The topic of non-violent tools for implementing measures against those who violate agreements has been raised by us several times before. Usually, in such cases, the conversation revolves around reputational institutions and ostracism, but besides this, the case of financial instruments providing the possibility of predetermining mechanisms to cover damages caused by a breach of agreement is particularly interesting. Transaction insurance can be called a fairly universal tool of this kind.
To demonstrate what is meant by transaction insurance, let us look at a case of an existing implementation of this practice. It is actively used in lending, especially when it comes to large loans or mortgages. The essence is that the person borrowing the funds also signs an insurance contract, under which they undertake to additionally pay an insurance premium, usually in the amount of a certain percentage of the remaining debt. This percentage is small; its value rarely exceeds 1%, and in the case of a mortgage, one can find an insurance premium rate as low as 0.25% of the remaining debt.
Why is this necessary? If a person finds themselves unable to repay the loan, or if they took it solely for the purpose of stealing the credit funds with no intention of returning them, then these funds are covered by insurance. Given that, in reality, not such a large percentage of people actually violate the terms of the transaction, the funds collected through insurance premiums are quite sufficient to cover the damage caused by a small percentage of deceivers.
As for me, transaction insurance has very great potential. This concept could be applied to a wide spectrum of transactions in principle. During any transaction, the parties could register the contract with an insurance company and contribute a certain small percentage of the transaction amount to an insurance fund. If one of the parties violates the terms of the transaction, the insurance company where the insurance was registered compensates the damaged party.
This method can also be combined with other types of non-violent sanctions, such as the aforementioned ostracism. A violator of a transaction will, of course, end up on blacklists; the insurance company, which had to spend funds from its fund to compensate for the damage, is especially interested in this. The violator’s life will be very difficult; many will refuse to conduct transactions with them or offer less favorable terms that account for the risk that this person might cheat. But, of course, they can get out of this situation if they eventually agree to cooperate and make concessions to those who suffered from their violation. Of course, they may not have the opportunity to compensate for the damage caused at the moment, however, in such a situation, the parties usually agree on more accessible terms for fulfilling obligations. In the credit sphere, a good example is the debt restructuring procedure, when payments are shifted to the future, stretched over time—which reduces the payment amount—or when a part of the interest rate or the debt itself is written off. In the end, all parties prefer some solution to the problem over the absence of one.
Reputational institutions can also be combined with transaction insurance in a different way. If someone is known for their honesty, with many transactions behind them that they did not violate, they may be offered lower insurance premiums, or even their complete absence. If, however, someone is a known violator or an unreliable agent, transactions with them can be concluded only on the condition of paying higher insurance premiums. Thus, it becomes profitable for people not to violate agreements, since the replenishment of the insurance fund will be shifted specifically onto the violators.
