Fairside Network Model
The model is based on principles of the traditional insurance coverage approach, which involves defining a loss ratio and risk-based capital.
FShare as explained in Bonding Curve Formula, is a network metric used to define the reserve usage of the bonding curve.
Risk-Based Capital (RBC) is an off-chain actuarial calculation that estimates the necessary reserve capital based on the perceived risks within a network. This reserve acts as a financial cushion to support the network's operations and is initially set and subject to annual adjustments based on projected membership fee revenue for the next 12 months.
Establishing this reserve is crucial for covering payouts when the frequency or severity of claims exceeds initial expectations. It is anticipated that 57.5% of all collected membership fees will be allocated to cover losses, reflecting the loss ratio. The loss ratio, defined as the ratio of payouts to annual membership fees, is a standard insurance metric used to adjust premium rates. "Total active membership revenue" refers to the income generated from "total cost share benefits," with 57.5% of this revenue allocated for claims payouts. Both the RBC and the 57.5% allocation rate must remain flexible to adapt to varying loss experiences, allowing for adjustments to reserves based on actual outcomes. Additionally, a gearing factor determines the maximum coverage limit relative to the RBC. This factor is adjustable, enabling changes in coverage limits in response to shifts in the reserve base. For example, with an RBC of 2500 ETH and a gearing factor of 50, the maximum total cost share benefits(The portion of claims or costs that the network covers for its members.) would be 125,000 ETH, calculated as follows:
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