The metaverse represents a $20bn opportunity for insurers: Aon

The “metaverse” remains a hard-to-define, nebulous concept. According to Wikipedia, the metaverse is “a loosely defined term referring to virtual worlds in which users represented by avatars interact, usually in 3D and focused on social and economic connection”. Although in some ways it has been around for decades, it remains a mystery to many in business and, as such, it is difficult to quantify in terms of risk or reward—never mind assess for risks or insure.

But that is starting to change—according to Aon. New analysis by the broker estimates a gross written premium potential related to the metaverse in excess of $20 billion by 2030.

Demonstrating insurer appetite, Aon has secured $4 billion in Web3-related limits, including more than $800 million in individual client capacity. Web3 is the term for a new version of the internet that emphasises personal data ownership and the use of blockchain technology and cryptocurrencies.

To put its significance another way, the economic contribution of the metaverse to Asia-Pacific alone could be up to $1.04 trillion by 2031, representing a share of 2.3 percent of overall gross domestic product. 

These are some of the findings of a new report titled “Evaluating risks for virtual assets in a metaverse environment” by Aon’s Adam Peckman, head of Risk Consulting & Cyber Solutions–Asia Pacific, & global head of Cyber Risk Consulting, published ahead of EAIC.

“The low adoption of insurance for digital assets represents a significant insurance protection, or capital efficiency, gap.”

One of the points Peckman makes in the report is that despite the growth of the metaverse, the risks associated with it, which in turn would inform insurance demand, remain low on the priority of most companies.

According to Asia-Pacific insights from Aon’s Global Risk Management Survey report (published in November 2023), a large majority of organisations (86 percent) have yet to perform any formal risk quantification of intangible or digital asset exposure from security or privacy threats.

“These issues partly explain why we observe risks associated with the metaverse, such as artificial intelligence (AI) and blockchain technology risks, ranked at number 50 and 58 out of 61 topics; appearing at the bottom of our global risk survey,” Peckman wrote in the report.

His report highlights a related issue: while 60 percent of physical assets are covered by insurance, only 19 percent of digital assets are covered. The reported average total value of these digital assets is $1.239 billion. “Thus, the low adoption of insurance for digital assets represents a significant insurance protection, or capital efficiency, gap for the metaverse,” he wrote.

A positive role for insurers

Peckman argues that the insurance industry can play a positive role in partnership with metaverse participants, by encouraging equity investment and enhancing capital efficiency through advocating the deployment of risk capital. 

He believes this can be achieved through the legitimacy the insurance market can bring to the nascent metaverse industry in a number of ways. 

These include improved risk management standards demanded by insurer due diligence (underwriting); sophisticated risk analysis through the adoption of insurer datasets and modelling techniques; greater safeguarding of institutional investments through adequate insurance protection of metaverse assets; and cultivating alternative forms of risk financing in the form of parametric and insurance-linked securities structures that allow a more efficient transfer of risk.

The report notes that depending on the area in the metaverse value chain, traditional insurance may need to be supplemented by emerging digital asset and AI insurance products.

The report makes the point that for many end-users of digital assets—blockchain technologies, crypto assets, AI services, etc—existing insurance products may be suitable. However, for companies building the infrastructure or delivering services on top of these Web3 technologies, more bespoke insurances may be needed. 

Examples of this include digital asset custody (specie) insurance to protect the offline (cold) storage of these assets (such as non-fungible tokens) for custodians, gaming platforms, wealth managers, or exchanges.

Another example is cryptocrime insurance to protect against the loss from theft of digital assets held online (hot, warm) or offline (cold).

Bitcoin mining insurance is also mentioned, as a way to safeguard bitcoin mining operations, including related hardware investments and mining rewards. 

Smart contract and tokenisation insurance are noted as a way to cover for code failures, Oracle malfunctions, and security threats to assets.

Intellectual property insurance, an emerging area in its own right, can be used to safeguard intellectual property rights in the decentralised world of Web3.

Finally, AI insurance may be used to give comfort to customers of new and innovative AI products that a compensation mechanism exists against potential performance issues.

The report concludes by noting that although the crypto market can be volatile, the price action of any crypto asset does not express the amount of investment and innovation that continues to be deployed to capture the broader opportunities across the metaverse.

For more news from the East Asian Insurance Congress conference (EAIC) click here.

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