Risk Carrier

In the InSaaS protocol, the risk carrier is responsible for maintaining the reserve capital that is needed to remain solvent and pay claims associated with the pool of risks that have been transferred to it. The risk carrier can be anyone who is interested in taking on risk, including individuals who are willing to bet against certain types of risk or enterprises that operate to manage specific types of risk. The ratio of risk transfer, or the percentage of risks that are insured for each risk carrier, can vary from 0 to 100 percent and is determined by each pool based on its own risk management strategy. However, all risk carriers must sum up to 100 percent in order to bear the overall risk exposure.

The main objective of the risk carrier is to ensure that the pool has sufficient capital to cover losses associated with the transferred risks. This capital is calculated based on the solvency ratio, which is determined by the governance board and represents the amount of capital needed to cover potential losses up to a certain confidence interval (e.g., 99.5 percent).

The solvency capital required for the risk carrier comes from these sources:

Pure premiums: Pure premiums are the expected cost of an insurance policy, calculated based on the probability and severity of potential losses. They represent the amount of premium that policyholders are required to pay in order to cover the expected losses associated with their policy.

To calculate pure premiums, risk carriers use actuarial data and statistical models to estimate the likelihood and cost of potential losses. This process, known as actuarial science, involves analyzing data about past losses and using probability theory and statistical analysis to model the likelihood of future losses. The resulting estimates of expected losses are used to set the price of insurance policies in a way that accurately reflects the risks being insured.

Gross premium: The gross premium, which is the total amount of premium collected by the risk carrier, serves as a buffer for the risk carrier. This is because the gross premium includes not only the pure premium, which is the expected cost of the policy based on the probability and severity of potential losses, but also additional charges and fees levied by the risk carrier. By including these additional charges and fees in the gross premium, the risk carrier is able to build up a buffer of extra capital that can be used to cover unexpected or large losses. This helps to ensure that the risk carrier has sufficient capital to meet its obligations to policyholders, even in the event of unexpected or large losses.

Solvency capital requirement (SCR): The solvency capital requirement (SCR) is a measure of the capital that a risk carrier must hold in order to meet its obligations to policyholders over the next 12 months with a 99.5 percent probability. This means that the risk carrier has a limited chance (less than once in 200 cases) of falling into financial ruin. The SCR is calculated based on the expected losses and other risks faced by the risk carrier, and is used to ensure that the risk carrier has sufficient capital to pay claims in the event of unexpected or large losses.

To meet its SCR, a risk carrier may need to obtain additional capital from external sources, such as external liquidity providers. This is in addition to the premiums paid by policyholders, which are used to cover the expected losses associated with the policies. By maintaining an appropriate level of SCR, a risk carrier can help to protect itself and its policyholders from the financial consequences of unexpected or large losses.

The risk carrier relies on the on-chain registry and on-chain routing provided by the "RiskCarrier Manager" contract in order to operate effectively. The on-chain registry keeps track of all risk carriers and their risk transfer ratios, while the on-chain routing helps to distribute risk among risk carriers according to their respective capacities.

Overall, the risk carrier plays a crucial role in managing risk and ensuring the solvency of the InSaaS protocol. It helps to transfer risk to a trustworthy party, enabling each insurance pool to better manage its own risk and providing policyholders with the reassurance that their claims will be covered if the unexpected occurs.