Digital assets could become the next big market for insurers and brokers. For those unacquainted with the term digital asset, we’re not talking about the digitisation of the front or back end of an insurance business. For insurance professionals and their business customers, the relevant definition incorporates digital financial products, including cryptocurrencies like bitcoin and also non-fungible tokens (NFTs). They all depend on the IT infrastructure known as blockchain.
This alternative world of financial possibilities, part of what’s known as the metaverse, could be about to get really big.
“There is absolutely huge amounts of investment [billions of US dollars] in this space globally from major institutions,” said Liam Hennessy (pictured above), partner with insurance-focused law firm Clyde & Co.
His practice focuses on digital assets, including their licensing and product design. Hennessy said this industry is “booming globally”.
Another indicator of this boom - apart from billions of dollars of investment - is the growing political support for cryptocurrencies, said Hennessy, including from Donald Trump in the United States to the UK’s new Prime Minister Keir Starmer.
Around the world, and in Australia, significant regulations are about to come into play.
Hennessy said in 2025 cryptocurrencies in Australia will be regulated using a framework that’s not dissimilar to current insurance industry regulations. From next year, anyone dealing in cryptocurrencies will need an Australian financial services licence (AFSL).
“There’s a huge market demand here because with all of the licensing coming into this area, every AFSL requires there to be insurance behind it - including professional indemnity (PI) insurance,” said Hennessy.
The Clyde & Co partner said his firm is one of a handful of local experts in this area.
“We are underwriting a lot of PI policy for an area that has growing pains and is a huge line of business for the brokers and underwriters in this local market,” he said. “It will be frenetic for them in 2025.”
Hennessy said these risks are very difficult for brokers and underwriters to price and cost.
“It is a market which is subject to regulatory challenges, political challenges and it is very globally dispersed,” he said.
The stakeholders and assets in this digital space could be just about anywhere, including, he said, the Cayman Islands, Hong Kong and Singapore.
“It is very hard for brokers and underwriters to gain the specialist skill required to appropriately price these assets,” said Hennessy.
However, experts say the digital assets themselves, particularly the blockchain-based system of payments, have significant advantages over the traditional online payments systems used by the banking world.
“It costs less in terms of the transaction infrastructure, it’s far more secure and far quicker,” said Hennessy.
It also avoids what he called “a spaghetti of people” that take part, for example, in a conventional bank transfer.
The digital capabilities of digital assets, said Hennessy, are also very powerful.
“I can take a financial product, which is just a contract at the end of the day, and I can represent that in a token, which I can program to do various things,” he said. “So if you missed your flight, the contract will kick into effect - or if your derivative hits a certain price, I can immediately exercise that strike price and make it pay you money.”
He compared these digital assets to working much like parametric insurance products and their automatic payments.
“The sting in the tail is this is all very complicated from a financial services reg practice, and from an operational practice,” said Hennessy.
Insurers and brokers would be wise to educate themselves and quickly get up to speed before the claims start coming in.
“It will be so frenetically difficult for the insurers to manage those claims and not only from a legal perspective but explaining all of the ins and outs of this to Australian judges,” he said. “It could be brutally difficult.”
The government’s regulatory framework for what it calls the “crypto ecosystem” is expected to be released next year. Treasury’s proposal paper provides details around AFSL requirements and other likely rules.
How do you see digital assets? Are they a big opportunity for insurers and brokers and how should they prepare? Please tell us below
