Insurance

Paying a small amount now to avoid a large loss later.

#Plain-English Definition

Insurance is a financial product where you pay a premium to protect yourself against a specific negative event. If the event happens, you get paid. If it doesn't, you lose only the premium.

#Prediction Markets as Insurance

Prediction markets allow anyone to create their own "insurance policies" without an insurance company.

• Scenario: You are a farmer. You are worried about a drought.
• Trade: You buy "Yes" shares in a market: "Will rainfall be below X inches this year?"
• Outcome:
  • Drought (Bad): Your crops die, but your prediction market shares pay out $1. The profit offsets your crop loss.
  • Rain (Good): Your crops thrive. You lose the cost of the shares, but you treat it as the "premium" you paid for peace of mind.

#Why It's Revolutionary

Traditional insurance is:

• Slow: Claims take months.
• Bureaucratic: You need to prove loss.
• Limited: You can't insure against everything (e.g., "Will my favorite restaurant close?").

Prediction markets are:

• Fast: Payouts are automatic upon resolution.
• Parametric: Pays out based on data (rainfall), not proof of loss.
• Flexible: You can hedge almost any risk if there is a market for it.

#Key Takeaways

• Buying "Yes" on a bad outcome is functionally the same as buying insurance.
• The cost of the share is your premium.
• It democratizes access to risk transfer.