Cryptocurrency holds innovation opportunity for insurance industry

Having access to the right insurance product is critical to the “safe and healthy growth” of cryptocurrency - therefore, bridging the gap between financial innovators and the insurance industry is crucial.

Cryptocurrency, such as Bitcoin, refers to a digital payment system that is stored in virtual wallets. Banks do not need to verify cryptocurrency transactions - it is a peer-to-peer system that can enable anyone, anywhere to send and receive payments. 

Speaking during a webinar hosted by cryptocurrency risk and intelligence platform Merkle Science, titled ’Insuring the Cryptosphere: Understanding and Underwriting Risk on the Financial Frontier’ on 7 December 2021, Ed Gaze, senior manager at Lloyd’s Lab, said there were multiple opportunities for cryptocurrency and insurance, especially in terms of adapting traditional products to meet blossoming cryptocurrency needs.

“There’s been a lot of interest in this [arena] from the innovative insurers in this market,” Gaze added.

Merkle Science is a graduate from the seventh cohort of Lloyd’s Lab, Lloyd’s of London’s innovation and acceleration programme for startups.

Likewise, Shelly Schachter-Cahm, group head of compliance at Mode Global Holdings - who has previously worked as a Lloyd’s broker - said that she sees the “insurance market as a key component to marks of credibility and trustworthiness”. 

Crypto as a portmanteau

George Beattie, Beazley’s head of incubation underwriting, described cryptocurrency cover as a potential “protection gap” the market has yet to fill.

He said: “We look at the protection [gaps] that companies face and we try and answer the call. Ultimately, our work fits into two parallel columns – one is we provide strategic advice, capacity and product work to insurtechs. The other is we create first party branded products that we underwrite ourselves that do different things.

“For me, it would almost be impossible to be in my job and not look at crypto in some way - crypto is a useful portmanteau for a range of activities that fall within new emerging technology.”

Drawing on what Gaze said, Beattie added that some insurers have some very prejudicial views around cryptocurrency that is not necessarily based on current regulation and how the market has developed.

Beattie continued: “What makes a lot of sense is to start with traditional products in an unconventional [arena], but obviously there are unconventional products for an unconventional [arena], but it’s the process of getting there.”

He noted that there is “a tonne of potential and lots of gnarly stuff to get our heads around as insurers” when it comes to cryptocurrency, however “this is a great topic for the innovation ecosystem and insurance market to get our teeth into because it’s growing so fast - so much wealth is being created and ultimately, this is going to be part of the future”.

Lloyd’s Lab innovating

Both Gaze and Beattie are working together on Lloyd’s of London’s Product Innovation Facility, which aims to provide a safe space for underwriters to experiment with new ideas in a controlled way. This will be renamed the Lloyd’s Product Launch Pad in due course.

So far, the Product Innovation Facility has brought 25 insurers together, discussing solutions around topics such as cryptocurrency.

“That group spreads across the Lloyd’s market and there is a lot of capacity behind it,” Gaze added.

Lloyd’s has also created a new innovation class, which will allow insurers to write an additional 2% of their normal capacity for innovatively distributed products - this is designed to “cut them some slack” and make it easier to innovate.

Gaze continued: “We have had over 80 insurtechs join Lloyd’s Lab over the past three years - dozens of success stories and crypto came up earlier this year as something they really wanted us to look at.

”Our interest is both personal and professional. It’s not true that insurance isn’t innovative, you have just got to find the right market and right people.”

Beattie said the opportunities around cryptocurrency are threefold:

• Income: In a new market that is growing as fast as cryptocurrency, Beattie believes “there is a large uncorrelated stream of revenue” because the premiums being earned are new to the market. “You don’t get many markets that create this kind of income opportunity,” he added.
• Continued relevance: Beattie pointed out that insurers cater to “less and less” risks over time. This issue here is that the market has to move as quickly as cryptocurrency is evolving. “We want a seat at the table in the future and to be a trusted partner you have to have relevant products - it’s not good enough to say it’s too new,” Beattie added.
• Opportunity beyond premium income: There is an opportunity beyond premium income which is around product innovation for example using blockchain, or how products are operated and triggered, intermediation.

Beattie said: “Insurance uniquely has an issue with transporting risk from company balance sheets to insurers and we lose a lot along the way – 40p or 50p on the pound. That’s a very leaky pipe.

”One of the things we have in mind is that some of these technologies might be able to help us generate a new generation of products beyond what we currently have. It’s definitely the first step. Why don’t we take what we currently do and ask the question – what is the same about the these companies compared to the ones we already cover?”

By doing this, Beattie believes the insurance industry might recognise there are “lots of similarities” between cryptocurrency firms and other insureds.

“There’s a huge amount of potential as long as we are realistic about it and we try to be constructive and practical about what innovative looks like to begin with,” Beattie said.

Speaking about opportunities for insurtechs here, Gaze added: “For insurers to write new products, they need data to understand the risk as best they can. Addressing these kinds of challenges and getting the data on it – all this is helpful for insurers.”