Editing Decentralized underwriting (section)

== Overview ==
Insurance is essential for every type of business transaction, every type of property, every type of service engaged in business. Every type of economic action is made more efficient when decisions are hedged, so we can be more confident in our investments in the future. Such stability allows more complex business arrangements which exploit subtler opportunities for profit. To achieve this stability, we require the trust that transactions will finalize satisfactorily as planned, or in the event of unforseen failure, that the contract will be made whole by the platform running the marketplace. 

Therefore insurance is an essential industry for the modern economy. Like the appeals process of the law, like policing, like the effort to keep track of reputation and maintain the protocols of governance, insurance is also an overhead cost that does not directly generate profit. It’s a type of business cost that any efficiency-minded engineer would prefer to eliminate entirely. But inasmuch as we can’t predict the future, insurance will never be eliminated, because it is valuable. Insurance improves the efficiency of the economy by investing in the future, to guarantee the system will continue running, despite inevitable unforeseen problems. Insurance mitigates risk. Insurance helps people overcome the fear of joining a business transaction due to the risk of loss. In physics jargon, insurance is a business catalyst, which provides activation energy for a transaction.

Decentralized insurance requires networks of policy writers with individual reputations for efficient underwriting of every type of transaction. In the basic iDAO workflow detailed below, which follows the basic [[DAO Governance Framework#DGF workflow|DGF workflow]], there are three crucial but unintuitive steps: 

# An underwriter gets new REP, instead of cash from premia, for selling contracts.
# All premia are given to the entire iDAO ([[Reputation#REP Salary Mechanism|REP salary]]), not the underwriter who risks REP.
# A claim is paid by a REP market which auctions the particular underwriter’s REP tokens. Underwriter loses REP, not money directly. And the risk is not covered by the entire iDAO, but only the specific underwriter who issues the contract.