The cryptocurrency sector is cursed by its dangerous image. British regulators recently warned potential investors they “should be prepared to lose all of their money.” But one obvious thing that might soothe the fear – insurance – is conspicuously scarce.
Currently, the market is not supplying nearly enough coverage to meet the demand. Even the biggest brokers in the world are having to tell clients they cannot get insurance for more than $10 million of crypto risk.
“Commercial insurers are still very cautious when it comes to providing insurance capacity for companies working with digital assets,” says Sarah Downey, co-head of the digital asset team at insurance brokerage giant Marsh & McLennan. “The commercial market’s supply is not keeping up.”
With crypto now worth more than $1 trillion, there is a huge untapped opportunity for insurance business, and a new online insurance marketplace called Nayms is hoping to find a niche.
It is proposing to facilitate insurance that pays out crypto, which would be a world first, according to Downey. This March it launched a pilot. Another giant brokerage, Aon, used the Nayms platform to place the world’s first-ever tokenized insurance contract underwritten by a regulated insurer. The test was with Teller Finance, a decentralized lending protocol.
The current disconnect of market size and insurance availability “doesn’t make sense,” says British entrepreneur Dan Roberts, CEO of Nayms. Many crypto firms struggle to get any insurance against hacks or for personal indemnity.
What it does
On the Nayms platform, regulated brokers and underwriters can find crypto capital providers to share in the premiums and the liability entailed in covering crypto risk. It is similar to Lloyd's, the historic London marketplace that since 1688 has brought together investment capital, brokers and clients looking to get risks covered. Nayms is a play on Lloyd's “Names,” the individuals and corporations who underwrite the risks.
Nayms does three main things, says Joseph Ziolkowski, CEO of Relm, a Bermuda-based pioneer of crypto-denominated insurance that is participating in the pilot.
First, it connects brokers and underwriters with crypto capital providers. They can “utilize Nayms to source alternative capital … in the form of native crypto assets to match the risk” of their clients.
Second, Nayms trims administrative costs – what Roberts calls “passing bits of paper around” – by tokenizing the insurance contracts on the Ethereum blockchain and wrapping them in smart contracts.
Finally, it answers to traditional regulators, unlike “pure" decentralized finance (DeFi) approaches that were previously attempted. Submitting to regulatory oversight stimulates confidence in the platform, which helps get established insurers like Relm on board, Roberts says.
Finally, crypto is starting to get the insurance infrastructure that any emerging industry needs to grow.
Roberts’ project germinated four years ago, when he met Ted Georgas at a wedding in Yorkshire, in England’s north.
Roberts co-founded a startup that put ad screens and pollution sensors on bicycles to gather data about cities. Georgas had been an IT consultant for PepsiCo, Saudi Arabia’s air force and several other groups. There was a gulf of experience between the two men but, a few years later, Roberts and Georgas were building a business together.
Roberts became preoccupied with the problem of scarce crypto insurance and growing numbers of private investors are holding crypto as a hedge against traditional markets. Might they want to invest it in return for steady insurance yields, which are decoupled from traditional markets, and therefore double down on the hedge?
After Roberts brought in Georgas, he recruited a couple of young front-end developers. On the commercial side, they hired well-connected investor Lawrence Tilli, who would go on to make their biggest introduction yet. Coinbase and the Maker Foundation invested in the seed round.
The job of reaching out to the biggest players in the global insurance business fell mainly to Tilli as the commercial lead. It was in that capacity, early last year, that he met with a man called Ben Peach in a bar.
Peach had only joined multinational insurance broker Aon that Spring, when the coronavirus pandemic was already shutting down Europe. Peach had no background in insurance. He had work experience with the West Midlands police and spent a couple of years advising startups with TokenMarket, a tokenized finance firm, a period he now refers to as the “wild west.” That Aon hired him shows the company’s openness to crypto.
Even so, putting together the partnership with Nayms was a long, drawn-out process. “You wouldn’t believe how difficult this has been,” Peach says.
He was accustomed to the rapid decision-making of startups, where an idea can be hashed out and a press release drafted within 24 hours. At London-based Aon, a $26 billion giant, everything took much longer. Only in March 2021 were the two companies finally ready to announce their work together.
Custodians of crypto
Mark Robinson, head of the U.K. tech team at Verlingue, an insurance broker, says it’s getting easier for firms to find hack insurance but harder to get professional indemnity insurance.
Hack insurance is a signal of the insurer’s confidence in the firm. Insurers make sure a firm is unlikely to get hacked before promising to pay out in that event.
But it’s not easy to get. Even crypto custodians that claim a high degree of cover often only have insurance for assets in cold storage, meaning those not connected to the internet, according to Alexandre Kech, the boss of Onchain Custodian.
When crypto firms do get good insurance cover, the returns are clear. “Our insurance coverage helps us on a day-to-day basis to attract customers,” Kech says.
There’s “a massive lack of knowledge in the broking sector,” Robinson says. He’s unusual in focusing on crypto cover. The scarcity of clued-up brokers naturally deters insurers, he adds.
Another obstacle: The insurance system is denominated in dollars or another fiat currency, introducing exchange rate risk. That’s when two currencies will shift in relative value between the agreement of the contract and the time of the claim, and even again before the actual payout. For insurers, covering crypto is like insuring Turkish lira with U.S. dollars.
“Insurance regulators perceive crypto to be volatile and illiquid and as such not an acceptable way to meet capital requirements,” says Ziolkowski, from Bermuda. If the capital and payout are all in crypto, that helps drive down costs.
“That would be ideal and I believe it is the future of crypto insurance,” says Kech, speaking of direct crypto payouts.
On that score, the decision of the Bermuda Monetary Authority to give Ziolkowski’s Relm the first Innovative Insurer General Business license in December marked a quiet breakthrough for the space. The license means it can now charge crypto premiums, pay out in crypto, hold crypto on its balance sheet and transact insurance contracts on blockchains. It cleared the way for the company’s participation in the Nayms pilot. (More-established insurers are not ready to move to crypto-denominated business.)
Tokenizing insurance and administering it with smart contracts could bring efficiency gains in the wider insurance industry beyond crypto, according to Peach. The army of suits who work on resolving claims would be made obsolete overnight as algorithms would do it automatically.
Robinson, a veteran of the industry, says smart contracts could eliminate brokers entirely. Clients could agree to deals directly with insurers, with self-executing code doing the rest.
That all makes for a titanic potential reward for bridging the gap between crypto and insurance.
Aon’s Peach cracks a smile at the thought. If Roberts could build a program that generated smart contracts for the biggest insurance applications, then his company “would be a unicorn within a week.”
Cracking open crypto insurance is a captivating prize, with $1 trillion of crypto out there. But the global insurance industry generates more than $6 trillion a year in premiums. If Nayms’ smart-contract-driven crypto marketplace takes off, that’s where it will be heading next.
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