The Naym of the game: Insurance.
Flow Ventures has a keen interest in backing projects within sectors where the ratio of impact and addressable market in relation to the number of projects working on the problem is high. Based on this ratio, insurance is one of the sectors that are under-represented in the current DLT (distributed ledger technology) landscape.
Currently there are only a few projects trying to seize the opportunity blockchain technology offers the insurance industry. Most notable today are Nexus Mutual and Cover, both with very different approaches. Most blockchain insurance projects are focused on the crypto industry in a narrow way, insuring against smart contract risks. Rightfully so, as the conditions are more easily defined and it’s where they have an advantage in specialization. Although this covers just a slice of the required crypto insurance spectrum. The crypto industry is a space that is rapidly growing and notoriously under-insured. Conversely, the broader non-crypto insurance sector stands to greatly benefit from blockchain-based insurance as well.
We believe insurance on the blockchain is among the most feasible use cases to find a clear product-market fit at scale.
Why insurance matters
Insurance is important because it allows people and organizations to insure themselves against risks. Clearly, this has value on an individual level as it gives the insured peace of mind and reduces the risks of catastrophic loss events. It’s also beneficial to the broader economy. It incentivizes and enables people and organizations to take on ventures that have risks associated with them. By effectively pooling risks, future financial predictability associated with certain ventures can be increased. The fruits of these ventures will, on the net, increase the productivity and wealth of a society. Insurance, therefore, enables behaviours that are beneficial to society as a whole. Throughout history, we have learned and understood the benefits of insurance. Scaling insurance has arguably been one of the most important drivers behind economic growth. Economic growth is fueled by risk-taking behaviours that are made possible by financial predictability.
Insurance today
Currently, the global insurance market is an estimated 6 trillion-dollar ($6T) industry and is projected to grow to almost $7T by 2023. Driven by both the growth of the underlying asset base it needs to insure as well as the increasing penetration of insurance globally. Making insurance one of the biggest and most important industries in our world.
The traditional insurance industries consist of contract-based services within a relatively limited scope of insurance types. These contracts usually exist between an individual and the insurer, an entity and the insurer or insurer and reinsurer — these services are currently rarely between peers. Not much has changed in this basic structure over the past century.
The traditional insurance market made a step towards increasing liquidity, flexibility and insurance options with the advent of insurance linked securities (ILS). ILS are financial instruments that, like all insurance contracts, derive their value from pricing risk. Risk-pricing is a product of the potential loss multiplied by the chance it will happen. Unlike normal insurance contracts, they trade as a security. The bigger ones will be available on a secondary market with a live quote, where risk is constantly assessed and re-priced by the market. In theory, this enables different types of participants to engage in these products and reduces the friction of re-insuring. It also allows for flexibility for both insurance takers and underwriters, as they can trade in and out of their contract before the term expires, creating a more liquid and efficient market. For binary events ILS can be divided into different tranches, allowing for more tailored ways to hedge or insure against risk for the participants. It also creates a financial instrument that can be of interest to investors that seek exposure to asset classes that are uncorrelated to other financial instruments, adding yet more participants and liquidity. When the open interest on a given market is made up of a broader set of actors, it is likely to be more accurate as the information will be assessed from different angles and the aggregate stake is higher.
However, most of these benefits have been theoretical so far. The ILS market is still very opaque, relatively small and plagued by restrictions on participation and information flow.
Unlocking the power of the blockchain
Insurance on the blockchain has a number of significant benefits over traditional insurance.
By putting ILS on a permissionless blockchain, peers and non-specialized entities will be able to underwrite risk and share in the upside. This means the same quality of insurance could, in theory, become available to anyone with an internet connection. This ultimately increases the penetration of insurance globally, which is still shockingly low, especially in developing countries. Normally, these products are only accessible in permissioned environments, excluding most of the potential participants.
Since a blockchain is transparent and immutable, the market can more fairly assess the position they want to take without worrying about having to act on incomplete market information. This should increase the number of willing participants. It is also much easier to avoid slow motion accidents like the 2007 mortgage-backed security CDO market that led to the credit crisis, an event that was lurking in the shadows and could have been prevented. Because the insurance can be tokenized, it can be made composable with other DeFi protocols, meaning it can be used for other purposes simultaneously — for example, as collateral to take out a short duration loan. In this way, the downside of sacrificing liquidity is further reduced, making both underwriting and taking out an insurance option an even more appealing proposition.
Additionally, the insurance taker tokens could serve as access tokens to certain platforms, places or products. For example, a financial application might only offer a certain derivative in up to X amount that is verifiably insured, which an actor can demonstrate without a third party by having insurance taker tokens for a certain event or market. Or more exotic use cases, like a forum that is only open to people that think Trump will win the 2024 elections and have taken out a token to represent that position. Utilized in this way it can serve as a way to build in permissions in a permissionless world, levelling the playing field in terms of access without sacrificing the benefits of requirements and permission for certain products and platforms.
The larger number of participants and the added utility of tokenizing insurance will lead to increased liquidity. Increased liquidity will enable options for larger cover ceilings and more efficient pricing. More efficient pricing means the average cost of insurance will go down and the predictive value of insurance contracts will increase. It is also likely it will lead to an explosion of new insurance products since anyone is able to open a market and the friction to open a market for existing players is much lower.
The Nayms Way
Nayms is a project incubated by Insurtech Gateway, an incubator in London that focuses on insurance technology. Since then Nayms has secured additional funding from top tier venture firms.
After filtering for industry, feasibility and TAM, the founder team becomes the most important factor we select for with Flow Ventures. We aim to look for founder teams with a relentless work ethic and a very good understanding of the vertical they are operating in. We were impressed with the level of professionalism and understanding of the insurance market Nayms showcased. Nayms has a very good sense of where the major pain points and opportunities for (blockchain) insurance are.
This expertise has been validated in the past two years by launching a beta and partnering up with different quality projects in their strive to showcase proof of concepts. They are currently running a very promising pilot with Breach insurance on a contract for Breach’s client Coinlist.
Aside from a killer team and interesting progress, Nayms differentiates itself from current DLT insurance projects by starting with a go-to-market strategy that focuses on bridging the biggest pool of sidelined capital in the traditional insurance world with the biggest pool of sidelined demand in the crypto asset insurance world. Namely: hundreds of professional underwriters eager to get exposure to a rapidly growing crypto asset space and trillions (projected to be many trillions) of crypto assets that remain largely uninsured as of today. It is currently very hard to get insurance on your crypto-assets. The ceilings offered are often not meeting the demands of the bigger participants, who are eager to get insurance. There are still major institutions that are not able to enter the crypto space because of the lack of insurance options. Other institutional players have entered, but in much smaller quantities they desire due to the lack of insurance availability.
Insuring crypto assets is a notoriously tricky endeavour, as it comes with greater FX volatility considerations. For example, It is very hard to insure ETH-denominated risk with a pool of fiat capital. As the ETH-denominated risk is subject to ETH price changes — meaning the risk could get much more expensive. Therefore Nayms will start to offer products that insure risk in the same currency the risk is denominated in. This is something currently only specialized players are willing and able to do. However, they lack the professionality, underwriting skills and capital pool of the traditional (sidelined) insurance players. Bridging the worlds could give immense benefits to the crypto asset space and open new revenue opportunities for the insurance industry. Two worlds that will increasingly become indistinguishable in a future where digital assets will play a role in every financial vertical we know.
Structurally Nayms will start out with a model that is more akin to the Cover P2P (peer-to-peer) model. Where they differ is that Nayms will be focused on existing insurers, re-insurers and underwriters. A problem for Cover is that the pool of participants is not very well suited in assessing risk and is not sufficient in capital abilities to offer meaningful insurance ceilings. The P2P model without sufficient liquidity is also very expensive, the rates are not competitive to competitors. Competitors such as Nexus Mutual and InsurAce employ a mutual model. A model that is easier to bootstrap and offers better capital efficiency, but has less flexibility. A P2P model works best with proper bootstrapping in terms of actors and liquidity. When the P2P model is liquid, it can offer many benefits over a mutual model. There will always be a trade-off between capital efficiency and flexibility, which is why different models will be better suited to different types of insurance.
Nayms will start by offering fully collateralized and portfolio underwriting use cases. In the collateralized case, investors have direct access to specific insurance exposure. For the portfolio use case, investors can invest in different types of insurance exposure by backing the underwriters themselves, most of whom will have established track records. This allows investors and speculators to get exposure to a diversified portfolio of risk that is often not correlated with other investment types. This offers a great product addition for investors that run broad portfolios and are risk-reward conscious.
We like the focussed approach Nayms is employing for their go-to-market strategy and think it is the best way to bootstrap adoption around their ecosystem of insurance products. We believe Nayms will be successful and we will support Nayms in their endeavour for the betterment of our industry and the decentralized financial landscape.
Flow Ventures always looks for interesting synergies, be it between us and a project or between projects within our network. For this reason, we are always looking to work with new projects and expand our network in the crypto ecosystem. Feel free to reach out to us if you are looking for help on your project or for collaborations. We offer a wide range of support, from incubation to financial backing. We are always open to discuss new ideas and cooperations.
