Detailed Instructions

The calculation begins by quantifying the total financial loss from the covered incident, such as a smart contract exploit. This is the Claim Amount. Simultaneously, the policy's Coverage Limit is retrieved. This is the maximum amount the policy will pay out, often denominated in a stablecoin like USDC. For example, a vault policy might have a coverage limit of 1,000,000 USDC. If a hack results in a loss of 1,500,000 USDC, the claim amount exceeds the limit, triggering a partial payout scenario. The insurer or protocol's claims assessor will verify both figures on-chain, referencing transaction hashes and wallet balances to establish the loss event's validity and scale.

Tip: Always verify that the loss event is within the policy's defined coverage parameters and occurred during the active policy period.

Detailed Instructions

The core of partial payout calculation uses a proration formula. The key variables are the individual claimant's Verified Loss and the Aggregate Loss across all valid claims for the same incident. The formula is: Payout = (Verified Loss / Aggregate Loss) * Coverage Limit. This ensures the limited coverage pool is distributed fairly proportional to each claimant's share of the total loss. For instance, if the total coverage limit is 1,000,000 USDC, the aggregate loss is 2,000,000 USDC, and your verified loss is 200,000 USDC, your payout would be (200,000 / 2,000,000) * 1,000,000 = 100,000 USDC. This step is typically executed by the claims smart contract or the insurer's backend system after all claims are submitted and validated.

Tip: Understand that your recovery rate is Coverage Limit / Aggregate Loss. If the pool is insufficient, this rate will be less than 100%.

Detailed Instructions

Before the proration formula is applied, policy-specific terms are factored in. First, the Deductible is subtracted from the claimant's verified loss. If your loss is 200,000 USDC with a 10,000 USDC deductible, the adjusted loss for calculation is 190,000 USDC. Second, Coinsurance may apply. A 90% coinsurance clause means the policy covers only 90% of the loss after the deductible. So, 190,000 USDC * 0.90 = 171,000 USDC. This adjusted amount is then used in the proration formula as the claimant's share. These terms are defined in the policy's smart contract or legal wording and are non-negotiable during a claim. They directly reduce the potential payout amount even before aggregate limits are considered.

solidityCopy
// Simplified logic snippet for adjustment
uint256 adjustedLoss = verifiedLoss - deductible;
adjustedLoss = (adjustedLoss * coinsurancePercentage) / 100; // e.g., 90 for 90%

Tip: Carefully review your policy's deductible and coinsurance terms before purchasing, as they significantly impact net recoverable amounts.

Detailed Instructions

Once the final payout amount for each claimant is determined, the disbursement is executed. In a decentralized insurance protocol, this is typically done by a Claims Payout Smart Contract. This contract holds the coverage pool funds (e.g., in a vault) and, upon successful approval of a claims assessment, transfers the calculated amount to the claimant's address. The contract will call a function like processPayout(uint256 claimId), which internally performs the transfer using IERC20(usdcAddress).transfer(claimantAddress, payoutAmount). The transaction is immutable and verifiable on-chain. In traditional insurer setups, this might be a manual bank transfer, but the on-chain traceability is a key advantage of DeFi insurance, providing transparency that the prorated amount was paid as calculated.

Tip: Always verify the transaction on a block explorer after a payout is initiated to confirm receipt and finality.

Detailed Instructions

Understanding potential outcomes requires analyzing Recovery Rates. The recovery rate is the percentage of your adjusted loss that is actually paid out, calculated as Payout Amount / Adjusted Loss. This rate is constrained by the sufficiency of the coverage pool. For example:

• Scenario 1 (Adequate Pool): Aggregate Loss = 800,000 USDC, Limit = 1,000,000 USDC. Recovery Rate = 100%.
• Scenario 2 (Insufficient Pool): Aggregate Loss = 2,000,000 USDC, Limit = 1,000,000 USDC. Recovery Rate = 50%.

Your final recovery is further reduced by deductibles and coinsurance. A key insight is that in large-scale events, even policies with high individual limits can result in low recovery rates if the protocol's total capital is overwhelmed. This analysis highlights the importance of the protocol's Capital Efficiency and Reinsurance Backstops in mitigating this risk for claimants.

Tip: When comparing policies, consider the provider's total capital available for claims relative to the potential aggregate loss of the protocols they cover.