In 1992, Hurricane Andrew put $27 billion dollars of losses onto the insurance industry. Reinsurers ran out of capacity and the market's answer was to go looking for capital outside its own balance sheet. Thirty-four years later, that outside money, which the industry calls insurance-linked securities (ILS), sits at roughly 17% of a reinsurance pool now worth something like $785 billion.
The standard explanation for the low participation of outside capital in the reinsurance market is that this is a natural ceiling, and that the appetite simply doesn’t exist. But that’s not what I hear when I sit across from allocators to figure out their pain points and how blockchain can modernize insurance infrastructure.
What Allocators Actually Say
Allocators are usually not shy of reinsurance because it's one of the only asset classes left that's genuinely uncorrelated to equities and default risk. Take catastrophe risk, for example: A hurricane doesn't care what the Fed did last week.
In a world where every allocator is chasing diversification, a clean, uncorrelated return should be oversubscribed depending on the price. Reinsurance should be attractive even if the return profile would be similar to a bond with similar risk and yield because of the diversification benefit.
When asked for their reason to stay away from reinsurance, however, they describe a set of mechanical problems that have nothing to do with appetite.
The Mechanics Of The Reinsurance Ceiling
The deal is that backing a reinsurance treaty means posting collateral that gets locked to that specific treaty for its full term. So if your view on the risk changes six months in, you have no way to act on that. Your capital is welded into that position.
There is no secondary market for reinsurance risk. A cat bond investor can sell before maturity if a buyer happens to be there but a collateralized reinsurance position mostly can't be sold at all. This is partly due to regulatory requirements such as being a licensed reinsurer, but compare that to literally any other institutional asset class an allocator holds. Equities, credit, or even private credit, they all increasingly have a secondary market. Reinsurance looks like it's still operating in the 1990s.
At a deeper level, there’s a fragmentation issue. Each party in a reinsurance chain keeps its own books and there's no shared, real-time record of what's actually being ceded, to whom, or on what terms. So before an allocator commits capital, they have to go through a data room process that can run ninety days or more to reconstruct exposure from documents according to some conversations we’ve had.
The net result is that allocators demand a higher return to compensate for capital they can't move. This prices a lot of them out entirely, and caps how much of their book the rest are willing to allocate.
When we look at it this way, that 17% ceiling for alternative capital is mainly due to a data and record-keeping bottleneck. This keeps these risk liabilities from being priced properly and transformed into liquid products. It’s a liquidity problem that has more to do with outdated processes than it has to do with the risk appetite of allocators and the returns for reinsurance.
What If We Fix The Plumbing?
Today we have the technology for two things to happen that could effectively break through this ceiling:
First, we can create a shared, verifiable record of exposure using blockchains to illuminate the risks that are currently siloed across insurance providers. This would be one ledger that every involved party can see, instead of each side reconciling its own books against everyone else's on a lag.
This isn't a new idea. The industry already tried this out with the B3i consortium. Fifteen major insurers and reinsurers including Munich Re, Swiss Re, Allianz, and Zurich spent six years and real money building a shared insurance and reinsurance ledger on a distributed ledger. It eventually shut down in 2022 and the common explanation was that insurers saw no commercial case for it. In my view, it was because the industry, and blockchain infrastructure in general, just wasn’t as prepared for this as it is today. It was more of a dependency problem.
Today, stablecoins have become ordinary financial plumbing rather than a niche crypto product, and tokenized reinsurance is no longer theoretical. Schroders Capital and Hannover Re closed a live tokenized collateralized reinsurance deal in April 2026.
Once we have all relevant parties participating in a shared ledger like that, we could build upon it and turn the underlying risk into something that behaves like an asset. Risk itself could be collateralized, priced, and able to change hands before maturity once it’s represented properly onchain. It could even open up new capital formation opportunities that break through the ILS 17% ceiling. Of course, this opens up all sorts of questions such as who makes these markets and the regulatory implications of having a licensed-reinsurer going onchain.
The good news is all the missing pieces to build this exist today. Tokenization is already working for many other asset classes like T-bills, home equity loans, and private credit. Capital markets infrastructure for insurance risk could be next, and they could exist without any of the old structural constraints.