A New Tokenized Reinsurance Blockchain Arrangement Launches

A row of blocks connected in a chain

January 23, 2024 |

A row of blocks connected in a chain

The so-called blockchain-based alternative risk transfer and capitalization marketplace, Nayms, recently launched an industry loss warranty (ILW) contract to leverage blockchain technology through tokenized reinsurance for catastrophic weather events in Florida.

The contract was successfully launched on Base, a layer-2 Ethereum blockchain solution (Ethereum is a cryptocurrency (crypto) and one of the major players in the crypto space). The collaboration aims to provide investors with streamlined access to tokenized reinsurance opportunities.

McKinsey & Company defines tokenization as "the process of issuing a digital representation of an asset on a blockchain."

"Tokenization is a way of protecting data by replacing it with tokens that act as surrogates for the actual information. A customer's 16-digit credit card number, for example, might be replaced with a random string of numbers, letters, or symbols," according to a recent Immuta blog post by Peter Keough titled, "What Is Data Tokenization and Why Is it Important?"

Layer-2 is a type of blockchain architecture that "builds upon the foundational base layer (or Layer 1) which typically houses the protocol for a blockchain network like Bitcoin or Ethereum," said Keisha Oleaga in a recent NFT Now Media blog post titled, "Base: Coinbase's Ethereum Layer-2, Here's What You Should Know."

Nayms' Cofounder and Chief Technology Officer Ted Georgas, said, "We are excited to be launching on Base, our first Ethereum Layer 2 network. Our deployment was seamless, as it is fully EVM compliant, and we look forward to leveraging the reduced fees and easy on-ramp that Base provides."

The reinsurance arrangement uses a Bermuda-regulated segregated account structure, where investors achieve returns through reinsurance premiums. Target investment returns range from the mid to high teens.

Nayms' traceable smart contract operates on a trustless system, enabling insurance brokers to place contracts between market participants across various sectors and share in the future value of open trade, allowing regulated brokers and underwriters to connect with digital asset capital providers to share in premiums and liabilities covering digital asset risk.

In a statement, Nayms said tokenization emerges as a pivotal element in the evolving insurance sector, providing institutional investors with a unique avenue to diversify their portfolios. Nayms' tokenized offerings span reinsurance for property and casualty risks, including cyber, errors and omissions, directors and officers, crime risks, specie risks, and various industry loss warranty products.

This level of exposure, traditionally limited to major institutional investors, is now accessible to all qualified investors through tokenization.

Key benefits of tokenized reinsurance exposure for qualified investors include diversification of returns from the broader crypto market, access to historically challenging private markets now in a tokenized wrapper, high-yield returns with liquidity and low volatility, and the safety and security of the decentralized Ethereum network at a low cost, with faster settlement times through Base Layer 2, according to the Nayms statement.

Furthermore, Nayms believes the ILW market that it targets is a crucial segment of the global catastrophe reinsurance market, generating over $300 billion in annual renewal premiums.

Industry loss warranties (ILWs) are reinsurance or derivative insurance contracts with loss triggers based primarily on industry thresholds and not the insured's (frequently an insurer's) own losses attached to specific events. In exchange for premium paid (to a reinsurer or hedge fund, for example), if losses exceed the threshold (trigger the industry loss warranty), a limit amount will be paid to the buyer. ILW collateral is held for the length of the instrument's term and is then released at the end if there is no loss.

Nayms' ILW loss triggers for named windstorms in Florida require two independent storms to each cause damage exceeding $10 billion during the 2024 in-force policy period. The use of USD Coin cryptocurrency (USD is a stablecoin) as collateral within an independently audited Ethereum smart contract enhances transparency and operational efficiency, according to Nayms.

January 23, 2024