There is also the dilemma of collusion between two parties to defraud the insurance. I havn't figured that one out yet.
That's the biggest problem. I think it's an excellent idea, but it may turn out to be so hard to get it right that it's just not practical.
There has to be a way that eliminates the risk that is transparent, easy to use, timely and fair.
Insurance companies make money hand over fist. I can't imagine we can't do the same with the goal of just paying administration costs.
Full traceability is their trick. They know everyone's identity and have the ability and willingness to sue people for fraud if needed. That may be part of your solution, but that won't do it completely for you.
I think your biggest problem will be avoiding the rate/risk spiral and keeping the rates low enough that honest people with low-risk transactions are willing to use it. The more the rates go up, the higher the risk that will be needed to justify buying the insirance, which will lead to the rates going up again as all the insured transactions are high risk.
You need to find a way to force diligence on the part of at least one party.