Cryptocurrency: nascent tech is already a ‘top risk’ for re/insurers

It may still be “nascent” but cryptocurrency, and its related technologies, is already “one of the top risks in most insurance companies’ risk portfolios”, according to Lorie Graham, senior vice president and chief risk officer at property and casualty reinsurer AmericanAg.

In an exclusive interview with Intelligent Insurer Graham, who oversees the corporate enterprise risk management programme and the research and product development function at the reinsurer, discussed cryptocurrency insurance, and what it means for re/insurers.

In her role, Graham identifies emerging risks and considers the opportunities, so cryptocurrency, its adoption, and subsequent impact on the reinsurer is something she and her colleagues have been looking at for quite some time.

“From our view, and the view of the majority of the industry, crypto is still relatively nascent,” Graham said.

“There’s been some movement towards crypto transactions such as smart contracts and the industry is slowly responding with insurance products for cryptocurrency assets.”

Smart contracts, which allow a predefined response to predefined events, are part of the blockchain and the insurance industry is considering the evolving options around this, she explained.

“Currently, predefined contracts are more of a simple ‘if x, then y’, so if x happens, then the cryptocurrency will be paid. But with all the additional technology that’s available, and the future integration of big data, artificial intelligence, sensors on machinery and cars, and machine learning, we’ll be developing how these transactions can be more complex, with multiple triggers and decisions being made automatically.”

There are already examples of contracts of this type in the insurance industry. Graham highlighted Lloyd’s parametric programme JumpStart, which provides earthquake coverage in Canada.

Digital demand drivers

The COVID-19 pandemic ushered in the wider adoption of technology in society and with it a greater acceptance of, and comfort with, digital payments.

Graham said: “If we’re talking about consumers—what they need, why they’re demanding it, and why we need to respond to that—digitisation of assets is becoming more common.”

Property transactions are happening in the blockchain today, she added, which have “unique insurance needs” and the industry is looking for ways to respond to that.

“There’s a big need for trust in our industry and crypto provides a single version of the truth in blockchain and for insurers there’s an opportunity for fraud prevention.”

Graham highlighted the efficiencies that this type of digitisation can offer as another “big benefit” for consumers and insurers.

“Efficiencies have been determined in the claims management process and on underwriting automation, and policyholders can get quicker payments. Insurers are also seeking ways to enhance customer engagement, so through applications and solutions like this we can engage with them in different ways.”

Crypto risk landscape

As to how cryptocurrency insurance is changing the risk landscape, Graham said: “It’s a pretty common risk, it’s one of the top risks in most insurance companies risk portfolios and it’s a new technology, but there’s a lot of uncertainty.

“We have uncertain regulatory status, there’s no clear framework in the US and the Federal Deposit Insurance Corporation is providing guidance to us but it doesn’t protect cryptocurrency. There’s a patchwork of regulations in other countries, so globally there is a lot of uncertainty.”

Cybersecurity and privacy risks require significant risk management efforts, she added, and said there are concerns about integrating crypto technology into the existing systems and processes of insurers.

Cultural adoption could be another stumbling block, as re/insurers don’t know how it will be adopted by customers and by the people within re/insurers’ own organisations.

“Information exchanges will be necessary for truly efficient transactions, so there will have to be a lot more transparency between organisations,” Graham said.

On top of all this, initial capital costs to implement crypto solutions are “pretty high”, she said.

Big opportunities in smart contracts

Graham sees opportunities in the market as there’s “a very big protection gap for cryptocurrency insurance” to safeguard cryptocurrency assets.

“As customers increase their adoption of digital assets insurers are going to have to respond with solutions that need to remain relevant and meet the customer expectations,” she said.

“From a reinsurance perspective there’s a big opportunity for us in smart contracts and parametric insurance, and microinsurance is another opportunity for our industry where we can create niches of coverage that are tailored to fit the requirements of low-income clients.”

Auto insurance makes a great use case for smart contracts, according to Graham, because this area of the industry already has sensor technology and automated and efficient claims processes, which are necessary due to the frequency of claims.

Digital assets and cryptocurrency are just starting but re/insurers can provide services to clients to protect against things such as hacking of exchange wallets, social engineering attacks or loss prevention services, she said.

Regulations and aggregation of exposure

Making the most of market opportunities is not usually plain sailing, and Graham is clear-sighted about that. On the challenges re/insurers are likely to face, she points to regulation as a major hurdle.

“The regulatory landscape is going to be a challenge for us. We’re a highly regulated industry, we need to see where this all falls out. I also think the asset itself, cryptocurrency, is very volatile, and the question is: is its value sustainable over time?

This is something we’re going to have to keep an eye on,” she said.

Graham added that this type of digital money presents very diverse risks. “Cryptocurrency is exchanged on different platforms, which have different rules and guidance, and there are ever-evolving crimes. Just when we think we have our finger on the pulse of what’s going on in crypto, or cyber in general, it changes.”

The currency of claims payments could be another issue. “Not everyone can accept crypto,” she added, asking: “How do we account for the difference in exchange rates for different platforms and valuations for cryptocurrency.”

She flagged up aggregation of exposure as one of the biggest concerns for the insurance industry .

“You could have a single event hit a significant number of insured policyholders,” she warned.

“And who is an insured? Today we know who the entity is that owns the cryptocurrency but there’s anonymity in cryptocurrency, so some considerations need to be thought through.

“There’s a lack of past experience on loss data, but as this continually evolves, everything we capture isn’t relevant to making any prospective considerations.”

As a reinsurer AmericanAg is a business-to-business company, so not as consumer-driven as some. Graham emphasised that the company is a member of the Institutes RiskStream Collaborative, the risk management and insurance industry’s largest enterprise-level blockchain consortium. AmericanAg participates in the development of some of the solutions developed by the institute.

The reinsurer researches and educates its cedant companies about the risks, use cases and adoption of cryptocurrency.

“We’re still exploring the risks and opportunities for our organisation. We haven’t implemented any solutions at this time but we keep cryptocurrency on our radar and we consider its use when and if it’s viable for our organisation,” Graham concluded.

Lorie Graham is senior vice president and chief risk officer at AmericanAg. She can be contacted at: lgraham@aaic.com