Bridging capital and risk

The origins of insurtech disruptor Nayms go back to research its chief executive officer Dan Roberts conducted a couple of years ago into the potential marriage between insurance and blockchain. He discovered it was a fertile ground, but one in which little had so far been planted. The cryptocurrency space represented around $200 billion at the time (that’s now risen to just over one trillion dollars) yet insurance is still largely absent.

“Insurance is one of the financial pillars of any kind of liquid market or any financial market that are needed to provide security and strength and efficiency of the allocation of capital,” says Roberts.

“Insurance is a little behind, both in the traditional world in terms of digitisation, and in the cryptocurrency world in terms of solutions and adoption.”

His solution, in collaboration with chief technology officer Theodore Georgas, was to create Nayms, which uses smart contracts to collateralise cryptocurrency risk with matching crypto-assets, bringing insurance with no foreign exchange (FX) risk to a space that is 96 percent uninsured.

As Roberts explains, the main reason being behind collateralising these risks with crypto-assets was that “due to the volatility between the two, insuring Bitcoin or Ether losses with dollars meant that because assets don’t match liabilities, your premiums have to be expensive to factor any kind of FX risk into the pricing of a policy—and the cover didn’t scale”.

“The BMA has a very forward-looking digital asset framework for companies looking to do regulated business in that space.”

Nayms is designed to provide a bridge between capital and risk, in which capital matches risk or assets match liabilities, so there are no pricing errors.

“Essentially what that means is we’ve built a platform where brokers place contracts of insurance between capital markets and risk,” says Roberts.

“Brokers will have a client that wants insurance coverage for a private key custodian, or some tech errors and omissions cover for other smart contract protocols, for example. That risk is denominated in Bitcoin or Ether, and they get the capital from capital markets in Bitcoin or Ether, so we’re effectively building a global insurance marketplace for digital asset risk.”

Nayms has partnered with one of its investors, The Maker Foundation, to collateralise these “smart insurance contracts” using its stablecoin, Dai, using open-source software supported by MakerDAO. This partnership will allow Nayms to apply its platform to traditional risk in the wider insurance market.

“Using a stablecoin, we can underwrite dollar-denominated risk as well, which opens the platform out to the rest of the insurance market,” explains Roberts. “We have some early partners who are using the platform to access traditional cover—dollar-denominated cover—from capital markets.”

It’s a field in which Nayms will have some competitors, but Roberts says Nayms has certain distinguishing features.

“The technology we use, and the design of the system, is such that we have the correct incentives for brokers,” he says. “They’re incentivised to place contracts, and in a transparent open marketplace, they get value from future trading activity of those contracts—so they don’t lose out from initially placing the contract.

“The immutability of our contracts means that you don’t require some lengthy legal process to provide trust to that contract of insurance. We digitise insurance from the ground up.”

Playing in the sandbox

Nayms has made significant progress so far, helped by its entry into the Bermuda Monetary Authority’s (BMA) regulatory sandbox, an innovation track for companies looking to test new technologies or business models to a limited number of clients in a controlled environment for a limited period of time.

Since entering the sandbox in 2020 Nayms has achieved several key milestones, including the December 2020 launch of its first pilot, a digital insurance contract placed by Breach Insurance for its client, Coinlist.

Nayms has closed a £1.5 million ($2 million) seed round led by XBTO, alongside other investors across insurance, capital markets and cryptocurrency such as Coinbase Ventures, Maven11, the founders of Synthetix, and Insurtech Gateway, which co-founded the project with Roberts from day one.

The funding will enable Nayms to continue launching larger pilot programmes in preparation for a full launch later in 2021 following graduation from the sandbox into a full regulatory licence. Also on the agenda is further work on its capital market integrations prior to a series A funding round, planned for Q1 2022.

Roberts credits Bermuda with providing a favourable environment to help the company get to this point.

“Bermuda is a great intersection between digital assets and insurance, specifically, reinsurance,” he says.

“It’s a global hub for reinsurance, and the BMA has a very forward-looking digital asset framework for companies looking to do regulated business in that space. This meant it was a no-brainer for us to go and speak with them.”

Next moves

Nayms currently has a Digital Asset Business Licence and a class IGB (innovative general business insurer) licence. Those two sandbox licences come to an end in May 2021, at which point Nayms will most likely convert to a Digital Asset Business Licence and an Insurance Marketplace Licence.

“We enjoy working with the regulators,” says Roberts. “They’ve certainly been a catalyst for our maturity and have enabled us to have good access to the insurance industry in Bermuda and the London Market as well.

“It’s clear what you need to do to meet the regulatory requirements and to conduct safe business with the industry. The sandbox enables very early-stage startups like us to get going in that regard, even with relatively limited resources and regulatory experience.

“Startups obviously have limited resources and want to move quickly, so the sandbox is a real positive for them,” he says.

Progress has not always been as fast as he might have liked, but in retrospect Roberts sees benefits in certain small delays.

“Regulation and innovation are an interesting balancing act.”

“The challenge has been in trying to innovate and iterate through our product development as a startup would, while remaining within regulatory guidelines,” he says.

“We have done a relatively good job—having got our first contract out before the end of 2020, we’re now at the point where we can continue to get more and more of these contracts out.

“There was perhaps just a six-month period where we would have liked to have been iterating in a live environment, but our processes weren’t up to speed on that side, so it was key for us to get over that first hurdle. Hopefully, we haven’t lost productive time.

“We certainly haven’t on the development side, but regulation and innovation are an interesting balancing act,” he explains.

The Nayms team has grown from five to 11 people, based around the world, and it continues to achieve important milestones in its back-end development.

“This will be a big year for us—a proving year,” says Roberts. “There is lots to do, lots to show, to achieve and to execute—including a full licence in May, larger contracts before that time, and a full redesign of the platform.

“It’s a good year for us to get our heads down before our series A funding round.”