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AON, the world’s second-largest insurance broker, announced today that it would conduct a pilot with Nayms, an insurtech startup that uses the public Ethereum blockchain. The startup’s name implies that it intends to provide something akin to the London Lloyds’ industry, where the underwriters are known as “names.” Unlike other DeFi insurance startups like Nexus Mutual, Nayms takes a more traditional approach and is not as decentralized.
Nayms is currently operating inside the Bermuda sandbox until May to have a controlled insurance market. Rather than relying solely on retail resources, as Nexus does, Nayms is looking to traditional insurance companies to underwrite the risks and brokers like Aon to find clients and price the risks. Nayms is a platform that allows insurance contracts to collect funds from capital markets.
The initial goal is the notoriously underinsured digital assets market, but Nayms’ goals are far broader.
“If we’re going to put in the amounts required to provide cover for the $1.5 trillion of uninsured (digital asset) risk, we can’t just rely on retail markets to provide the cover in a way that’s priced by the crowd or an autonomous pricing mechanism,” Nayms CEO Dan Roberts told Ledger Insights. Instead, we’ve taken a managed approach.”
The foreign exchange risk, or the gap in Bitcoin and dollar rates, is one factor that raises the cost of cryptocurrency insurance. The concept behind Nayms is to balance the currencies so that the capital financing the risk is locked up in Bitcoin, or provided that the network is built on Ethereum, Bitcoin is “wrapped” in Ethereum. The funds are locked up in Maker’s DAI dollar stablecoin if the insurance is denominated in dollars.
For incumbents, this is a huge move forward.
“By working with Nayms and Relm to launch this pilot, we are taking the first step toward building a network for digital asset companies to scale up their coverage quickly and affordably as the market grows,” said AON Associate Director Benjamin Peach.
“This pilot, as the first of its kind, is a watershed moment for the digital asset and insurance industries. We’re thrilled to be collaborating with such forward-thinking companies, and we’re excited to see how we can support traditional insurance and reinsurance, as well as open up digital asset risk capability to capital markets.”
Since the pilot is still in its early stages, the specifics of the program are unknown. The first is with Teller, a decentralized lending protocol, and Relm Insurance, a specialist underwriter.
The word DeFi has been used to describe this transaction. It’s important to differentiate between the insurance policies themselves are DeFi (which they probably aren’t) and whether the insurance cover is for a DeFi risk (for the pilot, yes seems so).
AON revealed a new alliance on Monday that would also focus on capital markets. For product liability risks such as nanomaterials and 5G, it has partnered with Praedicat to pass these risks to reinsurers and capital markets.
Transparency is essential.
One of the reasons for the business world’s apprehension regarding Ethereum is its openness, though there are ways to disguise stuff nowadays.
“It’s our giant move to say insurance should be completely transparent,” said Nayms CEO Roberts, “so we’ll start with the forward-thinking partners in the space.” The advantages of this approach, he said, are insurance risk liquidity and available pricing. High-level information will be available “for the sake of access to risk, pricing, settlement,” and other stuff.
Users would be able to delve further into the contracts thanks to the user interface. However, the blockchain would not contain any personally identifiable information. This kind of information is kept off the chain.
The road ahead
The scope for securitization becomes apparent when there is a transparent pool of insurance contracts. It’s worth noting that Insurance-Linked Securities (ILS) saw record growth in Q4 2020, with $6 billion in new issues, taking the total for the year to over $16 billion (credit: Artemis). Despite this, the market is still thin, with just $48 billion in outstanding bonds at the end of the year.
Nayms is keeping an eye on the ILS market. However, this isn’t the first blockchain startup in the region. In January 2019, ChainThat launched the blockchain-based Bermuda Insurance Exchange, which focuses on traditional insurance rather than digital assets. The Corda business blockchain is used. This piece will be updated with a brief ChainThat status update.
While Nayms’ initial emphasis is on digital asset risk, Roberts envisions a wide range of insurance contracts, including Director and Officers liability, travel, disaster insurance, and so on.
Given that one of the primary benefits of blockchain would be cost savings, Roberts said that he sees other low-hanging fruit such as parametric insurance, which essentially automates the claims process.
“We see a tremendous amount of cost savings in the long run,” Roberts said.