Cryptocurrencies may not be at the top of the “to do” list for casualty insurance professionals and risk and benefits managers — but they should be on their list.
That’s primarily due to the increasing consumer and commercial demand for all things crypto, including payment tools like bitcoin, Ethereum and dogecoin, among others.
Case in point. According to a new survey of 1,500 U.S. adults by Survey Monkey, “a majority plan to buy more cryptocurrencies in the next three months.” Additionally, with Tesla’s recent announcement a $1.5 billion bitcoin purchase, and its intent to use cryptos as an acceptable form of payment, cryptocurrency is shifting into higher gear.
Rising demand is already reshaping the cryptocurrency insurance market, which had been operating in fits and starts.
“Although the crypto market is soaring to new heights, the cryptocurrency insurance sector still lags far behind,” said Chris Abrams, a licensed insurance agent and founder of Abrams Insurance Solutions in San Diego. “The global cryptocurrency market recently passed the $1 trillion threshold, but there is only about $5 billion in cryptocurrency insurance available,” Abrams said. “The gap may continue to widen as investors become more comfortable with cryptocurrency but insurance providers remain risk-averse with this volatile market.”
While the future may not be now for the cryptocurrency insurance sector, the road ahead looks sunnier — especially for the property and casualty insurance sector.
“Crypto has the potential to revolutionize the property and casualty insurance sectors,” Abrams said. “One big barrier to these sectors is the manual entry of claims. Insurance providers have to manually process claims and that’s not only a tedious process, but it can also lead to errors.”
“Blockchain technology has the potential to expedite this process and limit the number of errors that occur when processing these claims. Additionally, smart contracts can help automate and speed up the process,” he added.
No Wave of New Products — Except in DeFi
That doesn’t necessarily mean the P&C insurance segment — or any insurance sector — will be bursting out of laboratories with new crypto-related insurance packages
“Generally, the regulated property and casualty insurance market addresses either first-party loss (i.e., theft, damage or destruction, of property, etc.) or third-party risks (i.e., litigation, negligence, civil, criminal and regulatory liability),” said Jacob Decker, director of financial institutions for Woodruff Sawyer, a 100-year old independent insurance broker based in Seattle, Wa. “Businesses that operate under the same legal systems and geographies have similar types of business risk. Consequently, I don’t necessarily think there are likely new “cryptocurrency insurance” products specifically.”
The changes Decker sees are less about developing new concepts of insurance and more about clarifying and upgrading the contracts themselves — and to provide precision about what is to be insured.
“It’s about making sure we’re covering the aspects of the cryptocurrency business that need coverage,” he said. “When you’re dealing with new business models and businesses that didn’t exist a decade ago, there’s a lot of innovative thinking that goes into “what will this business need to consider” to mitigate and transfer its risk.”
That said, Decker does see “a good deal of innovation underway,” specifically in the decentralized finance (DeFi) space that likely falls outside of the traditional regulated property and casualty insurance world. “This might be the one area where more novel “cryptocurrency” specific products are developed,” he noted.
New Changes Coming in 2021?
With more knowledge of what is needed by crypto companies and investors, some much-needed clarity is in order in 2021.
“The big issues are largely the same as over the past two-or-three years,” Decker said. He sees the most significant market activity picking up speed on three fronts.
A bigger megaphone. Among the top challenges is advancing the education of key stakeholders to help corporations, policymakers, insurers, the government and investors understand the risks and opportunities of crypto. “There has been a tremendous amount of advancement in this regard over the past few years but also a long way to go,” he said.
Improved regulatory clarity and thoughtful rulemaking will continue to be critical. For example, some of the recently proposed rules from FinCEN around data collection requirements tied to their mandate to safeguard the financial system from illicit use, Decker said.
“That creates some unique challenges to crypto specifically and could certainly threaten or limit certain types of activities,” he said. “As a result, companies operating in any sort of regulatory grey area will continue to have significant challenges purchasing some forms of traditional insurance until some of these “rules of the road” are more clearly defined.”
The rise of “hard to get” insurance. Finally, an issue that’s not directly tied to cryptocurrency insurance — but could impact it — is the so-called “hard” insurance market.
“Costs of insurance are going up across a broad swath of (non-crypto) industries and types of insurance products due to years of challenging loss developments,” Decker said. “This means commercial insurance is more expensive and harder to secure for all buyers given current market conditions than it has been in many years.”
Adding cryptocurrency insurance, which is “perceived as high risk” and remains generally less understood, may cause further challenges for the insurance industry. “You don’t have an optimal macro-environment that would lead carriers to push into new areas and develop tailored solutions for a still-emerging crypto industry,” Decker said.
“Insurance market cycles come and go, but a “softening” of the market would be a welcome development for insuring the crypto industry.”
Brian O’Connell is a senior analyst at InsuranceQuotes.com and freelance writer based in Bucks County, Penn. A former Wall Street trader, he is the author of the books CNBC’s Creating Wealth and The Career Survival Guide. His work appears regularly on major media platforms like Fox Business, U.S. News. The Motley Fool, TheStreet.com, and many others.
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