How Does InsurAce Work?
A crypto insurance protocol where you can buy coverage against hacks and stablecoin crashes, or provide capital to earn premiums as an underwriter. It proved the model works by paying out $11.6M in claims after the Terra UST collapse. Its B- grade reflects the fundamental problem that $30M in reserves may not cover a major correlated event.
TVL
$138,000
Sector
DeFi
Risk Grade
B-
Value Grade
D
Core Mechanisms
6.2.1
NovelMulti-chain DeFi insurance: coverage for smart contract exploits, stablecoin depegs, and custodian failures across Ethereum, BSC, Polygon, and more
InsurAce provides parametric insurance for DeFi risks, most notably stablecoin depeg coverage. Users buy policies denominated in specific risk types (smart contract, depeg, etc.). InsurAce paid $11.6M in UST depeg claims, proving the model can work at scale.
6.2.2
Underwriting pools: capital providers stake assets in risk-specific pools to earn premiums
InsurAce uses a pooled underwriting model where capital providers (LPs) stake in specific risk pools (e.g., depeg pool, smart contract pool). They earn a share of premiums but also absorb losses from claims. Standard insurance capital model adapted to DeFi.
6.2.3
Claim assessment via governance: InsurAce DAO votes on claim validity for edge cases
When a claim is filed, InsurAce's automated system checks if the trigger conditions are met. For ambiguous cases, the InsurAce DAO (INSUR token holders) votes on whether the claim is valid. Standard decentralized governance for claim adjudication.
5.1.1
INSUR governance token: token-weighted voting over coverage parameters, pool allocations, and claim decisions
INSUR token grants governance rights over protocol parameters, including which protocols to cover, premium pricing, and claim approvals. Standard governance token model.
6.2.4
NovelSCR (Solvency Capital Requirement) model: risk-based capital reserves calculated per-pool to ensure solvency
InsurAce implements a DeFi version of the insurance industry's SCR framework, requiring minimum capital reserves in each pool based on risk exposure. This is novel as a formal actuarial approach in DeFi insurance, increasing credibility but also complexity.
3.5.1
Dynamic premium pricing: premiums adjust based on pool utilization and claim history
InsurAce adjusts insurance premiums dynamically based on supply (underwriting capital) and demand (policy sales). When a pool is heavily utilized, premiums rise to attract more capital. Standard market-based pricing mechanism.
How the Pieces Interact
If multiple insured risks materialize simultaneously (e.g., USDC + USDT depeg, or Aave + Compound exploits), InsurAce's underwriting capital is overwhelmed. Because capital is finite and pooled, a correlated event can exhaust reserves, leaving later claimants with pro-rata payouts below full coverage.
When large claims are filed, capital providers may panic and attempt to withdraw from underwriting pools to avoid covering losses. This creates a bank run: early withdrawers get full capital out, but remaining underwriters are left covering all claims, creating a death spiral.
Stablecoin depeg events are rare but severe (UST collapse, SVB-triggered USDC depeg). If InsurAce underprices depeg insurance premiums relative to true risk, it collects insufficient capital to cover eventual payouts, operating at a structural loss.
When a claim is disputed, InsurAce DAO must vote on validity. Large claimants could attempt governance capture (buying INSUR tokens to vote favorably on their own claim) or governance can deadlock, delaying legitimate payouts during time-sensitive events.
InsurAce covers assets on Ethereum, BSC, Polygon, etc. Verifying claim conditions (did a depeg happen? was a contract exploited?) across chains requires cross-chain oracles, which introduce latency, attack vectors, and potential false triggers or missed claims.
What Could Go Wrong
- Correlated depeg events (multiple stablecoins or LSTs depegging simultaneously) can trigger claims exceeding InsurAce's $30M underwriting capital, leading to pro-rata payouts below full coverage
- Capital provider withdrawals during stress events create a death spiral: claims deplete pools → underwriters panic and exit → remaining claims become unpayable
- Depeg insurance pricing is inherently difficult; if premiums are set too low relative to true depeg risk, InsurAce operates at a structural loss and cannot sustain payouts
Correlated Depeg Event Exhausts Underwriting Capital
ModerateTrigger: Multiple stablecoins or LSTs depeg simultaneously (e.g., USDC + USDT or stETH + rETH), triggering mass insurance claims that exceed InsurAce's underwriting capital
- 1.USDC and USDT both depeg to 0.90 due to a banking crisis affecting Circle and Tether simultaneously — InsurAce's stablecoin depeg insurance pools face claims from thousands of policies covering $50M+ in notional exposure
- 2.Underwriting capital in depeg-focused pools depletes rapidly as legitimate claims are filed — InsurAce protocol's $30M TVL is insufficient to cover all valid claims; payout ratio drops below 100%
- 3.News spreads that InsurAce cannot pay full claims, causing panic among policyholders and capital providers — Capital providers (underwriters staking in insurance pools) rush to withdraw before more claims arrive, further reducing underwriting capacity
- 4.InsurAce's reputation collapses; future premium sales drop to near-zero as users lose trust — Protocol death spiral: no new premiums → no capital inflows → remaining claims unpayable → remaining underwriters exit
Risk Profile at a Glance
Overall: B- (33/100)
Lower score = safer