Premium Decomposition
How derivative premiums are calculated — from engine probability through to the final client price.
Every Cliff Horizon derivative (Tier 2 warranty or Tier 3 standalone) is priced through a transparent premium waterfall. The client sees exactly where their money goes.
The Formula
Total Premium = purePremium + jrCoc + srCoc + ensuroCommission + partnerCommission
Where:
| Component | Formula | Who Receives It |
|---|---|---|
| purePremium | payout × lossProb × MoC | PremiumsAccount (covers expected losses) |
| jrCoc | jrScr × jrRoc × duration / secondsPerYear | Junior eToken holders (LP compensation) |
| srCoc | srScr × srRoc × duration / secondsPerYear | Senior eToken holders (LP compensation) |
| ensuroCommission | f(purePremium, cost of capital) | Ensuro protocol |
| partnerCommission | Risk Module parameter | Cliff Horizon (revenue) |
Component Breakdown
Pure Premium (Expected Loss)
The actuarially fair price of the risk: what the contract would cost if there were no capital costs, no commissions, and no uncertainty loading.
purePremium = payout × lossProb × MoC
- payout — the maximum amount the contract pays if triggered
- lossProb — the engine's calibrated probability of the trigger event (in WAD units, 18 decimal places)
- MoC — Margin of Conservatism (set at the Risk Module level by Ensuro)
Cost of Capital (jrCoc + srCoc)
Ensuro's capital providers lock USDC into eToken pools to back policies. They earn a return for this:
- Junior capital (jrScr) — first-loss layer, higher return (jrRoc)
- Senior capital (srScr) — second-loss layer, lower return (srRoc)
- Cost of capital scales linearly with duration — a 12-month policy pays more capital cost than a 30-day policy
Commissions
- ensuroCommission — protocol-level fee for infrastructure, smart contract execution, and regulatory compliance
- partnerCommission — Cliff Horizon's revenue per policy
Pricing Waterfall (Visual)
The Derivatives tab on the dashboard shows this waterfall visually:
| Step | Detail | Amount |
|---|---|---|
| Engine probability | lossProb | 18.5% |
| × Payout | Notional | $500,000 |
| × MoC | Margin of Conservatism | 1.15 |
| = Pure Premium | Expected loss | $106,375 |
| + Junior CoC | Junior capital cost | $12,400 |
| + Senior CoC | Senior capital cost | $8,200 |
| + Ensuro Commission | Protocol fee | $6,800 |
| + CH Commission | Cliff Horizon revenue | $9,500 |
| = Total Premium | Client pays | $143,275 (28.7% of payout) |
How Calibration Affects Price
The engine's calibration accuracy directly affects competitiveness:
- Better calibrated lossProb → Ensuro can set a lower MoC → lower premium → more competitive pricing
- Poorly calibrated lossProb → Ensuro needs higher MoC to protect capital → higher premium → less competitive
This is why the ForecastEx proving ground matters commercially: the reliability diagram IS the evidence that justifies a tight MoC, which translates directly to lower premiums for clients.
Tier 2 vs Tier 3
Both tiers use the same premium decomposition formula. The difference is in the parameters:
| Parameter | Tier 2 (Warranty) | Tier 3 (Derivative) |
|---|---|---|
| Trigger threshold | Lower (tighter tolerance) | Higher (catastrophic) |
| Payout | Smaller | Larger |
| Duration | Aligned to subscription period | Bespoke (days to years) |
| Premium visibility | Embedded in subscription fee | Quoted separately |
| lossProb | Typically higher (smaller deviation) | Typically lower (larger deviation) |