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A while ago, my friend Sugarfix suggested that I look at the Lloyd's case as an example of decentralization, long before the crypto revolution that made the world aware of the term decentralization. Most people involved with cryptocurrencies and/or DeFi speak Wall Street language, instead of thinking about the fundamentals of the revolution, which are precisely the opposite of those proposed by Wall Street and the banking industry. Precisely, decentralization means eliminating intermediaries, that is, banks, stockbrokers, and other scourges of the capitalist system.

In a previous post here on Publish0x, I wrote How to measure the decentralization´s centralization.

Decentralization is what is truly important, not cryptocurrencies.

The insurance industry is as old as humanity, and it seems to have been born as verbal contracts between overseas merchants. Companies or individuals offer and acquire insurance to protect themselves or their beneficiaries against future events, such as death, illness or accident, or to protect property and real estate from theft, loss or damage, among others. The participants are the insured, insurance companies, intermediaries (there is never a shortage of brokers, advisors, sales agents), liquidators, government supervisors, reinsurers, risk rating agencies, auditors.

In this controversial new millennium, the insurance industry is rapidly transforming to be able to meet the pace of the new generations. The term “Insurtech” merges “insurance” and “technology”, and arises as a response to adapt the whole industry to a digitalized world. Examples of this new concept are the use of IoT devices, such as sensors installed in cars or portable devices, which allow insurers to collect real-time data on the behavior and habits of the insured. One of the main contributions of Insurtechs lies in their ability to facilitate processes and offer highly personalized and efficient services, using digital possibilities. For example, using machine learning algorithms to analyze an individual’s health history and offer a health insurance policy that is specifically tailored to their unique needs and risks. In this way, customers receive coverage and benefits that they really need, instead of generic solutions that do not fit their profile.

That is to say, we can expect major disruptive changes in this insurance industry in the coming years.

Now, the interesting thing is not to analyze an insurance company, but the possibility of operating in a decentralized environment, which is precisely what Lloyd's does.

The name Lloyd's comes from the surname of Edward Lloyd who set up a coffee house in the financial district of London in 1688, where businessmen and merchants of overseas products began to gather. The business of underwriting or sharing in parts the value of a shipment gradually developed. These subscribers or "Insurers" became known as "Lloyd's Underwriters" and the business of underwriting and sharing the risks of a shipment was called "Insurance." To formalize this subscription of a risk, a document was created in which each subscriber noted the percentage of the total risk that he/she was willing to assume. The document called "The Policy" circulated until the total value of the risk was covered. Edward Lloyd was not involved in the insurance business, and his main function was to provide a place, his coffee house, where these insurances would be carried out. When Lloyd died, the need arose for a place where the “Underwriters” could continue their business. The rather informal, union-like “club” moved several times until it occupied the present building. Until 1871, Lloyd’s Society had functioned as a kind of private club in a coffee house. Then the “Lloyd’s Corporation” was formed.

The methods used to conduct insurance business are very similar to those used in the 17th century. Today, insurance contracts made at Lloyd’s are signed with individual “Underwriters”, “each for his/her own.” Old Lloyd could not be sued for policies written in his coffee house, and, likewise, the “Corporation” cannot be sued today.

Lloyd’s is not an insurance company, but an insurance market. It is not a company. It is a decentralized ecosystem. Lloyd’s is a leading global specialty insurance marketplace with business in more than 200 countries and territories worldwide, often being the first to insure new, unusual or complex risks.

Members join together to form syndicates to insure risks. Much of Lloyd’s business is on an underwriting basis, where more than one syndicate takes on a portion of the same risk. Lloyd’s members are grouped together in syndicates, which are tasked with underwriting or insuring risks. Lloyd’s thus serves as a meeting place for financial or insurance companies. Each syndicate takes a proportional share of the same risk to minimize its exposure to it, most of which is underwritten through brokers who facilitate the transfer of risks between clients and underwriters. Risks are underwritten through two mediation mechanisms: either through a subscription agency (coverholder) or through a Lloyd's broker on the open market.

Coverholders are legal entities authorised by one or more insurers and authorised to underwrite risks on their behalf. These subscription agencies are the links between the broker, the client and the syndicates. Each coverholder is accredited by one or more syndicates. In any case, these subscription agencies are not insurance intermediaries, but are direct distribution instruments of the insurance company that has granted them the power.

Lloyd's underwriting companies do not deal directly with the insured, but accept risks through Lloyd's brokers, or through brokers who, without the status of Lloyd's brokers, are verified by a Managing Agent, or through coverholders, i.e. subscription agencies. These agencies are authorised by one or more insurers. Each agency is accredited by one or more syndicates. These agencies must have the status of “Lloyd’s coverholder”. The syndicates accept the risk underwriting for a percentage of the risk taken. Each syndicate is responsible for the percentage accepted. There is no solidarity in the acceptance. If a syndicate does not respond to the risk, litigation is brought against this syndicate without affecting the others. All syndicates are backed by a Central Fund. The financial solvency of Lloyd’s is defined by a “security chain” which is made up of premium funds from each syndicate, cash capital or convertible assets contributed by each member of Lloyd’s, and central assets of Lloyd’s if the previous statements are insufficient.

With this distributed and complex scheme, Lloyd's is considered a good backer for very high and complex risks such as Arctic exploration, international disaster relief organizations, satellite launches, cyber risks, terrorism, and climate change. The economic, geopolitical, social, and technological changes that humanity is going through make Lloyd's and its particular risk distribution system a reassuring solution. Some risks are too big for a single insurer to take on. Lloyd's distributes the risk among syndicates and dilutes the chances of default.

All of this that I have just told you is very similar to a typical consensus protocol of the crypto ecosystem. It could not be said that the operation of Lloyd's is based on blockchain technology, because for that you would have to relate each transaction with the previous one by means of a hash, find a nonce, and in general, do a proof of work or participation. But it does seem to me that the operation of Lloyd's could be assimilated to the operation of a PoS consensus protocol. In particular, it occurs to me that the way Lloyd’s works is quite similar to the way the Avalanche consensus protocol works.

Avalanche randomly checks validators’ transaction confirmations by having all nodes work in parallel with each other, using multiple validator chains and subnets, using a consensus algorithm called “snowman.” The idea is that repeatedly doing random checks increases the probability that a transaction is true/valid. The Avalanche network has decentralized governance that allows owners of AVAX, the network’s token, to participate in decisions. Snowman takes rapid random samples, and by verifying that sampling, validators can determine if there are conflicting transactions, incentivizing other validators to verify those transactions. This, which means huge savings in time and money by exponentially increasing the number of transactions per second on the network, is possible thanks to the formation of subnets, which are secondary networks formed by groups of validators that help verify the Avalanche consensus as a network. Any user can create a subnet for any purpose, helping decentralized decision making. Each Avalanche network has to be monitored by a single subnet of validators. Each subnet can validate multiple networks at once. Validators can be members of multiple subnets, and each group can decide who can join the subnet, or ask for certain requirements to be met to be accepted.

It seems that Avalanche studied the Lloyd’s case in depth to build itself and enable itself as a serious competitor to Ethereum and Solana in the Web3 ecosystem.

I am not suggesting a technical similarity, but a conceptual one. The Lloyd’s syndicate “subnets” act as validators of the transactions that occur in the insurance market that is Lloyd’s. And this has been going on for at least three centuries. Let’s put it this way, the insurance industry did not need anyone to solve the Byzantine generals problem to decentralize in everyday practice, creating a brand that is a world star like Lloyd’s.

Conclusion

At the architectural level, Avalanche has a scalability solution that allows it to meet an ever-increasing demand for transactions. This solution is the validator subnets, which allow developers to create networks for their own applications.

This strikes me as very similar to the Lloyd's ecosystem.

Avalanche can be considered a decentralized network. Although it has an administrative arm in Ava Labs for development and financing, any decision to modify the protocol is voted on and rectified by users on the network through their AVAX cryptocurrencies.

The Lloyd's name is important, both for insurers and policyholders. The support of the Lloyd's ecosystem is a necessary and sufficient condition to attract users, even when there is no specific company that holds governance.

Avalanche is one of the networks with the most validators connected in the market. It has more than 1,300 validators in charge of monitoring the information registry and about 100 independent subnets operating at all times.

Lloyd's is the largest insurance market in the world, made up of world-renowned insurers, insureds of all kinds, especially high-risk ones, validating syndicates, coverholders, brokers, and service agencies. Together they shape a decentralized business that has existed, albeit with modern variants, for centuries.

It's not that humanity realized decentralization a couple of decades ago. It has been thinking about this for a long time. It's just that every revolution has to go through several stages. One day, we'll realize that there are no more banks and that those that remain are used to be demolished and build on their premises a good number of green parks in the cities.

Thank you for visiting!