Cryptocurrency
Cryptocurrency Opens New Frontier for Life Insurers

• Terrence Dopp
• August 2021
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Key Points

• Newness: The centuries-old life insurance industry has found itself taking initial positions in crypto, which has only been around since 2009 and was envisioned as a way to gain independence from traditional financial systems.
• Rationale: As cryptocurrencies become more prevalent, insurers will need to figure out their place either as an investment or a form of payment—or both—and how they can benefit from the underlying technology.
• Volatility: The wide and rapid swings of digital tokens like Bitcoin will prove to be an impediment as they move to wider adoption.

If there's one corner of the U.S. financial system where predictability is a virtue, where volatility is largely to be avoided, it's life insurance. Policies are a long game in the industry, and along with its sibling-business annuities they are based on the idea of measured returns in exchange for stability.

Then there's the emerging cryptocurrency space, where a tweet from billionaire Elon Musk can move values and headlines proclaim the ups and downs on a near-daily basis. It conjures up images of cyberpunks out to usurp monetary systems, the tech world and hipsters that either made it rich on a well-timed play or found themselves on the wrong end of a bet.

Yet the two are moving closer, and some life insurers are dipping their toes into the crypto waters.

Massachusetts Mutual Life Insurance Co. announced late last year it had taken a $5 million equity stake in NYDIG, a firm providing institutional investment and technology solutions for Bitcoin, as well as purchased $100 million in Bitcoin for its general investment account through NYDIG. The insurer will hold its position on NYDIG's custody platform, which NYDIG touts as secure, audited and insured.

“I think it's fair to say that it's both on the product side as well as the economic side,” said Eric Partlan, head of portfolio management at MassMutual. “It's really what our policyowners and the market are asking for.”

Partlan said that by staking a claim in NYDIG, the company is able to stay involved in both the asset class and the functional aspects of Bitcoin.

“In NYDIG, we have the ownership stake both because they custody our assets but we also believe that over the longer term they will grow their custodial capacities and they will grow their asset management capacities, which both from an investment standpoint is great for MassMutual and the policyowners,” he said.

A NYDIG spokesman declined to comment beyond the initial announcement.

NYDIG in April said it had raised $100 million in additional growth capital from a roster of partners that included property and casualty-focused insurers Starr Insurance and Liberty Mutual Insurance. Along with MassMutual, other life insurance and annuity-centered partners have included New York Life.

Ted Mathas, chairman and chief executive officer of New York Life Insurance Co., in March was appointed to NYDIG's board of directors in addition to his company taking a financial position. The exchange at the time cited his experience as helpful to growing its Investor Solutions business, while Mathas said crypto is an emerging component of the insurance business and institutional finance.

Money/Not Money

A quick primer: A cryptocurrency is essentially a digital-based unit of money that can be used to buy or sell goods. It also can be held as an investment like any foreign exchange currency. Rather than one single digital currency, there are several, led by the likes of Bitcoin and Ethereum.

For life insurers, cryptocurrency—or simply crypto—can be viewed as either an investment or a means of taking and receiving payments. The underlying technology also offers promise from an operational standpoint, making the promise very real for insurers on several levels. Whittling them down to a standard one or two cryptocurrencies is likely to be crucial for wider adoption in insurance.

“There are a lot of people who believe that it works on both sides,” said AM Best Director Rosemarie Mirabella. “It could be potentially an asset class but it could also be useful in certain product lines and certain administrative, data-gathering functions. I think it's got multiple applications by its very nature.”

Where crypto differs from the more traditional fiat currencies offered by governments is it exists in a purely digital realm, with no physical bills and coins to fill up your pockets. Also, digital information packets or blockchains detail each step the coins take as they are traded.

There's also a fundamental split on another level in that some involved in the industry view crypto as a monetary replacement while others see it becoming a safe-haven asset like gold.

While movements in the U.S. dollar or the euro can be modest, cryptocurrency can see larger swings. In June, Bitcoin, for instance, fell below $30,000 for the first time since the beginning of the year after hitting a high of $60,000 in April. The drop came after the Chinese government said it would continue a crackdown on the so-called mining of the coins involving processing massive amounts of data to create new units, which the country has sought to curb because of its massive power use, CNBC reported.

Tom Rosendale, an AM Best senior director, says the wider adoption of cryptos faces a headwind in the life insurance market because they are seen as too speculative to serve as an investment. At the same time, he said, there's also a risk in taking them as payment because their values may shift before a company converts the digital coin.

“Typically, insurance companies don't invest in currency for the most part,” he said. “They hedge currency risk but they don't really view currency so much as an investment along the same lines as the other investments they use to back liabilities. The potential volatility of cryptocurrency is so large it's kind of hard to make a case for investing any material amount in anything like that.”

At the same time cryptocurrency is new to the insurance world, it's also relatively new to the wider world as well. Bitcoin, often viewed as the first digital currency, was launched in 2009 following the financial crisis that wreaked havoc on currencies worldwide.

It's come a long way from its roots as a disruptor that looked to be the territory of people like criminals and those looking to make an end run around financial systems. In fact, one might even say it's brushing up against the mainstream: NYDIG, MassMutual's partner, in May estimated 46 million Americans own at least a share of Bitcoin and half of all people with life insurance have some.

Baby Steps

John Ruth, co-founder and chief executive officer of Build Asset Management, an asset management firm focused on fixed income and options strategies, said long-term institutional investors such as retirement plans and insurers are starting to take “infant-sized” steps into the crypto world for a number of reasons including staying abreast of markets and gaining the operational benefits offered by blockchains.

He's also noticed another word creeping into the popular vernacular for the first time in a while: inflation.

Ruth said crypto could provide an alternative to the “hot printing presses,” or so-called easy-money policies that governments have doubled —or even tripled—down on since the financial crisis. He also cited the effect of the COVID-19 pandemic prompting governments around the world to enact massive stimulus plans to goose their economies.

Crypto's finite supply of coins could help the currency overcome its traditional weakness of volatility, Ruth said.

“The I-word had not entered conversations that often in the prior 10 years, but it's leading through the door in some of the meetings we're having,” Ruth said. “That's creating this gold alternative narrative. That's why this is being viewed by some, especially in the institutional space, as an inflationary protection item. It's a stored value item.”

Partlan, of MassMutual, said the days of any crypto being common in the life insurance market are still far off. He chalks this up to newness—to date, the space has been the province of individual investors, and as it moves into the institutional realm, companies are just beginning to figure out issues such as accounting procedures, regulatory needs and compliance and issues of taxation.

“It doesn't just have an ETF so you have to make sure it's held somewhere you're comfortable holding it and that physical security is there,” he said.