Why Reinsurance Could Become DeFi’s Best Collateral | Ryan Connor & Ayyan Rahman

Reinsurance, which acts as insurance for insurance companies, is poised for significant growth and could become a key player in decentralized finance (DeFi) as a form of collateral. The reinsurance market has traditionally operated in isolation, attracting investments primarily from pension funds and private equity firms. Henri aims to enhance transparency in this sector by providing insights into risks, geographical exposures, and underwriting layers, which could attract more participants.

The reinsurance market is expected to offer attractive annual percentage yields, with Henri's yield token, ONYC, backed by capital in a Bank of New York Mellon treasuries account. Historically, reinsurance has shown a 13% compound annual growth rate with 2.8% volatility, outperforming the S&P 500's 8% CAGR and 15% volatility. NYC provides liquid exposure to reinsurance on-chain, making this asset class more accessible and potentially increasing its attractiveness to investors.

Investors can earn over 7% on USDC through NYC, which features a 15% liquidity layer, a notable innovation in the market. However, holding NYC comes with exposure to global underwriting risks, especially during peak seasons like hurricane season. The underwriting process requires reserving 50% of total premiums to mitigate potential losses, and larger reinsurance players curate their portfolios to manage specific risks effectively.

Data from NOAA indicates a decline in landfall hurricanes over the past three decades, with this season's probability of hurricanes being notably low. The use of AI in the insurance market is enhancing predictions and improving the accuracy of weather forecasts, which could lower costs and increase assets under management in the reinsurance industry. NYC's integration across various DeFi protocols underscores its growing significance in this evolving landscape.

Ryan Connor discusses the intrinsic risks associated with tokenized reinsurance, emphasizing that these risks are integrated through actuarial tables. He notes that the actual net asset value (NAV) is determined off-chain and measured by an oracle, which may not affect the true value but can influence on-chain dynamics. Connor highlights the importance of timely reporting on-chain updates to NAV within 24 hours of an event, as well as the evaluation of loan-to-value ratings based on historical events.

Ayyan Rahman points out that teams managing real-world assets (RWAs) are now more risk-aware than in the past. He predicts significant growth in the total addressable market for tokenized reinsurance products over the next three years, with the current total reinsurance market valued at approximately $800 billion, of which only $300 million is on-chain through Onry. Rahman asserts that Onry's product is fundamentally superior to existing options and identifies liquidity as a major constraint in the current market.

Connor explains that Solana was chosen for its infrastructure, which allows for efficiencies and had very few RWAs last year. He emphasizes the need to find the right platforms for distribution, which is application-specific. Rahman anticipates a demand for credit-tronching in the coming months to achieve consistent gains, while also noting that not all RWAs are viable due to sufficient existing distribution channels.

Rahman forecasts that Anri will reach $10 billion in assets under management in three years, highlighting the appeal of diversified yield exposure from RWA assets. He advises individuals to conduct their own research and consider their risk appetite, as yield markets are gaining popularity, particularly among professional investors. Rahman expects mainstream asset managers to show increasing interest in structured products within the crypto space, signaling a shift in how traditional finance interacts with emerging DeFi opportunities.