How the insurance industry is navigating the crypto "wild west"

January 17, 2023 3:25 PM

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In a game of word association, 'volatile' might easily be the first one that springs to mind when crypto is mentioned, and indeed the emerging asset has something of the explosiveness of the old west about it.

In this latter-day environment, the insurance industry is having to move forward rapidly to keep pace, but caution is very much the watchword.

In our roundup, read more about how the industry is navigating the wild west crypto landscape.

Time to lay the groundwork for a digital currency

A central bank digital currency moved one step closer to reality with a Treasury Department recommendation that the U.S. should start making preparations for the future.

The department's report on the "Future of Money and Payment Systems" is the first of three ordered by the White House, with reports on consumer and investor protection, and illicit finance risks in the works.

While the report did not suggest the U.S. must follow China's lead by adopting a digital currency now, it laid out a clear case for why the government should start preparing for one sooner rather than later.

Read more:

Treasury recommends preparing for U.S. digital currency

Crypto in Tbilisi as Devotees Begin to Contemplate a Market Bottom

Valeria Mongelli/Bloomberg

Thinking differently is the key to crypto insurance

The rapid growth of crypto around the world has been quite remarkable, but as an emerging asset class that is relatively speaking still in its infancy, how does the insurance industry approach the challenge of providing coverage?

A good place to start, according to Rachel Jenkins of insurance broker Founder Shield, is recognizing the common ground crypto shares with other industries, but with its own unique exposures, areas which include regulatory variability, market volatility, cybersecurity threats and talent acquisition.

The next step is where it gets interesting: "Insurers must think differently — and even go as far as to develop novel products for the industry," said Jenkins. "Fortunately, plenty of insurtech and legacy players are jumping aboard."

Read more:

How insurers cover such a highly unregulated industry like crypto

Crypto FDIC insurance claims get shot down by agency

The false implication that investments in crypto are covered by FDIC insurance received short shrift from the government agency, which issued cease-and-desist letters to five errant crypto companies.

The letter could not have been more definitive: "The FDIC does not insure any cryptocurrency exchanges; FDIC insurance does not cover cryptocurrency; the FDIC only insures deposits held in insured banks and savings associations."

In the event of "immediate corrective action" not being taken, the FDIC was clear that it would use the power at its disposal to rectify the situation, including issuing civil financial penalties.

Read more:

FDIC calls out FTX US, other crypto firms over insurance claims

Whether hot or cold wallet, demand for coverage looks set to grow

It doesn't take long in the crypto world to learn that online hot wallets are, for want of a better word, safer than offline cold wallets. Simple enough, one would think, for insurance purposes.

But given the nature of crypto, insuring hot wallets could cost 10-20% more for less coverage than other types of assets. The current market for crypto insurance is about $200 million, but is projected to reach $1 billion within two years.

"Growth right now is constrained by market capacity rather than by interest or willingness to pay on the part of prospective insurance," said Jacqueline Quintal, digital asset leader at insurance broker Marsh. "A lot of companies in this space would buy more if they could, and if it were more favorably priced."

Read more:

Insurance for crypto: A 'hot' and 'cold' affair

Blockchain to protect African farmers from climate change

Blockchain is coming to the aid of smallholder farmers in Africa in the shape of parametric weather insurance provided by the Lemonade Crypto Climate Coalition.

"Africa has an estimated 300 million smallholder farmers" said Rose Goslinga, co-founder of Kenya-based insurtech Pula that provides agricultural insurance. "The majority face real climate risks to their livelihoods, as traditional, indemnity-based insurance is often unaffordable or unavailable to them."

The parametric coverage, which will insure farmers against specific events such as droughts, is based on the magnitude rather than the losses. The insurance will be stablecoin-denominated or valued based on a major currency like the U.S. dollar.

Read more:

Lemonade Foundation launches blockchain parametric insurance