Procyclicality
The tendency of listed capital to flood in during good times and pull out at the first alarm, which amplifies cycles instead of dampening them.
Procyclical capital follows market sentiment: it floods in when all is well and pulls out when fear rises. Traditional reinsurance capital is patient, committed over long cycles. Tokenized capital trades in real time; it is nervous and can flee at the first alarm. Yet insurance needs capital that stays when the loss occurs, not capital that leaves as it approaches. Tokenization brings the liquidity mechanisms of financial markets into reinsurance, and their instability along with them. It strips away the protection that the very illiquidity of the instruments used to provide.
Someone will have to check that the tokenized capacity gained in calm times is not paid for with capacity lost in a crisis, precisely when it matters.
procyclicality, procyclical capital
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