Today AON, the world’s second-largest insurance broker, said it plans to run a pilot with insurtech startup Nayms, which uses the public Ethereum blockchain. As the startup’s name suggests, it has its sights set on offering something similar to the London Lloyds’ market where the underwriters are the ‘names’. However, unlike other DeFi insurance startups such as Nexus Mutual, Nayms has a far more conventional approach and is not as decentralized.
Nayms aims to offer a regulated insurance market and hence is currently operating within the Bermuda sandbox until May. Instead of sourcing funds purely from retail capital, which Nexus does, Nayms is looking at conventional insurance firms to underwrite the risks, and brokers such as Aon can source clients and price the risks. What Nayms provides is a marketplace for insurance contracts to raise money from capital markets.
The initial target is the digital assets space that is notoriously underinsured, but Nayms’ ambitions are broader.
Nayms CEO Dan Roberts told Ledger Insights, “If we’re going to bring in the volumes needed to provide cover for the $1.5 trillion of uninsured (digital asset) risk, then we can’t just rely on retail markets to provide that cover in a way that’s priced by the crowd or an autonomous pricing mechanism. Instead, we’ve taken a regulated approach.”
One aspect that adds cost to cryptocurrency insurance is the foreign exchange risk or the difference between Bitcoin and dollar prices. With Nayms, the idea is to match the currencies so the capital funding the risk will be locked up in Bitcoin, or given the platform is on Ethereum “wrapped” Bitcoin. If the insurance is denominated in dollars, the funds locked up would be in Maker’s DAI dollar stablecoin.
A giant step for incumbents
“By collaborating with Nayms and Relm to launch this pilot, we are taking the first step to creating a platform for digital asset companies to scale up their cover efficiently and cost effectively as the market continues to expand,” said AON Associate Director Benjamin Peach.
“As the first of its kind, this pilot represents a huge milestone for the digital asset and insurance industry. We are extremely pleased to be working with such innovative organisations and look forward to exploring how we can support traditional insurance and reinsurance, as well as open up digital asset risk capacity to capital markets.”
It’s still early days, so details of the pilot are still unclear. But the first one is with decentralized lending protocol Teller and specialist underwriter Relm Insurance.
The term DeFi has been bandied about for this deal. It’s worth distinguishing whether the insurance contracts themselves are DeFi (arguably not) versus whether the insurance cover is for a DeFi risk (for the pilot, yes seems so).
On Monday, AON announced another partnership that will also target capital markets. It’s partnered with Praedicat for product liability risks such as nanomaterials and 5G to transfer these sorts of risks to reinsurers and capital markets.
One of the enterprise world’s hesitance about using Ethereum is transparency, although nowadays, there are ways to mask things.
“It’s our giant step to say insurance should be fully transparent,” said Nayms CEO Roberts, “so we’ll start with the forward looking partners in the space.” He stated the benefits of this approach are liquidity of insurance risk and open pricing. High level details will be available on blockchain “for the sake of access to risk, pricing, settlement” and the like.
The user interface will enable users to dive deeper into the contracts. But no personally identifiable information will be on the blockchain. That sort of detail is stored off the chain.
The way forward
With a transparent pool of insurance contracts, the potential for securitization becomes obvious. It’s worth noting that Insurance Linked Securities (ILS) experienced record growth in Q4 2020 with $6 billion of new issues bringing the total to more than $16 billion for the year (credit: Artemis). Yet the market is still relatively small, with just $48 billion outstanding at the end of the year.
ILS is an area that Nayms has its eye on. But it’s not the first blockchain startup here. ChainThat set up the blockchain-based Bermuda Insurance Exchange back in January 2019, targeting ILS for conventional insurance rather than digital assets. It uses the Corda enterprise blockchain. We plan to add a brief ChainThat status update to this piece.
While digital asset risk is the initial Nayms focus, Roberts envisions many kinds of insurance contracts such as Director and Officers liability, travel, catastrophe insurance, and the like.
Given a key blockchain benefit will be the cost savings, Roberts acknowledged that he sees other low-hanging fruit as parametric insurance where effectively the claims process is automated.
“Long term, we see a huge amount of cost savings,” said Roberts.