Could crypto change (re)insurance?

Motivated by recent news from Bermuda! "Lending Club for Insurance" anyone?

Hi folks! Today’s piece is driven by the news that Nayms has partnered up with MakerDAO for trading Insurance-Linked-Securities! Albeit this is a short read, I’m going to unpack this topic carefully (do skip bullet points if you’re familiar!)

  1. Who is Nayms? A UK-based InsurTech start-up building the infrastructure to support insurance transactions for the “digital world” (i.e. digital assets, crypto and other intangibles).

  2. Who is MakerDAO? A DAO (Decentralized Autonomous Organization i.e. “funky company”) operating on the Ethereum blockchain protocol. Effectively an organization powering peer-to-peer lending via cryptocurrency.

  3. What’s the news? [1]

    • Nayms and MakerDAO have been admitted into Bermuda Monetary Authority’s “Digital Asset” sandbox (Bermuda is big on all things insurance and crypto).

    • Nayms is testing out using the MakerDAO stablecoin “DAI” (pegged 1:1 with the US dollar) as a settlement instrument for Insurance-Linked-Securities (ILS) secondary trades.

    Bermuda Life & Annuity Conference is Cancelled – Insurance Edge

    ILS transactions tend to happen with cocktails, (lots of ) paperwork and private jets!

  4. Let’s unpack this

    • ILS is best explained as a “derivative contract” on existing insurance contracts (for e.g. a Private Equity fund buys $100M “worth of Florida property hurricane risk” i.e. in the event of a hurricane damaging property in Florida, during the contract term, the PE fund stands to lose its $100M).

    • ILS is a $30bn annual market [2] However, suffers from a major flaw - difficulty in getting out of a position.

    • Effectively, Nayms is gunning to create a marketplace to “trade” ILS instruments i.e. Nayms will provide the digital infrastructure and the DAI stablecoin (pretty much US $) will act as the means for settlement (significantly cheaper than pure US $ settlement due to blockchain “rails” v/s traditional “payment rails”)

  5. Why is this profound (if at all)?

    • Could this open up ILS to retail investors?

      • Just like Lending Club opened up P2P loans and SeedRs opened up Venture Capital as an investment opportunity for retail investors, I think Nayms could open up Insurance-Linked-Securities to retail investors.

      • Why? Well, if Nayms is using the DAI stablecoin (and its underlying rails), effectively the “counterparty” to an ILS trade, could be anyone who owns a DAI (and literally, anyone can!)

      • There would be nothing (except securities law) stopping an accredited fund manager from “crowdsourcing capital” via DAI and using that DAI to engage in ILS transactions.

    • What could this mean for me as a consumer?

      • Imagine being able to buy “$5 worth of hurricane risk in your home country” i.e. you get paid a small “annual fee” for taking on the risk that your home country faces hurricane-related damage.

      • Now, if you’re an expat in the West (from an Asian country), this suddenly resembles an “ESG” or “infrastructure” style bond - it has the right tails - investment for social good.

    Naturally, all of my above comments are speculative. I’d imagine Nayms will initially only power “trading” of ILS instruments between “current” investors (e.g. Pension Funds, specialist Hedge Funds and Reinsurance companies)

  6. Crypto is already changing insurance

    The image below contrasts how insurance works today with how it could work tomorrow; to get a sense of the abstract, check out Nexus Mutual - they let individuals come together to “protect” against smart contract failures on the Ethereum protocol.

    The beauty of model of allowing external capital investors to participate in a community-based insurance scheme is that it helps with reducing default risk of the scheme and supports quicker scaling.

    We’re certainly a long way away from using cryptocurrency and DAOs to let communities insure themselves but the piping is being laid by companies like Nayms and Nexus Mutual.

I’ve scratched the surface in terms of the opportunity that lies before us; if you’d like to dive deeper into any of the themes - crypto in insurance, the “Lending Club for insurance” or Insurance-Linked-Securities, do ping me!

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