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Bringing the $1T Reinsurance Market On-Chain: Money Moves
Recorded: May 22, 2024 Duration: 0:58:36Space Recording
Short Summary
In a groundbreaking discussion, RE and Nexus Mutual unveil their innovative tokenized reinsurance fund, highlighting strategic partnerships and the potential for significant growth in the insurance sector through blockchain technology. This collaboration aims to enhance transparency and yield opportunities for investors, marking a pivotal moment in the evolution of insurance.
Full Transcription
All right, welcome everybody back with another episode of Money Moves.
Thanks everybody for joining and coming in right on time.
Excited to talk to two of our partners here today from RE and from Nexus Mutual.
Talk a little bit about the tokenized reinsurance fund.
I think there's a lot of interesting things to learn about and how this all works and how it's being brought onto Avalanche.
So we're going to get our speakers up here and get the conversation started in a few
minutes.
So hang tight.
We got two guest speakers and Morgan here as well.
So we're going to bring them up and then we'll jump into the conversation today.
For those of you that are just coming in, we'll probably have the opportunity to do
a little bit of a Q&A at the end.
So hang tight for after we run through kind of an overview of the fund and how it all works.
So appreciate everybody coming in right on time.
And we're going to get started here in a few minutes.
So we'll get our speakers up here.
All right.
Cool.
Let's see.
All right.
All right.
Hugh is up here.
How are you doing today, Hugh?
Hi, very good.
Good to be here.
Thanks for having me.
Absolutely.
Thanks for joining.
Appreciate you taking the time out for us today.
Cool.
We got Morgan's loading up here.
Karn, I think I added you up. Let's see if you're going to be here. having me. Absolutely. Thanks for joining. Appreciate you taking the time out for us today.
Cool. We got Morgan's loading up here. Karn, I think I added you up. Let's see if it loads up here. All right. Hi, Morgan. How are you? I'm good. Can you hear me? Yep. Definitely can hear
you. I know you're probably running around today, so it still sounds good. Okay. Thanks.
Let me try to invite Karn's account up here one more time, and then we'll get going.
All right, I think it's working now.
There we go.
All right, it's up.
Karn, how are you?
Hey.
Good, good.
Thanks for having me.
Absolutely. hey good good thanks for having me absolutely glad to have you back on again and uh excited
to talk through the latest developments for the re-platform the tokenized reinsurance fund
i think there's gonna be a lot of new information and some some new innovations to cover here and
i'm sure morgan will do a great job kind of taking us through all of that so yeah let's um
let's kick things off here.
Welcome everybody again. This is another episode of Money Moves. This is our Twitter Spaces series
where we talk about all things tokenization, all different sides of it, how it's being developed,
how innovation is happening on Avalanche. And we're excited to dive in today with our partners
from RE and from Nexus Mutual. So we're going to dive in today with our partners from REE and from Nexus Mutual.
So we're going to give them an opportunity here to do a little intro on themselves,
and we'll kick off the conversation from there. So let's start with you, Karn. Why don't you tell
us a little about you and your role with REE, and then we'll go over to you after that.
Yeah, sounds good. Hey, everyone. I'm the CEO of RE. We are an on-chain reinsurer.
For those of you who aren't familiar with what reinsurance is, it's like insurance
for insurance companies. So our customers are exclusively admitted insurance companies around
the world, starting in the United States. We wholesale take risk off of their balance sheets to enable them to
grow their businesses, enter new lines of business, explore frontier lines of business.
Right now, we back nine U.S. insurance companies, put on a considerable amount of premium,
have a significant amount of pipeline. And you'll hear me talk about this over the course of this conversation today.
But insurance and reinsurance, and I'm sure you will agree, is the perfect use case
as kind of a transition
of moving risk transfer on chain, largely because we sell an intangible product
that's memorialized as a contract.
And there is, in my opinion, no better way to do it than in a completely transparent,
immutable way that coordinates all counterparties and obligors.
So I'll leave it at that.
Maybe Hugh, you want to introduce yourself?
Yeah, thanks, Cairn. Hey, everyone.
My name's Hugh Karp. I'm the founder of Nexus Mutual.
And we do similar stuff to come, but maybe in a slightly different way.
I'm sure we'll get into that in a bit more detail.
But we're, I guess, an on-chain marketplace for risk.
And so we primarily cover smart contract related risks
within DeFi and on chain,
as well as a bunch of other things.
But we're kind of like, we fully run everything on chain.
And yeah, looking forward to kind of getting into more detail
about how we and Nexus work together
and how we're kind of doing similar stuff,
but in a slightly different way in places.
So, yeah, that's kind of the quick background.
Awesome. Yeah, it's going to be exciting to see
how these two protocols work together,
and I think there's a lot of stuff to showcase
that's brand new to a lot of people.
So let's dive into it.
Morgan, you want to say hello and take it away from there?
Sure. Thanks. Thanks, Kyle. And thank you, Karin and Hugh, for joining us on this latest episode.
Really excited to dive in, maybe just for the benefit of our listeners and just to kind of level set on the Money Move series.
money move series. We started these spaces, I guess, sometime last year, as we were working
with more and more partners on Avalanche, specifically on tokenization in some way,
shape or form. And we really wanted to use these sessions to kind of create a space to ask, like, I
don't want to say stupid questions, but like make things more accessible and use this as
an opportunity to explain concepts that we that who are doing this like every day, all
day, we start to take these things for granted.
Like we're in a rabbit hole of rabbit holes, right?
And we talk about wholesale banking and capital markets and balance sheets and all these things, but we want to be able to kind of, to the
extent possible, really make these terms and concepts as accessible as possible for our
community, for potential investors, for potential partners, and kind of go from there. So we may or may not have time for questions
at the end, but I try to, you know, ask these questions in the way that, um, you know, really
tries to bring things down to, to as, as accessible of a level as possible for not just myself, but
also for our audience and for our community overall. Um, so with that, would love to dive in.
Karin, with you first, I mean, I know you mentioned at a high level
kind of what you guys were focused on,
but let's maybe take like a giant step back and talk about,
maybe if you want to even just talk about like the reinsurance space today,
like what it looks like, who are the different players, why it's such a, um, complicated trans, uh, not trans, definitely not transparent,
opaque, um, industry, not standardized. And like, what are all of the problems that potentially
exist in the industry as it, as it exists today, which I'm presuming is the thing that caused you
to create re in the first
place. But maybe let's level set and talk about that. And then obviously, Hugh, if you want to
kind of opine, I know you mentioned you guys are focused on building and ensuring that most,
if not all of your components are on-chain today as well. Maybe let's start there to level set,
at a level set and then we'll go from there. So Karan, let's start with you. Yeah, for sure.
and then we'll go from there. So Karin, let's start with you.
So I try to spend my time working on things that I think are going to be inevitable.
And one of those things is all of insurance and all of reinsurance moving on chain,
meaning that I've had the benefit and or the misfortune of scaling a national insurance company in
the past, Cover.com.
And so I was able to develop a pretty good feel for all the intermediaries in the space,
a very good understanding of how data and cash flows from the origination or the sale
of an insurance policy all the way to capital markets.
And so insurance, reinsurance are chock full of intermediaries.
You have folks who sell policies, you have brokers, you have reinsurance brokers,
you have primary insurance companies, you have insurance companies that act purely as fronts
that don't take balance sheet risk.
You have reinsurers clearly that take risk off of insurance companies.
You have retro markets that is effectively insurance for insurance for insurance.
What I view as inevitable is the chain and the information and
the capital will at some point or another be transparent from the inception of a policy all the way to the risk bearer.
And, you know, my viewpoint, and I think you will agree with this, is effectively there'll just be a re-mutualization of the entire insurance industry where the folks who are providing capital are the policyholders and also are effectively the insurance company.
If there's a single problem with insurance now,
it's the fidelity of information
from when an insurance policy is sold
all the way to the end of that chain.
And so if you were to talk to 100 underwriters or actuaries,
you would see that, hey, when an insurance policy is sold, you have
near complete information. As it changes hands between the numerous intermediaries in this
insurance value chain, it gets sanitized over and over and over again. It gets aggregated over and
over and over again to the point where the folks who are actually at risk, the folks who are providing the capital backing
to back these insurance policies,
probably aren't in a good position
to make great underwriting or pricing decisions.
And so fidelity of data is certainly one aspect of this.
The rest of it is largely a coordination issue, right?
Like an insurance program, an insurance set you know, set of policies are,
these are intangible. It's not physical goods. They're literally contracts that spell out
explicitly, you know, what is covered, what are the obligations under certain circumstances,
what is the capital that is backing those obligations. And I don't see why at some point or another,
that those things couldn't all just be smart contracts. They couldn't be transparently
conveyed in a way that benefits the insured. It benefits the regulator who's overseeing it.
It benefits any counterparties, the insurers and the brokers.
We're kind of at a state now in insurance where even the folks that are in the business,
you know, think of this as the future, but think of it as like 25 years down the road.
And I look at things like this and I say, hey, well, well you know banking thought of itself as 10 years late to fintech insurance things of itself as 20 years reinsurance maybe 30 years things are going to move a lot
faster than we expect we're kind of an inflection point where everything is going vertical
and being able to adopt you know stuff that's happening now in a massive opaque industry
that improves outcomes for policyholders and for people who are taking risks is just going to happen. That's what drove us into this particular space.
As it relates to, you mentioned, Karin, like the fidelity of data, as well as, you know, enabling smart contracts to take the place of a happens when some of these things go wrong or the
amount of people or hours or time or money that it takes to reconcile these things? Like,
can you just give us like a sense quantitatively, roughly of like what these problems cumulatively
look like? I can give you an idea. I used to be the CFO for reinsurers life operations in the UK.
We had a relatively, like we had a team ran a pretty big balance sheet and all the rest
of it.
We were pretty official.
We had about 100 people in the wider company, but the finance division was about 30, about
a third of that.
And honestly, I think about 25 of those people
that I was looking after,
you could boil down what they did day to day
as reconciling data from different providers.
I mean, working out what the differences were
and what the problems were and all the rest of it.
And so I actually kind of think that like,
like most of my job was effectively doing that,
which was, I don't know, pretty, when I look back on it now, it's a pretty sad state of affairs.
But, yeah, it's just all about making sure that you understand the data and that you've got the right information with which to make sure you're holding the right capital, make sure that the profit's coming out correctly, et cetera.
So, you know, I think it's a very big problem within the industry.
And everyone really does.
That's the same thing because there's no standardized data transfer type information, etc.
So I think like tokenization and blockchain, the tech is just, I think is just right for disruption.
And I think it's a really good solution.
Yeah.
So even like you hit the nail on the head, you know, even if we're talking about
a couple points of administrative overhead being abstracted away because you can now
get this reporting, this compliance related work for free by being on chain, that's a
significant part of the economics, you know economics of an insurer or reinsurer.
Moving by a couple points is a massive advantage over books of business that could be tens of
billions of dollars in premium. And so that could either flow back, you internalize that as profit,
that could flow back to the policyholders in the form of lower rates, really
depending on what it is that the entity that is a beneficiary of these savings wants to
do. I'd also point out it's very easy to lose track of certain risks. And what I'll call out is like,
hey, we're committed to memorializing
our capital position on chain.
And that benefits the insurance companies
that we back and makes the regulator happy
because their job is to make sure
that we meet our solvency requirement.
But it is, even in today,
you still have massive instances of fraud where collateral is misrepresented in the insurance market.
You have insurance companies and reinsurers that will misstate how they utilize their collateral to go off and buy soccer teams or other liquid assets,
illiquid assets. Is that right? They'll do things that they didn't necessarily
communicate to regulators. And it takes some time to kind of unravel that. We've also seen instances
of, you know, multi-billion dollar collateral fraud with Vestu, you know, actually quite
trivially, you know, modifying PDFs that were, you know,
letters of credit to prove that they had assets. And then it's seemingly, you know, socially
engineered verification of those transactions by hiring on people to pick up phones and pretend to
work at a bank or a Chinese bank.
So there's lots of crazy stuff
that kind of can come out of this, but is impossible,
you know, if you're dedicated to the transparency
and memorializing transactions and collateral on chain.
And I think it's, again, this inevitability theme,
it is almost certain that all of this business over the course of the next decade
or two is going to be moving to on-chain rails.
Right, right.
And I really like how you mentioned the idea of really starting the process as upstream
as possible from the origination.
And therefore, I think from
there, all of these other things that you kind of mentioned as it relates to like the administration
and then reinsurance and all these things can kind of therefore flow from that. But I think,
frankly, whether you're talking about insurance, reinsurance, or any other financial asset,
the more upstream that we can go, frankly, the less service providers ultimately I think you'll
need and the greater the fidelity of the data and all the other products and services that
are built on top of it.
So I really like that point that you made.
Real quick, before we go into the protocol, just give us a sense of why you decided to
focus on reinsurance in particular.
And then actually, if you could talk about the protocol itself and what it consists of,
what are the products and features today that will be imminently out.
Let's kind of get into that.
Yeah. So why reinsurance? I built Cover.com, which was a national MGA business in the United
States. And so I sold policies directly to the end user. I sold auto insurance, home insurance,
et cetera. I built agency-facing software So thousands of local agents could distribute our products.
Myself and my team were on this call. We built apps, we built, you know, direct consumer portal,
we built custom CRMs. We found that we just couldn't make the business work with the number
of intermediaries that had a hand in the pot of the economics
that we were generating. And so we were paying fronting carriers, we were paying reinsurance
brokers, we were paying reinsurers a significant amount of our economics. And the margin profile
of the business ended up being not as attractive as we had initially set out for it to be. And so somewhat
selfishly, we took a step back and we thought about, hey, where is there an opportunity to
build something new? Quite frankly, where are people making money and not doing very much work
is kind of the question that we asked ourselves. It's a good way to think about it.
is kind of the question that we asked ourselves.
It's a good way to think about it.
And so we visited some of our reinsurance counterparties
and a couple dozen people in a small office in Macon, Georgia,
handling multi-billion dollar books of reinsurance business.
And effectively, when you dig into it,
not much happening outside of them
kind of taking in you know a market approach to to attaching risk which means they're you know
being as diversified and broad as possible and signing relatively standard contracts
that could be replicated whose individual components can be replicated as kind of
part of a smart contract.
And so if you think about what the product is, it's quite literally a promise to pay,
coupled with proof that you can pay under certain circumstances with the counter being
insurance companies and their counterparties being the policyholders. And so what maybe took a little
bit of time to percolate, because we thought about for some time was, hey, these things, these risks that we want to be party to, the counterparties, whether they're brokers or they're sedents or whether they're third party adjudicators of claims, all of these counterparties could be memorialized in a smart contract.
The risks could be very easily stamped out.
And then what's important is that the regulator, the insurance company,
therefore the policyholder have comfort that if things go awry,
the capital is there to be able to fulfill the obligation that's within the smart contract.
And so we pushed down this vein and, you know, started off by effectively building out software that ingested information from insurance company partners,
standardized it, and made it ingestible by distributed teams of underwriters
and actuaries. And so the way that we operate today is while we do have direct business and
insurance companies come to us, we work with teams of underwriters and actuaries with a specialist
focus that originate price underwrite and submit business to us to be approved. And so, you know,
what we wanted to do is make sure that whatever we did next was also very, very high operating
leverage. And so partly building tools for these individuals to be able to address price underwrite
and submit this risk was a big part of what we wanted to do. And the final part, kind of analogous to what happens at Lloyd's, is we built a third party capital transformer so that, you know, alternative capital and crypto assets could flow into each of these deals and back the insurance companies that, you know, we thought and the underwriters presented as being potentially profitable
opportunities. And so, you know, worked on the origination, worked on the plumbing to make sure
that we could memorialize all of these deals, made it possible for smart people around the world
to pontificate on or to at least address and price and do the work of assessing this risk. And then,
you know, importantly, you know, Nexus and ourselves have now set a precedent
around being able to transform, you know, KYC to on-chain capital into something that is
useful as insurance collateral in the real world. And so a bit of a journey, you know, I didn't come
from reinsurance originally. I also didn't come from insurance when we first started off,
but attempted to scale very aggressively in this space and have learned quite a bit over the course
of the last year and a half. I'd say given what you did in your previous role definitely set you up and gave you a degree of expertise in this space.
Everything's fertilizer. And yeah, you're right. I'd be remiss if I didn't say I didn't know a lot
about insurance and probably know more than most humans on earth about insurance.
On earth. Well, actually, to that end, and this is a question both for you, Karn and Hugh,
and Karn, you mentioned on
multiple occasions, we strive to be the decentralized Floyds of London. And obviously,
in the context of the way that the insurance and reinsurance industries work today, there's
obviously a lot of ultimately unnecessary third-party service providers. when you guys both kind of set out to build both Nexus Mutual as well as
REE, how do you think about the incumbents today? And talk a little bit about potentially those
or those types that you're looking to potentially work with versus disrupt and kind of what does
that look like? And how do you see, I guess,
the industries evolving as they increasingly adopt this tech from an insurance and reinsurance
perspective?
Yeah, I'll give it a go.
I think Nexus probably started in a bit of a, I think we saw the same problems, basically
like connecting capital to risk in the most efficient way possible
rather than going through a massive value chain with everyone
kind of taking their slice along the way.
And I think kind of that transparency and all the rest of it.
So I think we've kind of started from the same problem,
but we're probably tackling it from a slightly different spot.
So Khan and Rii are definitely fully regulated
and they're tokenizing the fund and the capital provision
part.
But facing the regular end customer,
it's all kind of regulated and that's
a bit more traditional looking.
Nexus started fully fully kind of these
and decentralized spectrum.
So we bootstrapped our own capital pool from zero.
We're fully running on chain.
You can buy the coverage on chain.
We also started from risks that
the incumbents don't cover at all.
Although I haven't, didn't cover to start.
We were the first ones to cover like smart contract risks
and defi related risks.
And so we started from a different spot.
And I think two things there.
One, insurance companies and markets tend to have always
developed like over hundreds of years by people
or the communities actually coming around
and starting something because they see a risk
that no one else will cover.
And I think that's kind of how Nexus has started
with the smart contract risk and things like that.
So started there, but looking to expand into other risks.
In terms of how that works with incumbents,
from my perspective, I definitely think
everything will move on chain,
but I also think it's going to take a while.
And so that so that means like we we from Nexus perspective, we're really looking to grow in niches that are underserved and where the capacity there's capacity problems or something like that. Because for example, competing head on against a very well
established insurer or reinsurer in a highly competitive
business line or something is not going to be what Nexus
is going to be good at.
It's going to be about something else, more of a niche product
where it can't be served by the regular traditional markets.
And I think there's always this bit of attention
in the insurance industry about competition or collaboration. Because at the end of the day, a lot of people like you can't actually cover all the risk in one entity anyway.
So you do need to collaborate a lot more than you probably would in other industries.
And so a lot of these problems have to be solved together.
And, you know, naturally, if you've got everyone working on the same data and things are tokenized and all the rest of it, it makes it much easier to collaborate.
So that's kind of hopefully we can get there and things make it a bit better.
But I think I wouldn't necessarily say we're coming at it from a naturally competitive point of view.
We're more trying to push the space board and cover people where they can't get coverage now, but also then use the tech that we've got
and expand that into other business lines and stuff as well.
And I think that this particular deal
we've done together is kind of a big first step
in that direction.
We will definitely get into that very shortly.
Karn, I wanna hear your perspective
and then we'll get into the fund as well.
Yeah, yeah, for sure. And I'm aligned with basically everything Hugh's covered here. We
started in the real world assets part of the spectrum here backing traditional insurance
risks with a specific foothold, backing regional insurance carriers, specialty insurance carriers,
You know, backing regional insurance carriers, specialty insurance carriers, where there's a little less competition. And quite frankly, we also just lucked out launching when we did.
where rates have been going up, which helps our growth,
surplus capital for some of our competitors
because of their investment policies.
And certainly some of the insurance companies
have shrunk given like long dated fixed income,
unrealized losses.
And at the same time, the interest rate environment
has improved our profitability as well, right?
The basic premise behind our economics
is we invest float that we generate from insurance policies.
And if the risk-free rate is higher, we make more money.
And if it's a hard reinsurance market,
there isn't as much capacity.
The expected margin taking risk off of insurance companies
is higher as well.
And so just turned out to be luck. I don't know that we forecasted it this way,
but it also did make us a much more palatable partner
as an upstart reinsurance market,
especially an on-chain one,
to traditional market participants.
I just want to reiterate, this is a massive market. It's
incredibly large. To Hugh's point, a lot of deals are done alongside other market participants. And
so as kind of a rule of thumb, internally, when we back an insurance company, we're never the
only reinsurer that typically backs an insurance company. We're part of a panel of usually two or three other reinsurers.
And so when we set out to build what we are building today, it was with the view of like, hey, we can build new plumbing that improves data and capital transfer.
It improves transparency.
And that is a nugget of value that we can compound on top of.
It wasn't necessarily to displace reinsurance brokers
or insurance companies offhand.
I think that what some of these intermediaries
will have to do over the course of the next decade or two decades is show that they add value to the extent that they're able to capture value as part of an insurance or reinsurance transaction.
But I'm fairly certain that they would be hard pressed to go away unless you are completely vertically integrated. And that kind of takes some time.
The machinery that backs all of these transactions is going to get more efficient.
That's almost that's almost a certainty.
But the coordination of capital providers,
the the the capture of information, the submission of those information is still going to require folks.
And so we're actually built to be able to support the market as it is. We meet insurance companies
exactly where they want to be met. And so we don't ask them to do things like modify the way that
they submit data to us. We build software that normalizes that data. We build software that
keeps track of capital flows in and out of ourselves and eventually capital flows to the
original capital provider. That's the type of plumbing that I think is going to work in the
near term. Will the market arc towards greater and greater efficiency over the course of the next decade or two? Absolutely. I think Hugh and I are well positioned to be able to take over a significant amount of the insurance business, given how many folks are simply just retiring out of this business.
gets to where you have a much, much more efficient marketplace. But that does not prevent
some of these intermediaries from showcasing that they can add value. And they'll have the
opportunity to do so, working with folks like us and doing things on chain.
Thanks, guys. And I think one point that you mentioned, Karn, that is particularly pertinent for bringing what I would say like off-chain users or off-chain companies on-chain is, to your point, building plumbing that inherently connects with their systems that they already use such that they're able to access and or reap the benefits
of this platform without frankly knowing or care. I'm sure they know, but caring that it's on
blockchain, but that, you know, now they have these kind of great additional features or
efficiencies or opportunities that they didn't have before. So I really like that, that thinking.
I want to emphasize that because that's when we talk about like adoption, you know, we always talk about, you know, obfuscating,
um, those parts that are, that frankly make it friction full to access, um, to, to access,
uh, opportunities and protocols on chain. So thank you for that. I want to shift gears a little bit and talk now about the
fund itself. And obviously Nexus Mutual was a kind of major key contributor in the first instance to
the fund, in addition to the Avalanche Vista allocation as well. But Karn, maybe if you want
to kick it off and talk about, you know, what is
the fund? And maybe let me pause and say, none of this is financial advice. Please do your own
research. If you're interested, we can connect you with Karin and or Securitas and we can go
forward from there. But Karin, talk to us about what is this fund that was launched? And then
maybe Hugh, if you want to kind of add what made it attractive for you guys in assessing that?
And then we can go from there.
Yeah, yeah, for sure.
So we spent a fair amount of time, energy and money sorting out a compliant way to create a bridge into the crypto asset ecosystem.
And the way that we settled was, hey, we're going to we're going to use existing
regulatory Lego blocks in a unique way that would enable KYC institutions and
individuals that want access to the insurance or reinsurance market to be able to do it.
And so there are, you know, there's Lloyd's of London. There are names at Lloyd's of London.
There are transformer structures that take in third-party capital. There's an entire ILS market
that enables, you know, qualified buyers or qualified purchasers to participate in, like,
You know, qualified buyers or qualified purchasers to participate in like very
tranched out specific risks.
But we wanted to create something that was a little bit more elegant, you know,
simply enabled somebody to provide or an institution to provide capital into this
particular facility, which is an open-ended fund that's redeemable.
And then, you know, again, existing and approved regulatory
financial instruments to turn the assets that we captured through the fund into compliant
admitted insurance collateral. And so effectively what that means is, hey, you can now put down
some money and you are earning a return against a basket of insurance
companies, ostensibly could be hundreds of insurance companies starting in the United
States and eventually around the world. And the really problem we're solving is there's lack of
access to this massive market. And quite frankly, there isn't the fidelity of data for individuals, even accredited investors,
historically to get comfortable with these types of risks.
And what we've endeavored to do is one, we built the infrastructure to make sure that
the data is there for any person or informed entity to be able to dig in.
And then two, again, use these existing regulatory Lego blocks
that we could snap together to create something new and novel
that flows, you know, potentially any KYC, Don Chin Capital
into the real world and again,
backing hundreds of insurance companies.
That was kind of the North Star for us. We're, from the best of and again, backing hundreds of insurance companies. That was kind of the North Star for us.
We're, from the best of my understanding, we're the first to be able to have
accomplished this.
And so it has been, you know, precedent setting thing to do and quite frankly,
a precedent setting transaction.
So proud to have kind of achieved it and worked alongside Nexus and
Avalanche to do so.
But that is effectively what the fund is and what its
purpose is. Thanks, Karin. And Hugh, I'd love to kind of get a sense from your perspective.
You know, do you guys have a, I mean, obviously, I guess you guys have a mandator. How did you look
at, you know, the investment in the underlying fund? What are some
of the things that you guys took into consideration? And then potentially, how does that, I guess,
fit into your broader strategy as it relates to Nexus Mutual?
Yeah, I think the first thing is, like, we looked at this at a very high level,
like what Nexus is trying to do, and also what what re is trying to do is is connect on chain capital with risk um and and we like we knew that we could do some stuff we
also knew knew that we could do a bunch of stuff that we couldn't do like so that they're interfacing
with the the regulated world um the insurance licenses the the um all the regulators and all
that stuff and we're offering very much in the decentralized world.
But but we're also sitting on a bunch of capital that we want to allocate
and back risks.
And so I guess from a very high level point of view,
we we saw a strategic benefit for both companies to work together,
like in and of itself, this particular deal,
I, you know, I think it's good and the terms are great.
And, you know, went through all of our,
you know, mandates and all the rest of it.
Now members voted on it and approved it.
But I think the real benefit for all of this is the first.
It's the first kind of major deal of bringing on chain capital
to back real world risk. And I think it's the first kind of major deal of bringing on chain capital to back real world risk
um and and i think it's the first building block that for which we can hopefully do more and more and and you know we had to kind of make some simplifications and stuff along the way to
make sure that the regulators approved it and all the rest of it um but you know i think hopefully
both of us see it as definitely a first step with which we can, we can build further on.
And, you know, you have to, you have to open the door and get the regulators comfortable with step
one, and then you can take the next step after that. And, and hopefully, this is, you know,
definitely just the first step in this, and there's more to come.
And I guess you, from that perspective, you mentioned, you know, this is definitely a
really great example of applying or bringing on-chain capital to off-chain or real world, however you want to
call it, opportunities. As you are kind of speaking from the perspective, I would say,
like an on-chain institution, you know, crypto native, however you want to phrase it,
for those out there that are kind of
mulling these various opportunities, what are some of the things, especially since you guys
obviously went through KYC, went through the onboarding, like, what are some of the things
that you feel like those who are considering this should think about, whether from like a return
perspective or a duration perspective or a risk perspective, like what are some of those kind of
parameters? And then Karn, I do want to ask you also, like, is this type of thing something that you guys have
found would be compelling for off-chain capital and off-chain investors, whether it is accredited
investors or institutional investors, why should they care? So I just want to hear from both of
you guys from both of those different perspectives.
So maybe, Hugh, let's start with you.
Yeah, I think there's quite a few things going on.
One is it's our first major stablecoin-based investment.
And secondly, with Nexus, we back on-chain risks.
And so you don't necessarily also want to invest your float
in the same on chain risks,
because if something does happen,
then you're losing on both the underwriting side
and the asset side.
And so the fact that effectively these funds
are backing off chain risk
means there's quite a good diversification play for Nexus.
So there's definitely that as well as the relatively attractive yield
that that the fund offers.
So there's there's quite a few components that are perhaps
specifically related to the Nexus that we that we had to go through
to make sure it was OK.
We had to make sure that our assets and liabilities are matched in the right way.
We had to make sure that our assets and liabilities are matched in the right way. We had to make sure that our members were happy giving up
ETH-based upside for stablecoins yield.
So there's quite a few of those types of moments
we had to go through, but I think one of the big benefits
that this has was the diversification play.
That's a good point.
Because I think a lot of DAOs, protocols,
investors on chain grapple with that
or have to consider that on a daily basis
in terms of diversification, liquidity, duration,
all these things.
So appreciate kind of the view
from your perspective firsthand and kind of all the things that So appreciate kind of the view from your perspective firsthand,
and kind of all the things that you guys have to consider. Karin, talk to us about,
you know, you mentioned in conversations that we've had, you know, that you guys are,
are slash will continue to, you know, to do roadshows with family offices and, you know,
other types of investors, high net worth, private banks, so on and so forth.
What do you think this, like, why do you think this might be potentially compelling for them?
And how do you feel like they should kind of consider it within their broader portfolio?
Is it something that you're going to people who invest in this stuff anyway? Like, what does that
look like? Yeah. So I think one of the things that's made it a little bit easier for us is like the risk
profile of the underlying is something that they're comfortable with and they understand.
Right. Like we back, you know, small business insurance programs, we back agriculture programs,
we back workers' compensation, some, you know, some auto insurance, home insurance.
And so if you think about it from the perspective of an institutional investor, or even just like a family office comprised or
that manages for cash for high net worth individuals, a lot of these folks are already
kind of comfortable with one, the risk profile to the expected return, three, the diversification benefit. What happens with a million policy
holders across a diversified set of insurance lines of business can be
uncorrelated with what's happening in the broader market, in the equities market
or within the crypto asset markets.
So the diversification benefit is
significant because these things are uncorrelated.
The lens that those folks look at an opportunity
like us through is, hey, this is an allocation
to a relatively low volatility, high yield fixed income
component of a broader investment strategy, right?
For whomever that counterparty is.
So it's easy to grok.
It fits in neatly within the high-yield fixed income part of how they're allocating.
And so it makes pension funds, sovereigns, high net worth individuals, family offices
kind of all addressable to us.
And especially through the structure that we've built, the tokenized reinsurance fund,
there aren't necessarily sovereigns or pension funds
that can take custody of tokens,
but they certainly can take custody of their position
in an underlying fund,
which has made a little bit easier as well.
That's helpful.
Let's pivot a bit to talk about, you know, obviously we'd be remiss not to talk about Avalanche from like an underlying tech perspective. In the architecture
that you guys have outlined, Karn, there was a hybrid approach to kind of using C-Chain as a public permissionless chain for
the launch of the fund, as well as really like the, I would say, kind of almost like front-end
UI of the platform, and then leveraging a private permission subnet to really house more PII and
other types of private information that you need to be able to ultimately feed into and downstream into the various products and services.
Can you talk a little bit more about what that architecture looks like and potentially
why and how it might be fit for purpose for your guys' use case?
Because I think it's a really interesting kind of configuration that you guys have built.
Yeah, yeah.
So, I mean, I think you've actually covered it quite well.
It's a, you know, enforced premium,
all of that we managed on C-chain,
you know, subnets could offer the protocol
more of this isolation in the future.
So if we operate a subnet,
you know, their privacy implications,
we clearly capture PII and we'll have more power over the types of the users that are allowed on the network.
And so that, you know, that was attractive for us when we were, you know, assessing partners.
I think the other piece here is that the Avalanche team has been great.
has been great. I've said this before, but the bet on RWAs, the bet on making sure that
there is a bridge built into these businesses like reinsurance, where you can essentially
bring a ton of value on chain through just a generation of insurance premiums is the
directionally correct bet. And so Avalanche has been, you know, I think
you guys are very well instrumented to take advantage of, you know, not just what happens
in reinsurance, but what happens where you need KYC individuals and you are re-architecting,
you're re-architecting other parts of the financial, you know, services ecosystem. So,
yeah, I mean, that's, you hit it on the head with respect to how we use it.
But I think more importantly, the bet that you guys have placed on RWAs is the right one.
And we're here for that. Definitely playing the long game. But I think, you know, I think it's funny, like, a lot of the things that we're all building
in this space technologically, are are doable now. But when you're talking about really upgrading
legacy financial services, infrastructure, like re architecting institutional workflows,
like all those things, you know, it's, it's gonna while. And so like, even while some more, you know,
I think the people really deep into the crypto community might think that financial services
industry is like moving. I mean, they do, I guess, at a glacial pace. You know, I think you're at the
end of the day, you're moving such like a big, not just one industry, multiple industries. And so I
think the work that you guys
are doing is really instrumental in really helping to kind of move this space forward. So both you
and Hugh are really kind of making a difference in the short term and then obviously ultimately
in the long term as we bring more and more of this on chain. I can keep asking questions,
but I'm sick of hearing myself talk. So Kyle, can we open it up maybe for like one or two questions to see if we have any
questions from the audience?
And if not, I can maybe ask one more, but wanted to give the group a chance to ask questions
if they had any for Cardin Hugh.
Yeah, absolutely.
Yeah, we got about 10 minutes left here.
So let's see if we can take a few questions. I know, Rain, you've been requesting up to be a speaker. So if you want to drop in and ask a question, if anybody else wants to have a question for Connor, Hugh, or kind of the panelists overall here, feel free to request and come on up. We definitely want to keep all the questions focused on the conversation we're having today
and the re-protocol and kind of the fun that's been launched.
So if you have any questions around that topic,
feel free to call up and we'll invite you up.
Rain here, I think, is still connecting.
So that might take a sec.
So we'll give it a minute for anybody to request to be up here.
And if you have a question for the team here, but in the meantime,
while we wait,
if there's anything else you wanted to share about milestones coming up or
things that folks here could look out for as the fund evolves or as kind of
the protocols work together even further into the future.
Yeah, maybe Kyle, as we wait, Karin and Hugh would love to kind of hear from you guys in
terms of, you know, based on what Kyle just said, like, what's next? What should we be
looking out for? Frankly, both from a re perspective from a Nexus mutual perspective.
And maybe we can go from there.
Yeah, I can go. I mean, I can't talk too much about it because we still need to go get
regulatory approval for some of the stuff that we're doing. Yes, good point. Let's keep it
compliant. So there's that. But what I can talk about is like thematically what I'm excited about.
But what I can talk about is like thematically what I'm excited about.
I, you know, when you talk to insurance folks about like, hey, crypto, a lot of these folks
think about, inevitably, they think about, hey, volatility of the underlying.
They think about quality of collateral.
I, you know, I think that there's going to be a future here where, you know, the regulators of the insurance space, specifically in the United States, AIC, are going to have an increasingly tight lens around whether or not crypto assets, more native assets, can be considered admitted insurance collateral for the purposes of backing insurance companies. And I think there'll be headway made, you know, in that regard. What I'm particularly
excited about is like, you know, BlackRock, Franklin Templeton, other providers tokenizing,
you know, high quality collateral or at least high quality traditionally admitted collateral
like treasuries and money market funds.
There is a future here where, again, we use these money Lego building blocks, and you will be able to trivially pledge things like treasuries to a surplus capital base that backs every insurance
company in the world at some point in the future. There is a home for the broader RWA ecosystem
because of the pure composability of these things.
Tokenization, for the sake of tokenization,
in the real world asset space doesn't generate significantly
more alpha.
But I think as soon as you are able to recreate some
of the trad fi flows, like being able to issue a letter of credit against a basket of treasuries or securities, being able to house things in a trust account, but in obviously a smart contract, all of that stuff is going to enable not just reinsurance, but I think it's going to enable anything where a security instrument is
required. So like, you know, in trade finance, alongside a bill of lading, you know, you typically
have a letter of credit that's a security instrument that is issued to help back that
particular transaction. I think all of that infrastructure is going to start to be formed
around this. And I'm excited to see, you know, the utility that comes out of the tokenization of real world assets. That's,
that's something that I think is, again, another one of these inevitable things.
Yeah, I guess on my side, the way I kind of view it similarly, I guess from Nexus's point of view,
we're looking primarily to, you know, utilize our capital base more, write more cover.
I guess starting still with the crypto related or on-chain risks and stuff like definitely focused there.
But I think the way I kind of see it is this kind of this dam between the on-chain world and the off-chain world.
And we're starting to see cracks in it in different places.
And I think the more and more of these building blocks
that Khan's talking about that get built,
the more and more the opportunities,
and the quicker that dam kind of breaks down.
And so we're kind of looking for growth
in the on-chain world to start with,
but once the opportunities actually pop up
and we then have the opportunity
to then use our capital more freely in to back stuff in the kind of real world and tokenize
things, et cetera, where I think we're very well placed to be able to support that journey
and that market that I think will come on chain eventually.
So, you know, I think it's definitely slow and
steady. It takes regulators a while, takes the insurance industry a while to adapt to change,
that's for sure. But it's definitely coming. And I think we're well placed to capitalize on it when
it shifts. You guys are both definitely preaching to the choir as it relates to what we're all
excited about. So definitely
looking forward to continuing to work with you guys. You guys have been awesome kind of in this
journey and within this broader Avalanche ecosystem. So thank you to both of you. And
thank you guys for joining us. Maybe any final thoughts from either of you guys. Otherwise,
we'll wrap it up. But thank you again,
Karne and Hugh, for joining us. Obviously, thank you to our audience and our community for joining
as well. But Karne and Hugh, any parting thoughts? Yeah. I mean, look, there's so much to be excited about in this space.
It is kind of he alluded to it's it we're placing the first bricks of a foundation that brings a trillion dollar market on chain. You know, there are individual reinsurers and
insurance companies that have more surplus
capital locked up than there are, for example, USDC in circulation. And so the uptick from
here, you know, it's really an order of magnitude. So it's massive, it's coming. And I think
it's coming and I think folks should keep an eye on it and be excited about it.
folks should keep an eye on it and be excited about it.
Yeah, I mean, I echo that, but like the insurance industry doesn't get a lot of,
I guess, exposure generally, especially compared to banking. But the fact is, it's absolutely
massive. And the numbers there, like you just have to get a small part of it and that can make a big, big difference.
So I think, yeah, fully agree with all that.
But yeah, I think we're all kind of in the right spot
pushing forward and all the rest of it.
And, you know, it's hard going sometimes,
but it is changing and it's moving in the right direction.
So I'm looking forward to seeing where it goes.
Awesome. Thank you both.
Kyle, let me hand it over to you to wrap it up.
Yeah, definitely appreciate you both coming on here. I'm sure we're going to have future
conversations where we bring you on as well, because like you said, this is just the initial
foundation that's being built and we're going to see a lot of growth coming here in the future.
And so thanks for joining us. Thanks for breaking it down. Thanks for kind of
giving an overview of what you're being built and kind of a vision for the future.
So we're excited to keep building alongside both of you.
And thanks, Morgan, for leading the Money Moves conversations, as always.
We'll have this recording up on YouTube in the next couple of days.
And then, yeah, we'll be sure to share more as things develop both from the
re side and from Nexus mutual. So appreciate everybody for joining us.
We'll see you all next time. And thanks again, Karn and Hugh.
We will see you all soon.
Thanks y'all.
Thanks guys.
Thanks everybody. Thank you.
Host
Avalanche 🔺
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