Insurance and reinsurance broker Aon, working with cryptocurrency and smart contract focused insurtech start-up Nayms and Bermuda specialist insurer Relm, aims to open up the capital markets to digital asset risk, to source risk capacity for the burgeoning crypto space.
There have been a number of initiatives that have looked into leveraging crypto protocols such as Bitcoin or Ether, as a way to enable institutional investors to support cryptocurrency insurance products.
Typically these have involved sale of niche tokens to support a pseudo sale of an insurance-linked security (ILS), of sorts, but in the majority of cases these have failed to source any significant amount of capacity.
But as digital assets use expand, the need for capacity continues to grow and so Aon along with Nayms and Relm have developed a pilot that the group call “the first tokenised, or blockchain-enabled, placement of insurance ever conducted with regulated, professional insurance entities.”
The fully regulated nature of the arrangement is important, as any capital market participation in these sorts of risks will need to be on a regulated basis, through structures that are well-documented and offer investors a level of transparency.
Many attempts to insure digital asset and cryptocurrency risks end up being largely unintelligible to anyone outside of the niche coins and crypto protocols, as those driving the initiatives have found it hard to translate the underlying processes into language insurance and reinsurance market participants, or investors, can understand.
Aon through Nayms is conducting a first pilot with Teller Finance, a decentralized lending protocol, which it believes will highlight an ability to scale cover efficiently by matching assets to liabilities when underwriting crypto-specific risk.
Again, this is key, as these solutions have to be able to gain scale, or they won’t succeed as niche covers for a very few digital wallets, as some other schemes have proven to be.
Relm Insurance Ltd, a Bermudian specialist insurer is underwriting the insurance contract.
Benjamin Peach, Associate Director & Digital Assets Specialist, Global Broking Centre at Aon, commented, “Aon is committed to embracing technology and is constantly developing its offering for our growing client base in the digital asset space. 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. 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.”
Dan Roberts, CEO at Nayms, added, “As the digital asset space soars to $1 trillion, the need for appropriate insurance protection to scale alongside that growth will be vital for the sustainability of this innovative market. By working with Aon and Relm, we are enabling the collaboration between technology, regulation and the existing insurance marketplace, bringing a robust solution for the cover of digital asset risk to the market.”
Joseph Ziolkowski, CEO at Relm, also said, “We launched Relm in 2019 in order to bring to the insurance market informed and dedicated capacity for digital asset and blockchain businesses. To that end, we are excited to be working with Nayms and Aon in an area of the insurance sector to which we are fully committed and see great potential. In addition to supporting numerous digital asset companies all over the world with financial and professional lines coverage, the Nayms platform will enable Relm and Aon to transact insurance in a manner that creates more alignment with our target insureds. ”
Cryptocurrency and digital asset risk is not going to suddenly become a significant peril within the ILS market.
But, if the structures and mechanisms for risk transfer and ultimately securitization can be perfected, the risk could still be transferred using insurance-linked securities (ILS) technology, alongside digital asset tech, to certain capital market investors for who the returns from an insurance-related asset linked to crypto risk could be appealing.
With around $1 trillion of digital assets in circulation and new innovations such as non-fungible tokens (NFT’s) now being tied to physical assets, the values at risk in the cryptocurrency and blockchain related sectors are soaring, making access to insurance and reinsurance capital a critical need.
Pilots like this may help to demonstrate effective and fully-regulated routes to securing more capacity for this need.