The Friction Tax is over: Tokenization and the velocity of insurance capital
In the high-stakes world of marine and reinsurance, time has always been the most expensive currency. Yet, as we close 2025, the insurance industry is still largely operating on financial rails built for the 1970s. By the time a complex cross-border claim settles via traditional banking transfers, the market has moved. Sticking to T+3 (or T+7) settlement cycles is no longer just an operational annoyance; it is effectively paying a "friction tax" on your balance sheet.
With $2.89 billion now sitting in tokenized money market funds (as of Dec 2025), the argument for "wait and see" has evaporated.
The regulatory fog has lifted
The implementation of Basel III (Jan 2025) has validated Group 1a tokenized assets for institutional balance sheets, treating them with the same risk weightings as their traditional counterparts. Furthermore, initiatives like MAS Project Guardian have graduated from theoretical pilots to commercial reality. For a modern CFO or CRO, this is not a conversation about "crypto." It is a conversation about Capital Velocity.
The Gaps and Misses: Where We Are Losing Money
Despite the technology being ready, the industry suffers from three critical inefficiencies:
Trapped Collateral: In reinsurance and large commercial placements, billions of dollars sit dormant in trust accounts or letters of credit to secure obligations. This capital is often "lazy," earning suboptimal yields due to the difficulty of moving it quickly.
The Reconciliation Black Hole: The gap between a cedant's ledger and a reinsurer's ledger is where administrative costs explode. We are still manually reconciling spreadsheets against banking wires, creating a lag that slows down capital deployment.
Counterparty Opacity: In a traditional setup, verifying the real-time solvency of a partner is nearly impossible. We rely on quarterly reports and credit ratings, which are lagging indicators.
The Solution: How Insurers Can Bridge the Gap
The future belongs to insurers who transition from "Pay and Chase" to "Smart Contract Settlement." Here is how we solve the liquidity crisis:
Programmable Solvency: Instead of posting static cash collateral, insurers can utilize tokenized money market funds. This allows you to earn institutional yield on collateral until the exact second of a payout. The opportunity cost of holding reserves drops to near zero.
Embedded Compliance: By embedding KYC and AML checks directly into the asset’s metadata, we eliminate the repetitive compliance checks that stall cross-border payments. The token carries its own verification.
Instant Catastrophe Response: In marine and property catastrophe risks, speed is solvency. The ability to move $50M in collateral instantly to cover a loss, without waiting for banking windows or correspondent bank approvals, drastically improves the resilience of the risk portfolio.
Strategic Playbook for 2026
If you are managing a risk portfolio today, your capital model is likely pricing in the cost of trapped liquidity. To fix this, we must redefine our approach:
Audit Your Reserves: Identify liquidity currently sitting in low-yield cash equivalents. Migrate eligible reserves to Basel III Group 1a compliant tokenized assets to capture yield without sacrificing liquidity.
The "Velocity" Pilot: Structure a tranche of your 2026 renewal (e.g., a specific Marine or ILS treaty) using tokenized settlement rails. Test the difference in capital efficiency.
Redefine Risk: Update your ERM frameworks. We are trading "Counterparty Credit Risk" (will they pay?) for "Smart Contract Risk" (will the code execute?). This requires a new kind of due diligence — one that Sun Marine & Trading champions.
The Bottom Line: In 2026, the insurer with the fastest capital wins. The technology is here, the regulations are clear, and the friction tax is now optional. The question is whether your balance sheet ready for real-time execution.
