Why TandaPay is Going to Work
How to build communities upon zero-fraud architecture
In earlier blog posts we have discussed several different use cases for TandaPay. Before reading this post it would help to have the proper context. I have previously given a broad overview of how TandaPay assists communities to pool their resources, and in that post I discussed the following topics:
- What is a Tanda and how does this concept apply to insurance?
- What is the ideal group size and composition of a TandaPay community?
- How much should people pay in premiums?
- What benefits can they hope to gain?
- What safeguards them from fraud?
- How much are people required to know about blockchain to participate?
- Does regulation negatively impact TandaPay communities in any way?
In this post we want to expand on these themes and fill in some missing details with regard to how TandaPay communities function.
Our target market needs to be those who know what Tanda-based community financing is. This group needs to have historically relied on this concept in the past or still be using it today. The initial TandaPay participants need to have the concept of community borrowing built into their culture. Most Americans have never heard of savings clubs before. The only thing which would come close to a Tanda that someone might be familiar with is Christian Care Medishare. This is a type of discretionary mutual, but since most of its participants do not know how it actually provides coverage it might as well just be another type of insurance company. If you do not consider healthcare-sharing ministries, the concept of community finance is completely foreign to most Americans. The majority of Americans would rather rely upon easy access to credit rather than opening up their financial situation to friends and family for help.
I’ve talked to many of my friends about this idea and the result is always the same. My Caucasian friends are quick to identify the potential for trust issues between members of a TandaPay community. My non-Caucasian friends are quick to identify the existence of these types of groups as part of one or more cultural traditions they are familiar with. After discussing TandaPay at length with various individuals I feel that the initial target market should not be Caucasian Americans.
Mexican American communities are often familiar with the idea of a Tanda (Cooperativa de ahorro y crédito) and would likely embrace this concept. This familiarity would make it easier for them identify TandaPay as a valuable tool, since community savings groups are already a part of their culture. TandaPay is likely to be seen as more valuable in any community where an unexpected $500 deductible would result in financial distress, and we know that credit is generally not as readily available to members of minority groups within the US. Our initial target market therefore should be the Mexican American communities with household incomes somewhere between $20,000 to $60,000.
The easiest way to bootstrap a community is by leveraging the concept of a secretary. This person serves as a central coordination hub for all of the members of the pool. The secretary is an administrator who performs the following functions:
- Writing up a formal definition of the community’s charter
- Whitelisting the members for participation
- Whitelisting of claims for approval
- Removing members who violate the community’s charter
- Converting dollars to stablecoins, allowing members to pay premiums
- Converting stablecoins to dollars, allowing members to cash out claims
- Providing technical support to help on-board new members to the app
It is important to note that their role does not require them to ever hold the premiums of policyholders or take temporary custody of another member’s claim payment. The primary goal of TandaPay is to remove the liability created when a third party holds funds that does not belong to them. They also don’t have any ability to commit fraud because they can never approve claims that don’t follow the community’s charter. The restrictions which prevent this from occurring will be developed in more detail later.
In exchange for performing these functions, the secretary receives the following benefits:
- Initial liquidity to help bootstrap the community
- The social status of being seen as a community leader
- A chance to help members of the community who are in difficult situations
- Financial compensation decided on a per community basis
- An initial compensation award of $500 after the first three months
In this post I described three of the four key roles carried out by a secretary:
- Enabling the formation of a group
- Enabling a policyholder to pay a premium
- Enabling a claimant to convert a claim award into a cash payment
The final role is the whitelisting of claims for approval. Before understanding how this works, we first need to understand a community’s charter.
A Community’s Charter
The simplest definition of a charter is:
- A document which provides instructions for what risk is acceptable for coverage
- A method for identifying which claims are eligible to receive an award
In more specific terms it outlines the following items:
- All rules which determine whether a policyholder is qualified to participate as well as circumstances which would disqualify someone from the group
- The limitations of the group’s policy, and the acknowledgement of its inability for claim payments to offer more than supplemental coverage
- The specific risk the group intends to cover, and how a loss event is defined
- The documentation required to submit a claim
- The rules that determine how claims will be evaluated which would include:
- Factors which would restrict the eligibility of a claim
- Factors which allow claim payments to be awarded
- The specific award amounts claimants can expect to receive (which may not fully cover the value of a claimants’ loss)
Award amounts should be fixed values which don’t take into account the extent of a loss. This allows the underwriting of a policy to establish a known value for the cost of a single claim. These limits make it easier for everyone to calculate the value of their own potential future claim payment. By knowing the following three things you can determine the likely value of the payment you should expect to receive:
- The amount of premiums collected in a month
- An estimated number of claims in a month
- The value of a claim as defined by the charter
Simply divide the expected premiums by the total number of estimated claims multiplied by the value of each claim (the limitation being that a claim can never exceed the value permitted by the charter). To make this illustration more practical it is applied below to the example I gave in my previous blog post.
Consider a group of 50 people that formed a tanda to cover the cost of a $500 deductible. Each participant would be paying $20 a month, for a total in expected premiums equal to $1000.
Since TandaPay is not meant to indemnify pure loss, this makes it a special type of parametric insurance policy. This is one of my favorite aspects of TandaPay, because I have always believed that supplemental parametric policies are fundamentally simpler problems to solve. When TandaPay’s parametric architecture dominates the peer-to-peer blockchain-based insurance market I will be proven right. Our knowledge as to how to create decentralized insurance architecture is very immature. If possible I would like to create simple architecture to solve simple problems in a simple way. I feel the creation of supplemental coverage that awards claims of fixed amounts is much easier for people to understand. The more people can grasp this concept, the easier it will be for them to evaluate its fairness and then decide if they want to participate.
How Claims are Approved
TandaPay’s architecture prevents a secretary from being able to commit fraud by whitelisting claims that don’t follow the community’s charter. Before considering how this process works, let’s first understand how premiums move through the system:
- A policyholder pays the secretary the value of their premium in dollars.
- A policyholder receives the value of their premium in stablecoins.
- The policyholder uses the app to pay their premium into a smart contract.
- The smart contract holds these funds until the end of the month.
- A list of approved claims and their respective awards is published.
- The smart contract allows people to make a choice:
* Finalize their premium payment by sending it directly to the claimants
* Defect with their premium payment and walk away from the Tanda
* Do nothing in which case their payment is still sent to the claimants
- After paying out all of the claims, any remaining premiums are repaid to policyholders as rebates.
- Defectors are barred from further participation and the process repeats.
The critical step which eliminates fraud is step 6. This step allows policyholders the opportunity to veto decisions made by a secretary simply by walking away from the tanda with their premium (defecting). Although this provides great fraud protections for policyholders, it would seem to provide terrible guarantees for honest claimants. This is why it is essential that policyholders never join a TandaPay group composed largely of people whom they do not know or trust.
How you view this architecture is largely biased by your cultural perspective. The fact is that tandas have been known to work for hundreds of years across more than 100 different cultures and regions. They have allowed people the ability to borrow in the absence of institutional credit. They do require people to trust each other and not all cultures will be comfortable with this arrangement. Given the diversity of people from different socioeconomic backgrounds that have access to this technology, I am unclear why making trust a prerequisite is a bad thing. Releasing funds to claimants is voluntary to mitigate fraud, but unfairly withholding payments has social consequences to mitigate defaults. Those who would deny payment to a valid claim are called scumbag defectors. In another blog post I discuss which features of our architecture create disincentives against this type of dishonest behavior.
The stronger the social bonds are between people in a society, the fewer defections there will likely be. Conversely, the weaker the social bonds in a community the more defections we should expect to see. All participants know in advance that coverage is contingent upon a tanda community’s ability to trust a claimant and the degree to which a secretary can treat all claimants fairly. It is unwise therefore to rely on communities which are distrustful or secretaries which treat people unfairly.
Furthermore the ability to make payments will always be relative to a community’s solvency. If in a given month there is a large number of claims, then this means that the relative solvency of the community has dropped. So long as claimants in a given month are all treated equally, the system remains fair. Claim awards can potentially underpay an expected claim payment by a significant amount. This is why everyone realizes that this should only be treated as supplemental coverage. In this way, TandaPay never fails to meet the expectations of participants.
Over time guarantees for claimants can become stronger. The more the community trusts one another, the more policyholders will be willing to pay a higher premium for coverage. Any premiums not paid out to legitimate claims are always paid back to policyholders as rebates every month. This means that a higher monthly premium doesn’t necessarily imply that coverage is more expensive. The greater the premiums policyholders pay, the better the coverage becomes. This is because the number of claims which can be awarded in a single month increases as premiums increase. This is how stronger guarantees for claimants develop gradually over time, out of trust. The secretary never mandates the size of a premium to policyholders, rather the community mandates to the secretary the size premium they would be willing to pay if they were to participate.
How to Eliminate Insurance Fraud
Since policyholders can effectively veto any claim award by walking away from the tanda, the secretary is never incentivized to approve claims that don’t strictly obey the rules of the community’s charter. As a reminder, soft fraud is the claimant’s exaggeration of the size of a loss for a valid claim. Hard fraud is when a claimant deceives the tanda community by attempting to submit a claim for a loss that never occurred or one that doesn’t qualify for a payment. The community’s charter defines predetermined claim awards, which eliminates soft fraud completely. TandaPay’s architecture allows a policyholder to approve or reject every claim that will be paid with their premiums, and this removes any possibility of hard fraud. Thus in theory TandaPay communities should see zero insurance fraud. This demonstrates how the right design can provide perfect fraud protections.
Architecture which eliminates fraud isn’t enough to build communities however. People still have to learn to trust one another in order to help one another. Still TandaPay’s architecture goes a long way toward providing a solid foundation upon which that trust can be built.