How Does a Derivative Product like a ‘Slashing Insurance’ Contract Function?

A slashing insurance contract is a financial derivative that allows a validator to hedge the financial risk of a slashing event. The validator pays a premium to an insurer.

If a slashing event occurs, the insurer pays the validator the value of the lost staked collateral, minus the deductible. This transfers the specific operational risk of slashing from the validator to the insurer.