Cryptocurrency: Insurance Industry Tests the Waters With New Initiatives
Insurers explore whether decentralized finance may be a step they want to take with several placing initial markers in the space. Possibilities included making and taking payments, investments or even technological improvements. One key barrier to adoption: volatility.
- Terrence Dopp
- August 2021
- Newness: Bitcoin was founded in 2009 as a unit of money that stands apart from the traditional financial systems backed by governments.
- Movement: Over a decade of existence, cryptocurrencies have gone from the realm of outliers, criminals and hackers to the mainstream. A study by crypto exchange Gemini found 14% of U.S. adults hold cryptocurrencies.
- Sticking Point: Unlike traditional fiat currencies, crypto can be volatile, open to wide swings requiring institutional investors and insurance companies to often transact business through third-party exchanges.
Across the insurance industry—from life insurance to property/casualty, auto insurers to brokers—companies are taking their first steps into the realm of cryptocurrencies as they gain wider acceptance among both private and institutional investors. In some cases, that takes the form of letting customers pay premiums with digital coins, or it can mean paying claims with the currency when a driver gets in an accident.
It may also take the shape of investments and new business lines—as in institutions themselves putting money into the cryptocurrency market and insurers protecting so-called digital wallets against hacking or theft. And there's the technology itself: The currencies are based on blockchains, which embed information at every step and offer new levels of claims processing and efficiency.
As digital currencies such as Bitcoin and Ethereum enter the mainstream, those in the industry like Benjamin Peach, who helps oversee digital assets for mega-brokerage Aon plc, want to try and get in on the action.
In the case of Aon, the professional service organization focused on risk, retirement and health has partnered with Nayms to build extra capacity and product offerings in the insurance market for digital asset risks.
Peach, associate director and digital assets specialist with the Global Broking Centre at Aon, said the end-goal is creating a platform in which crypto risks can be priced and underwritten in the digital currencies being insured.
“As more and more financial institutions are starting to adopt crypto as a payment service or even trading these currencies, then there is more of an onus for large players such as Aon within this space to cater to that demand,” he said. “We need to make certain that we are servicing our clients to the best of our ability and part of that is developing and looking at new opportunities for transfer of risk.”
At their root, cryptos are digital-based units of currency either used in lieu of traditional, government-backed fiat currencies like the U.S. dollar, or held as an investment like any foreign exchange currency. There are several led by the likes of Bitcoin and Ethereum, and culling that to a front-runner is seen as one impediment to adoption.
A key difference from fiat currencies is that cryptos—a class of currencies sometimes referred to as “decentralized finance” due to lack of a central bank—exist in a purely digital realm. And there can be volatility: A Bitcoin's value dropped as much as 50% in June from its high of $60,000.
Peach said financial lines and the market for cyber insurance are natural first fits for a test run of crypto-based insurance. ''They're new lines of business when you look at the history of insurance products, which continuously need to innovate to keep up with industry demands,” he said. “Both lines of businesses can offer comprehensive risk mitigation for a digital asset company.''
According to Gemini, a crypto exchange, an estimated 21.2 million U.S. adults, or roughly 14%, own some form of crypto, and there is demand for more.
As more and more financial institutions are starting to adopt crypto as a payment service or even trading these currencies, then there is more of an onus for large players such as Aon within this space to cater to that demand.
Metromile Inc., the pay-per-mile auto insurer whose entrance into the industry promised to meld technology and insurance, recently said it would begin a pilot program of allowing its customers to pay premiums and receive claims payouts in cryptocurrency. The company also bought $10 million in Bitcoin for its general accounts.
NYDIG, a facilitator of crypto assets for institutional investors, in April raised $100 million from partners including Starr Insurance and Liberty Mutual Insurance.
As more mature insurers look to work cryptocurrency into existing business models, Evertas—known as BlockRe until a February rebranding— is one example of a new company looking to build operations from the ground up. The firm will cover institutional holders of crypto assets and plans to focus initially on covering the theft of the private keys that underline ownership of a crypto asset. It has raised almost $5.8 million in seed funding.
J. Gdanski, founder and chief executive of Evertas, said the company partners with incumbent insurers and provides a “bridge” to a burgeoning part of the financial sector that's only going to grow in terms of assets and importance. The firm cites a lack of capacity as the biggest issue holding back the wider adoption of crypto.
“We are solving the last major infrastructure problem for the crypto industry which is a lack of insurance, and simultaneously we're pioneering the first new risk since cyber for the traditional insurance industry,” Gdanski said. “You have incumbents who are ignoring something because they think it's too niche or too risky or not ready for prime time—none of which is correct at this point—and by the time they realize they want or need to address this market, it's too late.”
Rick Chen, a Metromile spokesman, said the company's flagship offering was based around the idea of giving drivers more choice in the manner in which they secure coverage. Using Bitcoin and other cryptos is a response to consumer demand and is an extension of that, he said.
While the company's pilot program had yet to begin taking any payments, as of press time he said initial indicators looked good and demand was growing. As a way to prove just how mainstream the once-fringe currency has become, he points to the inclusion of coins on U.S. tax forms. Insurance companies have so far used blockchain technology to handle claims and operations, but the adoption of the actual currency is still a new frontier.
“We see ourselves as a digital insurance platform,” he said. “We believe that supporting Bitcoin, or any cryptocurrency in this decentralized finance movement, is an extension of that—more choice. That's the primary reason we wanted to adopt this.”
The underlying technology also offers insurers promise through things like potentially enabling smart contracts and claims handling on the Ethereum blockchain that will improve back-office functions, Chen said.
Metromile, unlike other insurers who have announced plans to accept payment in Bitcoin and then have it immediately converted to fiat currencies, will deal in crypto on its own book. Because the program is new, Chen said results aren't yet available.
“We plan to take your Bitcoin one-for-one,” Chen said. “Eventually, we have it in a part of our store on our book and we can also then use that to make these claims payments in Bitcoin or, even in the future, other cryptocurrency.”
For all of the volatility inherent in the class, there have also been many investors who have made a lot of money in decentralized finance through early investments that have paid multiples. The moves into the space are in many ways a chance for insurers to tap into that growth and let people spend a bit of those profits.
And in coming years, Peach said, individuals and consumers will have a choice: Either pay for goods and services through government-backed currencies that may well be on blockchain and cash-free, or in a decentralized currency.
“Let's say you bought Ethereum in 2014. It's actually way more cost effective for you to part with a small amount of that in 20 years when it's at a much higher price,” he said. “That's a nice problem to have.”
Insurance Crypto Movers
A growing list of companies have claimed to make first-of-the-kind moves in the cryptocurrency realm.
- Pay-per-mile auto insurer.
- Purchased $10 million worth of Bitcoin and announced plans to begin allowing its customers to pay premiums and receive claims payouts in cryptocurrency.
Universal Fire & Casualty Insurance Co.
- Michigan-based multiline property/casualty insurer.
- Accepts several different cryptocurrencies including Bitcoin, Ethereum, Bitcoin Cash and Litecoin for premium payments for direct online license and permit bonds and other surety bond products.
- The second-largest global broker.
- Partnering with Nayms to build extra capacity and product offerings in the insurance market for digital asset risks with the goal of creating a platform to price and underwrite crypto risks in the digital currencies being insured. Bermuda-based Relm Insurance Ltd. will serve as underwriter.
- A New York-based provider of technology and investment solutions for Bitcoin.
- Raised $100 million in growth capital from a roster of partners that included Starr Insurance, Liberty Mutual Insurance, and others, joining previous life insurance and annuity-centered partners MassMutual and New York Life.