This post is an explanatory link from: what problems does blockchain technology actually solve in insurance?
Incremental claim payments are a fairer way of paying a claim than lump sum claim payments if you can’t be sure you have enough reserves to pay all outstanding claims. To illustrate this point lets say you have a cafeteria filled with 99 hungry people. 1/3 are preteen youths, 1/3 are senior citizens and 1/3 are football players. The first group can eat 8 ounces of food each, the second group can eat 16 ounces of food each, the third group can eat 32 ounces of food each. Unfortunately you are not sure if you have enough food to satisfy everyone’s appetite. If any more people show up you definitely don’t have enough food. The goal is to make sure that everyone is equally full regardless of their physical size. In other words, you want to feed everyone in a way that is both fair and proportional to what they need even though you may not have enough food for everyone to get fully fed.
What then should you do? You could send all the adolescents through the line first, followed by the senior citizens, and then the football players. If you did this however, it would likely mean that the football players would feel they were treated unfairly. You could send the football players first but reduce their portions by half and then require them to all come back for seconds. This might be slightly inconvenient for them yet it still wouldn’t guarantee everyone is treated equally. At best, it would only guarantee that the football players’ appetite would be at least 50% satisfied. To make matters worse, the three groups are assigned randomly at different dining tables and the most organized way of serving people is by table not by the size of people’s appetite. That is to say that the order of people who get in line to be served is random, you don’t have the luxury of ordering people according to their appetite. If our goal is fair treatment of participants then some trade-off of convenience will be required to achieve this goal.
The only way to be certain everyone is treated fairly is to require everyone to go through the line multiple times. Forcing people to return through the line four times, and limiting how much they can take each time, would make sure almost everyone is treated equally.
This would mean by going through the line a single time the following people would receive the following portion:
Youths: 2 oz.
Seniors: 4 oz.
Athletes: 8 oz.
To be clear, if there is more than enough food for everyone then multiple trips through the line are unnecessary. This example illustrates why paying incremental claim payments is better than paying lump sum payments. The cost of fairness is requiring everyone to make multiple trips through the line. In the case of payment systems requiring the writing, sending, and cashing of checks this is costly and inefficient. Incremental claim payments are unpopular primarily because they are inconvenient given all the payment friction in our existing financial infrastructure, which is why we don’t use them. Payment systems that don’t use banks or mail carriers don’t have this problem and the cost is almost completely negated. New payment technologies empower new methods of paying claims fairly. This solution is only relevant if it is uncertain that sufficient resources are available to pay everyone’s claim in full.
If we want to create small self governed communities of policyholders then we need to find new ways of managing the challenge of operating on low-liquidity. If cannabis farmers and dispensaries decide to use blockchain to self insure then this might be a useful tool of consistently paying claims when forced to operate on low liquidity. Bancor allows communities to set up fractional reserve escrows that anticipate future solvency issues and ration out reserves in a logical manner that meets the needs of the community given their limited resources. Thus incremental payments are relevant to the fair payment of claims in these communities.
FINAL NOTE: The way that insurance works in small communities is a reflection of how it works in the real world. Small communities have limited resources. We have to get over the thought that big insurance companies have an unlimited supply of money to pay all legitimate claims and the only reason why they deny a legitimate claim is out of greed or cruelty. Insurance companies deny claims to stay alive. They don’t have infinite money but from the policyholder’s perspective their actions only seem like greed or cruelty.