Risk and premium allocation in decentralized finance insurance

In this thesis, we mainly consider two practical models in decentralized finance insurance. In the first part, we will consider the risk allocation in peer-to-peer insurance. Using the criterion of minimizing total variance, we propose an optimal risk-sharing framework and demonstrate that the linear risk-sharing strategy should be applied to the residual risks rather than the original risks, which is contrary to common practice in the literature. This approach provides better variance reduction and stronger robustness. We further extend the model by introducing constraints that capture desirable principles such as fairness and participation incentivization. In the second part, we will consider the risk and premium allocation in distributed insurance. Unlike peer-to-peer insurance, distributed insurance enables individual investors to serve as insurers by sharing both risk and premium. We introduce a flexible loss allocation that generalizes the model that is currently being used in practice. It also unifies the existing allocation methods in traditional insurance, including proportional allocation and tranche insurance. This flexibility provides investors with multiple investment options, which increases market accessibility. We then design a premium allocation that incorporate the investment incentivization. The investors can be demonstrated to have better investment performance when investing more capital. Additionally, we develop a multi-period model in distributed insurance, which addresses the problem of lacking this model in practice. This model accounts for claim development and multi-period investment durations. We show that this system not only maintains fairness but also encourages longer-term investment, which aligns with the practical needs of a growing distributed insurance market.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Mathematics

Grantor

University of Illinois Urbana-Champaign

Year dc:date

2025

Author dc:creator

• Yang, Jiajie

Contributors dc:contributor

• Wei, Wei
• Feng, Runhuan
• Quan, Zhiyu
• Jing, Xiaochen

• Decentralized insurance
• Peer-to-peer insurance
• Distributed insurance
• Risk allocation
• Capital allocation.

Statement dc:rights

• Copyright 2025 Jiajie Yang

Language dc:language

en, eng

Handle dc:identifier

https://hdl.handle.net/2142/129267

OAI record oai:identifier

https://www.ideals.illinois.edu/oai-pmh?verb=GetRecord&metadataPrefix=etdms&identifier=oai%3Awww.ideals.illinois.edu%3A2142%2F129267