@paynewilliam
As smart contract insurance markets grow, evaluating capital adequacy becomes essential. Capital reserves must scale with aggregate exposure to avoid underfunding systemic events. Analysts can use value-at-risk (VaR) methods across correlated contracts to estimate aggregate liabilities. Diversification benefits may be limited if protocols rely on overlapping codebases. Concentration risk amplifies tail exposure, requiring higher reserve ratios. Evaluating solvency ratios, reserve-to-exposure coverage, and claim payout stress tests provides insight into sustainability. Without adequate buffers, insurance markets risk amplifying, not mitigating, systemic DeFi shocks.
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