From cointelegraph by Victoria Li

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.“

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.“