Title: Introduce a Quota Share Agreement for UNO WatchDog with DeFi Insurer Nexus Mutual
Scope: Protocol Improvement Proposal
Authors: Jas Singh, Sujith Sizon, Vithuran K.
The purpose of this proposal is to outline initiatives for a quota share agreement with reputable DeFi Insurance alternative Nexus Mutual. The benefits of the quota share agreement will increase market exposure for both UnoRe and Nexus Mutual, and increase insurance capacity to enable UNO WatchDog to meet market demand for an Insurance Audit product.
In the business of investing in risk, insurance companies pool together capital to diversify said risk. Since some insurable risks can be naturally correlated, it is wise to diversify insurance products by investing in other forms of risk through reinsurance. This is a common practice in the traditional insurance space. A quota share agreement is a contractual agreement for multiple parties to share insurance capacity and said premiums. The quota share percent will represent the percentage amount each of the two parties is required to invest and will have the premiums distribution divided accordingly.
UnoRe is looking to seal a collaboration with Nexus Mutual to engage in quota share under the following terms:
50% quota share
Shared risk and premiums for WatchDog clients
A quota share of 50% would represent a 50% share in insurance capacity and insurance premiums. For a $100k quota share amount, 50% of the insurance capital will be put up by UnoRe and the other 50% will be supplied by Nexus Mutual. This way, the pool of insurance capacity is split 50/50 as for the premiums as well.
The quota share percentage is subject to change upon voting by the Olympus Council. For claims, a new policy document will be created specifically for UnoRe WatchDog clients which will attribute to policies enforced by both UnoRe’s and the Nexus Mutual’s quota share cover wording cover wording.
Cast Study: Cost Benefit Analysis:
Having this quota share with Nexus Mutual is a mutual benefit for both parties because it allows UnoRe to scale its coverage for its WatchDog clients, while also offering Nexus Mutual a share of the premiums earned. Not only will this arrangement more than double Uno’s capacity for insurance provision, but in the future, exploring economically increasing leverage for the same also holds significant merit, leading up to a 10x increase in our capacity (i.e. the coverage we can sell to clients) as Nexus Mutual allows upto 90% Quota Sharing.
- Most of DeFi’s liquidity is concentrated within the top 25 protocols in the space; this means that to truly make an impact within the market, Uno’s capacity needs to be extended to bigger fish. In addition, as our WatchDog clients scale their TVL, their demand for coverage will also increase.
Since UnoRe’s insurance capacity can be a bottleneck for scaling our clients TVL coverage, a collaboration of this nature could be the way to establish Uno Re into the big leagues.
- Even though a portion of our premiums will be entitled to Nexus Mutual’s UNO WatchDog pool rather than our SSRP/SSIP stakers, staking APRs will still increase.
Let’s take a base case quota share agreement with the following parameters, taking into account our estimated covered portfolio EOY:
Total risk covered: $3M
Quota share percentage: 50%
Leverage ratio: 5x
Estimating a covered portfolio of $3M by EOY at 50% Quota Share (conservative projections for prudent risk management),
- UNO provides $1.5M in capital => sourced from 500k in SSIP pools
- Nexus provides $1.5M => sourced from its UNO WatchDog pool
In this case, a 6% premium on the $3M worth of risk will result in $180k worth of premium combined, and nature of the QS arrangement, $90k of revenue for Uno Re.
- As a DeFi-native business whose Tokenomics has built-in token burns, the weightages of which are directly proportional to the revenue collected in premiums, this also means that increasing our covered TVL would imply a larger amount of $UNO bought-back and burned.
In the above example, based on $180k worth of premiums collected, $90k would be the premium amount based on which how much $UNO will be bought back and burned will be calculated.
With the introduction of a quota share agreement with Nexus Mutual, comes mutual benefits to Nexus Mutual, SSRP/SSIP stakers, $UNO holders, and WatchDog clients.
Conclusion and next steps:
This forum post will provide an opportunity for the UnoRe community to provide feedback and suggestions; once the motion moves to vote on snapshot, UNO DAO members can cast their vote on whether or not they envision this collaboration to fit well with Uno’s long-term expansion and business development plans within the market.
About Nexus Mutual:
Nexus Mutual is a decentralized insurance alternative that allows members to join and share risk. Members can purchase cover products that protect against different kinds of risk. The Nexus Mutual protocol is built on Ethereum and provides the infrastructure for members to buy cover, underwrite risk, assess claims, and build risk management businesses.