InsTech’s Henry Gale speaks to Marco Mirabella, Founder & CEO of Ensuro, about how decentralised finance (DeFi) can provide a new source of capital for insurance, and what insurance and protection products Ensuro can provide capacity for, from travel to hurricane to cyber. Decentralised finance is the use of blockchain technology to offer financial instruments with cryptocurrency.
Henry: Marco, why did you found Ensuro?
Marco: I was looking for a way to connect decentralised finance (DeFi) to the real world. Insurance was a good fit for two reasons.
Firstly, an insurance contract is essentially a set of rules: if a loss event happens, as defined in the contract, the policyholder receives a pay-out. For some insurance policies, this set of rules can be encoded into a blockchain-based ‘smart contract’, enabling claims to be paid automatically.
Secondly, recent developments in DeFi allow the capital management aspect of insurance to be automated, while the surge of money invested in DeFi represents a new source of capital for insurance.
Henry: What are the benefits of connecting DeFi with insurance?
Marco: DeFi provides a new source of capital. Anyone can invest in DeFi, so using DeFi for insurance allows people or companies who have never invested in insurance risk to do so.
DeFi can also bring efficiency to capital allocation for insurance. Small amounts of money can be moved automatically within seconds using DeFi. Insurers have to allocate capital reserves to individual policies; with DeFi this can take place more quickly and cost-effectively.
Currently, the insurance market is hardening; premiums are increasing and it is harder to access reinsurance capacity. Ensuro was founded to provide an alternative to traditional reinsurance by connecting DeFi capital and technology to insurance.
Henry: How does Ensuro connect DeFi to insurance?
Marco: Ensuro collects capital, in the form of ‘stablecoins’ (cryptocurrencies tied in value to the US dollar), from investors, in return for an interest rate. Ensuro uses this capital to provide underwriting capacity to MGAs.
MGAs can sell insurance policies in fiat (non-crypto) currencies such as Dollars or Euros. The premium is sent to Ensuro and converted into stablecoins. Ensuro allocates the necessary capital reserves to that policy automatically.
For capital that is not allocated to policies, Ensuro invests it in DeFi investment programs such as Aave. The return that Ensuro can offer to its investors comes from both premium income and DeFi investment yield.
Henry: What types of insurance products are suitable for DeFi capital?
Marco: Parametric insurance products are the most suited to DeFi capital. For parametric products, a pay-out is triggered based on an external data source. With Ensuro, a blockchain ‘oracle’ transmits data from external data sources to Ensuro’s smart contracts, which can automatically execute a claims payment to a policyholder.
It is also possible to use DeFi capital for indemnity-based insurance policies, where a smart contract can trigger a claims adjuster. Other suitable products include warranty policies and benefit policies.
Henry: Can you give examples of what products Ensuro currently provides capacity for?
Marco: With MGA Koala, Ensuro provides a ‘cancel for any reason’ benefit to people purchasing flight or ferry tickets. When someone buys a ticket, they can purchase the benefit, which entitles them to a portion of the ticket’s cost returned immediately, if they choose to cancel their trip. The product is being sold through travel search engines such as Kayak and Direct Ferries.
Ensuro has also recently launched a parametric hurricane insurance product in the USA with MGA Parachute Insurance, which triggers pay-outs to residents based on the wind speed at their location as measured by the National Oceanic and Atmospheric Administration (NOAA).
The customers of these products do not need to use cryptocurrency or understand blockchain. Customers simply experience an affordable product that they can rely on for fast pay-outs.
Henry: Ensuro’s cancellation product with Koala has been available since February 2022. What figures can you give about the product’s performance?
Marco: Around 20,000 policies have been sold with Koala, representing a gross written premium of more than $650,000 USD.
Henry: What other products is Ensuro working on?
Marco: Ensuro is working with an image recognition company to offer a mobile phone screen warranty product. The image recognition company receives a photo of a policyholder’s phone and detects whether the screen is broken. If it is broken, Ensuro sends this information to a logistics company, which arranges for the phone to be collected and repaired. After the image recognition company verifies that the phone has been repaired, Ensuro pays the logistics company automatically.
Ensuro is also working on a ‘cancel for any reason’ benefit for event bookings, a microinsurance product for farmers in emerging markets triggered by satellite data and a commercial ransomware protection product.
Henry: What regulatory licence does Ensuro have to enable it to provide insurance capacity?
Marco: Ensuro has received an Insurance General Business licence and a Digital Asset Business Class T licence from the Bermuda Monetary Authority (BMA). Ensuro chose Bermuda because it has an innovation sandbox for new insurance companies and advanced digital asset regulation.
The combination of these licences allows Ensuro to act as a reinsurance company and use cryptocurrency as solvency capital. The BMA’s solvency framework is compatible with the equivalent solvency standards, Solvency II in the European Union and the National Association of Insurance Commissioners (NAIC) regulations in the USA.
Henry: How does Ensuro differ from a traditional insurance capacity partner?
Marco: Ensuro provides access to capital from DeFi investors quickly, offers real-time visibility on an insurance product’s performance and has lower operating costs which enable us to pass these efficiencies to our risk partners in the form of cheaper capacity. These factors allow Ensuro to conduct pilots with MGAs, which is something that traditional insurers generally cannot do.
This involves starting with a small sample of policies and gradually increasing the volume, while monitoring the product’s performance and modifying the pricing in real time. Ensuro has collaborative relationships with its partner MGAs, working with them to find the optimal pricing.
Henry: What’s next for Ensuro?
Marco: Ensuro has started out by providing capacity to parametric, warranty and benefit products. In the future, Ensuro is also looking to work directly with insurance companies so they can launch new products using Ensuro’s technology and access DeFi as an alternative source of capital.
Henry: Why has Ensuro joined InsTech as a corporate member?
Marco: It was an easy decision for Ensuro to join InsTech. InsTech’s Parametric Post newsletter and reports on themes across innovation in insurance help Ensuro learn about and connect with potential partners. InsTech is a way for Ensuro to build brand recognition and access companies that could be interested in capacity partnerships.
Henry: What sort of companies would Ensuro like to connect with?
Marco: Ensuro is interested to connect with companies that want to launch parametric products and are looking for capacity. Ensuro is also keen to talk to companies that want to launch innovative insurance products that are not specifically parametric. Ensuro is particularly interested in providing capacity for high volume, small pay-out products with short tail risk (meaning that claims can be settled quickly).