Category: Blockchain insurance · Reviewed by Tim Roche, Director · PI & Commercial · Last reviewed 2026-06-10
Decentralised insurance describes risk-sharing arrangements administered by smart contracts and governed by Decentralised Autonomous Organisations (DAOs), in which members contribute funds to a common pool and votes determine which claims are paid.
Most decentralised insurance protocols are structured to avoid being classified as a regulated insurance business. Whether they fall within the FSMA 2000 perimeter is a fact-specific question turning on whether the arrangement constitutes a “contract of insurance” under English law. Many protocols, including Nexus Mutual, expressly describe their cover as “discretionary” rather than indemnity.
A decentralised insurance protocol typically comprises:
The defining feature is that no centralised insurer underwrites the risk; capital, governance and claims handling are distributed among members.
The principal question under English law is whether the arrangement is a “contract of insurance” within the meaning of FSMA 2000 and SI 2001/544. The FCA’s perimeter guidance follows Prudential Insurance Co v Inland Revenue Commissioners [1904] 2 KB 658 and Department of Trade and Industry v St Christopher Motorists’ Association Ltd [1974] 1 WLR 99:
A discretionary mutual whose payouts are at the discretion of the governing body is not, on the orthodox analysis, providing a contract of insurance, because there is no enforceable right to indemnity. This is the rationale for the structuring of Nexus Mutual and similar protocols.
Other relevant materials:
Where a protocol markets products to UK consumers, the FCA’s financial promotions rules apply via the Financial Promotion Order 2023 amendments to qualifying cryptoassets, regardless of whether the underlying product is “insurance” for perimeter purposes.
A typical DAO-governed risk pool operates as follows:
The protocol’s terms typically state that cover is discretionary, that no person has an enforceable right to a payout, and that no insurance contract is being entered into.
The EIOPA Discussion Paper (2021; 2023) identifies governance, capital adequacy, claims handling and consumer protection as the principal supervisory concerns; the FCA has indicated similar concerns in its cryptoassets work but has not (as of 2026) proposed a dedicated decentralised insurance regime.
A DeFi treasury manager holding US$3 million in a popular lending protocol purchases discretionary cover from a decentralised protocol. The premium is 2.6% per annum, paid in stablecoin. The cover relates to smart-contract failure in the lending protocol. Six months later, an oracle manipulation attack drains funds from the lending protocol. The treasury manager submits a claim with transaction hashes; claims assessors review on-chain evidence and approve the claim. The protocol pays the claim in stablecoin. No insurance contract was entered into for FSMA 2000 purposes; the cover was discretionary, and the treasury manager had no enforceable right to indemnity but received a payout under the protocol’s governance.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-10. Next review: 2026-12-10.
Apex Insurance Brokers Limited. Authorised and regulated by the Financial Conduct Authority, FRN 724952. Registered in England and Wales, Companies House 07014570. This entry provides general information about UK insurance concepts and is not regulated advice. Consult your insurance broker on your specific position.
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