What is re-insurance and how does RE innovate Web3?
In this episode, host Morgan Krupetsky speaks with Karn Saroya and Cliff White from RE protocol to discuss the overall reinsurance industry, places for improvement, RE protocol and more.
Read our notes below to learn more.
About Morgan
Director of business development for institutions and capital markets at Ava Labs.
Works with a variety of different institutional partners across the financial services industry as they look to adopt blockchain technology and digital asset use cases.
About Karn
Started his career at Oliver Wyman in their financial services department as a management consultant.
Built an e-commerce marketplace where he sold high-end fashion on the internet called Style Kick.
Ended up joining Shopify as a relatively early member of a product team.
Left Shopify to build an insurance company cover over the last six and a half years.
Now working with Cliff and much of the original cover team on building a decentralized reinsurance marketplace that came to the woods of London.
About Cliff
Currently heading up the software development efforts of RE.
Spent two decades in the industry mostly leading software development teams.
Spent a decade in cyber security building distributed systems that were primarily based in private cloud environments helping enterprises and organizations to securely manage their infrastructure and data.
What is Reinsurance?
It is an insurance for insurance.
It backs other insurance companies and other specialized programs called NGAs that have a viewpoint or domain expertise within a particular business line.
What is RE?
It is a protocol that sits on top of a commercial general insurer that maps the insurance policies that are sold into different lines of business with alternative investors and risk capital providers that come from the crypto ecosystem.
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State of Reinsurance industry
It is nearly a trillion dollar market right now.
There are massive pools of capital that act as balanced shock absorbers against what you would characterize as nature’s casino.
A lot of programming law insurance companies are going to be under reinsured or rates are going to rise pretty quickly.
Where the structural challenges lie are largely around transparency of the types of risks that each of these monolithic reinsurers are taking.
There’s a lack of being able to leverage the massive amounts of capital that sit there to be able to absorb these risks and they’re finding that by incorporating the elements of DeFi, they solve many of these problems.
Transparency
By being transparent, it actually enables things like liquidity, the world knows exactly how much capital you have sitting around and what’s on risk at any given point in time.
Disentangling Component
Many of the contracts that back reinsurance treaties effectively say the same thing but are in non-standard formats.
If you’ve got a protocol that is memorializing the economic terms of each of these treaties, you now have a standard format for representing each one of these deals that can be packaged up, traded and eventually automatically execute without a significant amount of administrative overhead.
The price of an insurance policy or coverage that exists in spreadsheets or word documents could be onchain and available to really smart people around the world.
How does RE work?
They’re modeling after roughly 300 years of evolution in a reinsurance marketplace called Lloyds of London.
Lloyds of London is a physical marketplace where reinsurance brokers effectively work with insurances or specialized underwriting entities to find capital to back the risks that they originate.
RE are teams or specialized teams of underwriters and actuaries.
RE works with reinsurance brokers to be able to onboard programs.
As of today, they’re under $40M in premium over the course of a couple of months but they’re backing tens of thousands of small businesses or hospitality workers for workers compensation.
As long as there’s interest by sophisticated actors who are willing to put up their hand who finds a good deal, who has skin in the game and willing to put up capital or governance tokens, the protocol responds in time by being able to back the rest of that deal.
Incorporation of Regulations
They don’t sell policies directly, they back the people who sell policies.
They are endeavored to be above board at every step of the way in a regulatory perspective.
The critical piece between crypto and the insurance community is helping folks understand the insurance space that they’re not tying themselves to volatility and the underlying assets but they are building on top of blockchain infrastructure that makes the business 10x better.
As long as they are forthcoming with regulators around the tooling that they’re building, that is a process that we need to help inform regulators and work with them hand in hand to be able to adopt it over time.
Tokenization
Both crypto investors and traditional or institutional types of investors are targets of the protocol.
They are looking to acquire more capital to provide reinsurance capacity.
They are building a software to support multitude of different actors within the protocol to alleviate some of the complexity.
They partnered with Securitize to take care of KYCs and the AML of the investors and giving them access to deploy capital in an efficient way directly into the protocol.
Why launch on Avalanche?
Speed of the network and efficiency.
The most important for them is the flexibility of the blockchain itself.
The subnet functionality will give them permission to some of the data that shouldn’t be revealed to the public at a certain point and allow people to operate in a decentralized fashion.
The subnet gives that private blockchain functionality with all of the benefits, upkeep and interoperability of the Avalanche primary chain.
Future of Reinsurance Industry
Karn envisions that a standard format or a global transaction layer for the settlement of this type of risk is going to emerge and it’s going to enable more efficient pricing of the risk, enable more transfer of the risk and more.
Karn thinks what will happen over time is people will be open to being able to reserve in other assets.
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TODAY’S EDITION IS BROUGHT TO YOU BY LEDGER STAX WALLET
Ledger’s latest innovation, the Ledger Stax, is a credit card-sized hardware wallet complete with touchscreen and Bluetooth capabilities. Did we mention it’s designed by Tony Fadell, the creator of Apple’s original iPod?
Act now, click the link below and preorder the Ledger Stax to use crypto on the go.