriting surplus increases for redistribution to members	No change in sum assured, increases underwriting surplus/profit of insurance company