Lockton looks to educate insurers about blockchain technology

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Lockton's U.S. headquarters at Valencia Place, West 47th Street in Kansas City, Missouri.

Digital Insurance spoke with Sarah Downey, managing director, blockchain advisory leader and financial services claims leader at Lockton Companies, the global insurance brokerage firm. She joined Lockton in 2021 after seven years as a managing director at Marsh, where she advised digital asset companies on insuring their risk exposures. Previous to that, she represented insurance companies as an attorney. Downey began working on blockchain issues for insurance while at Marsh, eventually leading a team to find what the broker needed to do to understand blockchain.

As you got started, what issues with blockchain for insurance did you recognize?

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Sarah Downey, managing director, blockchain advisory leader and financial services claims leader at Lockton Companies.
Scott Rosenthal
When I first started, being a lawyer by background, having always worked with more traditional companies, and then being at an insurance broker that always worked with traditional companies, it became apparent really quickly, that with any new technology and any new asset class, there was a huge learning curve. It was very clear from the beginning that we were going to have to focus on educating the insurance markets about the space. We knew we would have clients who needed the insurance. Education has always been a big challenge. Or the lack of education has always been a big challenge.

We spent a lot of time with lawyers and clients in the space, educating the insurance markets about the space so they're more comfortable providing the coverage to our clients. When we first started, the real focus was on insuring against the loss of assets. Not that the clients or the companies felt that there was a high risk for theft. But it was a great way to market themselves to say that they had insurance in place, in the off chance their security protocols failed and their assets were stolen from their platform. As these companies started to bring in more experienced business people to help run them, directors and officers liability insurance became a huge priority too, because it was experienced board members who came on or officers who came in required D&O insurance.

Are there issues with blockchain technology that become legal concerns or liabilities?

The legal lens that I wear is just automatically part of what I do. There are legal issues that the technology gives rise to. And those are issues that we have naturally had to deal with along the way. Our understanding of the technology, being supplemented by the legal understanding of all the various law firms that are working with our clients in the space, and that work with us in the space, have really helped us get past those challenges. 

How do insurance needs vary among the blockchain firms you're working with?

They vary a lot depending on what the specific client does and what their priorities are. If you take an exchange or custodian, the theft of the customer assets is a huge exposure and is something that they love to insure. But if you take a data analytics firm, they aren't holding assets for customers. Instead, they're providing technology as a service. And so the cyber and technology errors and omissions component is a bigger priority. The insurance needs vary so much, depending on the type of business and that specific company's own priorities.

Exchanges, custodians, any company that holds third-party assets, their customer assets – their focus tends to be either on crime coverage, or custody coverage through the specie market [for insuring high-value assets] in London. DeFi [decentralized finance] companies are really just technology companies. Their technology supports a platform that they don't control. So from a DeFi perspective, the cyber technology errors and omissions component is an issue.

DeFi has become such a bigger part of the industry now than it used to be. Cyber insurance has become a greater focus for many companies in the space too, where it wasn't six or seven years ago. Things have changed, but each specific bucket of types of companies does have some specific needs. NFT companies, for example. You could break that down further if it's a platform and they actually custody the NFTs and you go back to the crime and specie coverage. If they're really just providing a technology, then their focus tends to be on the cyber technology errors and omissions side of things.

What digital solutions are being offered that help how insurance claims are serviced?

From the claims perspective, in the financial lines space, it's going to be a little bit harder to transition things to the blockchain, because there is a lot of human interaction needed, because the claims tend to be super complex. But that'll take a little bit of time from the more parametric type of coverages where if X event happened, insurance pays out. Those could more easily be transferred to the blockchain. Some insurance companies are starting to consider the benefits of that. It will be a little bit of time before we actually see it more on the financial lines.

What are the biggest challenges coming up for this market with covering blockchain?

The regulatory environment right now by far is the most challenging issue confronting the industry from an insurance perspective. There are some nuances to the ecosystem where traditional insurance doesn't necessarily fit. And so we have seen some different types or newer, non-traditional types of insurance carriers popping up. Nexus Mutual is an example, Chainproof is an example. Some insurers that are entering the space are non-traditional insurers. They're entering to address those more nuanced, blockchain specific exposures. So I would add that as something that does cause some complexity too, but definitely regulatory issues are the biggest.

Are traditional carriers more reluctant? Are newer firms less risk-averse?

Over the last six or seven years, I have seen so many more traditional insurance companies take an interest in blockchain and digital assets. I would say the insurance market has really warmed up to the space. That being said, we have a long way to go. We're very fortunate in that we really haven't seen that many insurance markets pull back their appetites in everything that happened towards the end of 2022.

That could still change as more insurance markets could pull out of this space. But I think there has been a recognition that blockchain technology is here to stay. And so there are some insurance markets that are more comfortable than others. But I think for the most part, almost all of the insurance markets that we deal with are really trying very hard to learn about the space and to understand it, because they have realized this is probably not going away.