Bermuda’s ILS market eyes wider role for on-chain capital
As on-chain capital gains attention from Bermuda's reinsurance market, the next opportunity could lie in integrating it more widely into the island’s established insurance-linked securities (ILS) infrastructure.
Karn Saroya, CEO of Re, believes blockchain-based capital raising could complement existing arrangements by providing another funding source for special purpose insurers (SPIs), sidecars and collateralised reinsurers, without requiring those vehicles to abandon the structures that have made Bermuda a leading alternative capital market.
“The structures Bermuda has built, the SPIs, segregated account companies, collateral trusts, transformers and the managers and brokers around them are the reason alternative capital works at all, and we have no interest in rebuilding them,” Saroya told Bermuda:Re+ILS ahead of ILS Bermuda Convergence, held October 12-14.
“The structure we used to enter the market is deliberately conventional. What Re adds is a different capital layer underneath those structures, and that is where it fits.”
Re operates through two entities: the Resilience Foundation, which manages an on-chain protocol through which investors commit stablecoins, and Cover Re SPC, a Cayman Islands-licensed reinsurer that assumes risk under conventional reinsurance contracts.
Capital raised through the protocol is converted into US dollars and transferred to Cover Re through note agreements. Saroya believes the same mechanism could potentially be used to fund Bermuda SPIs, sidecars and collateralised reinsurers, subject to the necessary regulatory and capital requirements.
“A Bermuda vehicle that wants access to on-chain investors signs a note with a counterparty that raises its money on chain, and everything else about the vehicle stays as it was,” he explained.
The potential attraction is access to a wider pool of capital outside traditional institutional fundraising cycles, without fundamentally changing the reinsurance arrangements familiar to cedants.
Saroya also sees opportunities for Bermuda managers to extend alternative capital into business that has historically attracted relatively limited ILS participation.
“Most ILS capacity is property catastrophe. Casualty, specialty, and programme business are where cedants have been short of quota share capacity, and that is the business we have been writing,” he said.
Beyond funding existing vehicles, Saroya believes Bermuda could help shape the regulatory development of digital assets as reinsurance collateral.
Currently, Cover Re holds no digital assets. Stablecoins committed through the protocol are converted into US dollars before entering the regulated reinsurer, which provides cedants with conventional trust collateral comprising cash and eligible securities.
Saroya envisages a future in which qualifying stablecoins could be held directly in collateral trusts, allowing cedants to verify their collateral holdings on a public ledger.
That would require regulatory recognition of eligible stablecoins, suitable custody arrangements and acceptance from other market participants. Compliance with the US GENIUS Act would not automatically make stablecoins eligible as reinsurance trust assets.
“If any insurance regulator is going to be first to recognise GENIUS-compliant stablecoins as eligible collateral or trust assets, Bermuda is well placed, and that step would let the transparency of on-chain capital reach the cedant directly,” Saroya said.
His longer-term ambition is a market in which licensed underwriters can access a shared pool of capital through a common platform, while retaining the established protections of regulated reinsurance.
For Bermuda, Saroya sees an opportunity to build on existing developments in on-chain capital, extending their application across established ILS structures while preserving the regulatory and collateral arrangements on which cedants rely.
“Lloyd’s built that over three centuries with members’ capital. We think it can be built with on-chain capital, and Bermuda, with its underwriters, managers, and regulator in one place, is where much of that work would naturally happen.”
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