Bermuda, known for its pioneering role in the insurance industry, is now positioning itself as a leader in digital assets under the guidance of Premier David Burt. The Bermuda Tech Summit highlighted the potential for combining these strengths, particularly through the innovative concept of ‘Crypto CAT Bonds’. Joe Ziolkowski, CEO of Relm, a crypto-focused insurer, proposed using staked token pools as collateral for special purpose vehicles that underwrite reinsurance contracts. This could address a significant shortfall in the reinsurance industry, estimated to be as high as $60 billion for 2023. The shortfall is attributed to the aftermath of Hurricane Ian, climate change uncertainties, and general investor risk aversion due to rising interest rates.

Ziolkowski’s idea is based on insurance-linked securities (ILS), which have been successfully regulated and issued in Bermuda since the 1990s. He envisions an on-chain, smart contract-powered version of ILS backed by tokens locked in staking pools on proof-of-stake blockchains. This would provide crypto investors with additional, uncorrelated returns while potentially bridging the reinsurance funding gap.

Insurance is also seen as a key driver for crypto adoption, offering stability and security to decentralized finance (DeFi). Relm and other insurers like Chainproof, Nexus Mutual, and InsurAce are developing products tailored to the crypto industry, covering risks such as smart contract failures and cybercrime. Despite the growth of these services, the DeFi industry still faces significant security challenges, with over $718 million lost to crypto attacks in just the first 13 days of October, according to Chainalysis.

Innovative insurance hubs like Bermuda are well-placed to lead the effort in managing risk across the DeFi ecosystem. By providing financial backstops and incentivising best practices, insurance can play a crucial role in the growth and maturation of the DeFi industry.

For more information please click here to visit InsurTech or learn more about CAT Bonds and use of smart contracts here.