Trust is indispensable in the insurance industry, which makes transparency essential. However, according to Dan Roberts, the co-founder and CEO of Nayms, insurance companies often come up short of this crucial trait.
Speaking on a recent Cointelegraph X Spaces, Roberts said companies employ opaque practices, especially regarding capital use for claims. “There was a $4 billion fraud last year, where essentially even the largest insurance companies that were involved in this coverage weren’t really able to verify, it wasn’t clear if there was capital to cover claims, and it all ended up, you know, going south.“
👋 Missed our chat with @Nayms on insurance in Web3?
— Cointelegraph (@Cointelegraph) October 29, 2024
We explored how decentralized insurance and tokenized risk are shaking things up.
Check out the highlights.
[Brought to you by Nayms]https://t.co/EGGpSqIUOm
Blockchain appears to offer a solution by enabling the verification of capital. But its benefits could go far beyond that, extending to real-time price discovery, improved liquidity and efficiency. Roberts discussed with Cointelegraph the idea of insurance as a liquid and tradable asset, as well as the role of Nayms in creating liquidity depth in the insurance market and providing capacity behind insurance providers to enable more coverage for digital assets.
How insurance works
As Roberts explained, the property and casualty insurance space operates on the principle of risk transfer, where risk is transferred from primary insurance companies to other different layers to create a diversified pool and reduce correlation.
This means that, for example, when we buy insurance to protect our home from potential damage such as natural disasters, our insurance company takes on that risk, but it also buys insurance for itself, called reinsurance. This helps protect an insurance company from very large losses or a high concentration of losses in one area. Reinsurance companies, in turn, can also buy reinsurance, which is called retrocession. Eventually, much of the original risk, especially during big catastrophes, ends up in the capital markets through instruments such as insurance-linked securities.
“In the case of a property catastrophe, insurance-linked securities can back that kind of event in a fully collateralized way. Let’s say that for a potential loss of $100 million, there’s $100 million of collateral available for immediate payout. So instead of it being spread over a long chain, the capital markets can come in much more directly and provide capital against that, what’s called a very short tail,“ Roberts explained, continuing, “Meaning that you know if there’s a loss at the end of the period and it’s either going to be paid in full or it’s going to generate a return. This model allows the capital markets to invest in events such as natural disasters that are largely uncorrelated with traditional market risks such as interest rate fluctuations.“
Scaling the insurance industry
According to Roberts, Nayms serves as a provider of a reinsurance layer to existing insurance providers in the digital asset space. Reinsurance can increase the amount of issuable limits and the total coverable risk.
To clarify, the CEO explained: “For example, you buy a specific DeFi insurance at the point of transaction, like when you use a DEX or a bridge. You don’t come to Nayms for that, you buy from a primary insurer that focuses on that specific type of protection. Meanwhile, you can just add the type of cover and the volume or size of protection that you want for any period of time, like a three-minute risk for bridging. That’s really powerful because you’re not paying for a year, you’re paying for a kind of micro-insurance for a transaction that you’re doing.”
Roberts said this is what Nayms is working on - building the kind of scalable capacity that sits behind all of these primary solutions. “Historically, there has been a lot of struggle with scale. Insurance companies have not been able to move risk off the balance sheet and into the reinsurance markets, which have been very close to allowing those kinds of limits because of the perceived risks involved.“
According to the speaker, Nayms is focused on attracting capital markets to back a diversified portfolio of digital asset insurers, offering investors exposure to a broader range of risks, including risk management instruments such as property catastrophes and specialty lines. This approach not only increases insurance capacity but also provides the capital markets with access to diversified, uncorrelated yields.
Insurance for everyone
The company also tokenizes participation agreements, wrapping legal and regulatory obligations into the participation token. “An investor can invest in an insurance program with confidence, and we turn it into a tokenized asset. It allows you to track your ownership across different insurance programs and also trade your exposure to another buyer,“ Roberts explained. “We help you avoid months-long, closed processes with different expensive parties involved.“
While the company maintains its own order book for trading these tokens, it is also focused on building liquidity depth through the recently launched NAYM token. “And it’s not just that tokenization brings liquidity, we also need depth,“ the CEO said. “This approach has led to the creation of a community-driven liquidity pool that allows for easier trading of positions through a Nayms Liquidity Facility, or NLF.
The NLF addresses the regulatory constraints that often prevent retail participants and the broader digital asset market from accessing insurance. Users deposit stable assets into the NLF in exchange for NAYM tokens, and these assets are then invested in insurance risk ventures to generate returns. A portion of the profits are then distributed to a governance pool where token stakeholders can receive rewards for participating in the governance of the NLF. This structure creates an open insurance model that is accessible to a wider range of users, including those who may be new to insurance as an asset class.
The NAYM token, which is launched on various exchanges, gives holders governance rights, allowing them to influence how capital within the NLF is allocated to different insurance programs. “They can also vote to support new types of coverage, target specific needs in different markets, or simply direct capital to programs with the highest potential yields,“ added Roberts.
Currently built on Ethereum and with a presence on Base, Nayms is actively exploring layer-2 solutions and conducting proof-of-concept projects with various chains. Roberts explained, “We’re in the process of participating in insurance programs without having to bridge to other chains. You can take a popular insurance program that’s looking to scale, and you can launch new sub-pools on these different chains.“
Nayms is also preparing to launch its own reinsurance product, paving the way for ongoing fundraising and a more streamlined approach to providing coverage to primary insurers. In addition, the company is actively exploring partnerships with collateral providers, including those that offer yielding stablecoins and other collateral sources that can be used against claims.
“We’re setting a precedent for how these can be treated in the insurance landscape from a regulatory perspective and from an insurance buyer perspective. We want to open up important use cases for stablecoins, tokenized money, market funds and more, so you can use them as an insurance product like ours,“ the speaker concluded.
Disclaimer. Cointelegraph does not endorse any content or product on this page. While we aim at providing you with all important information that we could obtain in this sponsored article, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor can this article be considered as investment advice.