This is a bit off-topic from my usual discussions on insurance, risk, and capital modelling, but financial and economic risk matters deeply. And for insurers, we’ve seen how things can go very wrong.

Hyperinflation, Currency Crises & Insurance Industry Collapse

Hyperinflation destroyed Zimbabwe’s insurance sector, and decades later, it still hasn’t recovered. Currency crises in Lebanon, Argentina, and Venezuela have crippled financial institutions, showing how fragile financial systems can be when trust in money itself disappears.

A recent discussion started as a tongue-in-cheek debate: Is inflation a more efficient way to raise revenue than taxation? But it evolved into a broader debate on monetary risk, Bitcoin, inflation, and long-term economic trends—and why so many common arguments deserve scrutiny.

How Inflation Impacts Insurance

🔉 Premiums & Inflation Risk
High inflation makes level premiums unworkable, erodes the real value of cover. Optional benefit increases create adverse selection problems in life insurance. Even constant percentage increases fail under volatile inflation, and real wage stagnation worsens affordability pressures.

🔉 Monetary Instability & Insurer Solvency
Currency collapses create huge challenges for insurers trying to meet liability obligations in real terms. When inflation spikes, reserves built on past assumptions become grossly inadequate, leading to solvency concerns and even industry-wide failure.

🔉 Crypto & Smart Contracts in Insurance
Blockchain has potential for parametric insurance, automated claims processing, and fraud reduction. But much of the excitement outpaces practical application—or solves problems that were already solved while not addressing key remaining challenges.
(And let’s be real—just because a smart contract auto-executes doesn’t mean lawyers won’t find ways to argue intent and “meeting of minds.†)

My (Cautious) View on Blockchain

I spoke at the 2016 ASSA Convention on Seductions of the Blockchain, and my position remains:

• Cautiously optimistic
• Interested in opportunities
• Frustrated by the lack of rigorous debate from both fanatics and skeptics

The fanboys see blockchain as a cure-all, while the status-quo-invested skeptics dismiss it entirely. Reality, as always, is more nuanced.

Key Arguments & Concerns

1 Inflation as an ‘Efficient’ Tax?

Some argue that taxes are administratively complex, difficult to collect, and inflation acts as an “invisible tax† that transfers wealth to the state with less friction.

💡 The Problem? Inflation isn’t a neutral mechanism:

• Distorts price signals and makes long-term contracts unreliable.
• Increases uncertainty and raises borrowing costs.
• Disproportionately harms those without inflation-protected assets—often the poorest.
• Erodes trust in government’s ability to manage financial stability.

Hyperinflation isn’t just caused by overspending—it requires excessive money printing to cover deficits. Many governments (e.g., Japan, the US, and EU countries) have run huge deficits for years without hyperinflation because they borrow responsibly instead of monetising debt.

📖 Friedman’s famous quote:
“Inflation is always and everywhere a monetary phenomenon in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.”

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2 Bitcoin as a Predictable Alternative to Fiat?

Bitcoin proponents argue that a fixed supply prevents inflation and provides monetary certainty. But there’s a flip side:

💡 The Problem? A rigid money supply is deflationary, which discourages spending and investment:

• BTC expansion (~0.9% today, falling below 0.5%) is well below global population and economic growth.
• Fixed-supply currencies have historically failed because economies need monetary flexibility to adjust to shocks.
• A deflationary currency discourages productive investment. If BTC’s price is expected to rise, why spend it? Why take out a loan?

This is why almost all mainstream economists—from Keynesians to monetarists—support some level of controlled monetary expansion.

📖 Academic reference: Friedman advocated rules-based money supply growth, not a hard cap. Even Hayek, a proponent of free-market money, acknowledged the need for adaptable monetary systems.

💡 A bigger issue: Some crypto coins have fixed supply, but the total universe of crypto coins is unlimited. New projects, forks, and tokens emerge constantly, meaning there is no true scarcity at a system-wide level.

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3 Credit Risk & Smart Contracts – Who Pays When the Funds Aren’t There?

Smart contracts don’t solve credit risk. Traditional insurers must hold capital reserves and meet solvency requirements to ensure claims can be paid. Smart contract-based insurance lacks an equivalent safety net—yet.

💡 Key Risks:

• No Guarantee of Payouts: If a smart contract is underfunded, it can’t issue emergency capital or negotiate claims—it just fails.
• Over-Collateralization Isn’t a Perfect Fix: Many DeFi protocols require excessive collateral to mitigate risk, but this limits scalability and locks up capital inefficiently. Actuarial approaches to capital adequacy could provide a smarter balance.
• Cascading Failures in Market Shocks: A major market downturn can cause mass liquidations, leading to systemic failures—just like traditional financial crises, but with fewer stabilizers.

📌 Future Opportunity:

• As DeFi regulation increases, some form of capital adequacy requirements (like Solvency II for insurers) may emerge.
• Actuaries and insurance risk experts could play a role in designing smarter DeFi risk models.

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🔉 Final Thought: Smart Contracts Are an Exciting Tool—but They Need More Work

Smart contracts introduce new efficiencies, but they also introduce new risks:
✅ They remove intermediaries—but also eliminate safety nets.
✅ They change fraud risk—but introduce oracle manipulation risk.
✅ They enable fast, automated transactions—but don’t guarantee funds will always be there when needed.

For insurance, finance, and risk management, blind reliance on smart contracts is dangerous. But recent advancements show promise:

• Regulators are starting to provide legal clarity.
• Hybrid smart contracts (automated + human oversight) are emerging.
• Decentralized oracles & improved collateral models are evolving.

The real opportunity? Combining smart contract automation with actuarial risk management principles to build more resilient decentralized insurance solutions.

Would love to discuss with those working in insurance, risk management, DeFi, and blockchain regulation.

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