NMPIP: Grant Advisory Board the Power to Enter into Investment and Retrocession Agreement with Cover Re

[oSaaT]

This is a very exciting and complex proposal.
It took me a bit to wrap my head around it.

I found it helpful to decompose into its sub-parts and address these separately:

A. diversifying part of the capital pool into stablecoins investments

So far this had/has been a no-go for members of the mutual (see reactions to the Uniswap proposal earlier this year)
The realities of the market must be faced though. As reminded by Hugh above:

@Hugh

Whether the risk is stemming from crypto or not, future cover growth is much more likely to be stablecoin denominated.

Dopee also had a clear statement:

@Dopeee

If the Mutual wants to grow, it must expand its list of products and offer insurance, not discretionary cover. That will mean partnering with regulated insurance entities.

That obviously requires the appropriate asset / liability matching that comes with those regulations.

Now with the recent introduction of the RAMM and the possibility for members to exit at BV, mutual members who prefer to keep a 100% ETH exposure have the option to leave without (much of) a discount.

Btw this discussion feels certainly better to be had now with the ETH price back above $2k than a few months ago at half this price (and no certainty we don’t go back there…)

B. the actual investment.

A ~20% return on stablecoins is an attractive proposition, which obviously comes with risks attached.

Members asked many good questions above, and Hugh addressed some from the start & gave additional details:

• equity vs fund/vehicle?
• redemption?
• token / on-chain price tracking?
• relation between teams / conflicts of interest

Additional risk mitigation measures in place that I can see:

• investment position limited to <6% of the capital pool
• delegating powers for the agreement to advisory board: the AB members are the top (non-VC) NXM holders and couldn’t be more aligned with the success of the mutual. No shortcuts to expect here.

One question I’d have is for the Re team @Cliff and @karn :

→ what are you more interested in (i.e. incentivized for)?
Is it:
a) (premium) growth? via the 2-20% fee model…
or
b) writing profitable business? any incentives for this, for ex. any personal funds as co-investment alongside the Mutual in the open-ended fund? iirc this is something that existed for the Maple investment.

How should we understand the alignment of incentives with the Mutual here in case of (severe) underwriting losses?

C. New business for the Mutual

The retrocession deal described above means increased cover volumes in new business lines for Nexus.
This is the part that I find (really) exciting.

I want to underline 2 items from Hugh’s intro and a later reply above:

@Hugh

If approved, this would be quite an achievement for the Mutual, as it would demonstrate that the Mutual’s on-chain capital can interact with TradFi insurance companies, and this deal could serve as a blueprint for future deals.[…] MakerDAO and other DeFi protocols are exploring tokenised RWAs— a deal such as this one would be the equivalent for the insurance world. Members should consider this potential strategic value over and above the raw deal terms.

@Hugh

This deal would more than 10x cover revenue from our current position so is a perfect example of what this trade-off looks like.

A final question to clarify things, and this is more a question for Hugh:
→ My understanding (imho not really explicit in the proposal): the new business / retrocession part of the proposal is contingent i.e. depends on the investment part being acted on, correct?

The New Business would be fine in isolation for Nexus, but to open up capacity to write this additional business, I guess Re needs more capital and asks the Mutual to invest.

Congrats for all the preliminary work. Looking forward to it!