The high profile sale of the digital artwork “EVERYDAYS: THE FIRST 5,000 DAYS” by the artist Beeple for $69 million in March of this year revealed the staggering possibilities that lie within the rapidly growing non-fungible token, or NFT, marketplace. Yet while NFTs have exploded into the consciousness of the wider public relatively recently, they have been around the digital art world for several years now.
And so, for those insurers and brokers who operate in the fine art insurance space, the question of how the development of the NFT market will impact insurance services is one they have been mulling over for some time now. Speaking with Insurance Business, Will Turvey (pictured above), divisional director of Gallagher’s fine art, jewellery and specie team noted that insuring NFTs, as opposed to physical art pieces, is very different.
“Typical fine art insurance covers physical loss or damage to the artwork. An NFT doesn’t give the owner exclusive access to the artwork associated with it, given the artwork has been digitised,” he said. “We can all view digital art in the same way the owner of the NFT can – but we don’t all have a time and date stamp to prove that we own the authentic original. As such, what we are insuring for NFTs in the fine art insurance space is not the artwork itself, but the private key that proves ownership, which is stored offline and usually with a third-party custodian that specialises in the storage of these keys.”
As the insurance market for NFTs and cryptocurrency is in its infancy, he said, there is not as much capacity as there is for typical fine art. This means that the limits available – regardless of the cost value of the NFT – will not be vast. However, that should change as insurers look for new growth opportunities.
Adding to this, Honor Palmer-Tomkinson (pictured immediately above), of Howden’s fine art and specie division, noted the insurance market is constantly developing to provide more effective and innovative risk transfer solutions for clients. There is a huge opportunity for underwriters and brokers to understand the crypto world and the new risks this evolving industry creates, she said, and to develop products that focus on the clients’ wants and needs.
Palmer-Tomkinson noted that, like any monetary asset, NFTs need protecting and, with a wealth of experience in insuring items of high value, the fine art and specie insurance market is the best vehicle to do this. The appetite for cryptocurrency risks is expanding and insurers are embracing this growth and recognising its potential as a new business opportunity.
“Howden has been working on a solution that tailors the already solidified cryptocurrency insurance products to cover NFTs,” she said. “The product that we can currently offer our clients is limited to NFTs being held in cold storage (offline) by third party custodians and can be insured on an agreed value basis. NFTs don’t have to attach to an artwork. As an asset with a high value, an NFT attaching to a tweet or meme, could potentially be insured in exactly the same way. This is a constantly evolving space and we are enjoying the challenge of evolving along with it.”
The fine art insurance underwriting community is currently engaged in learning and understanding exposures and how they could be underwritten, according to Adrienne Reid (pictured immediately above), vice president, Aon Huntington T. Block Insurance Agency, Inc. The principal issue regarding underwriters’ view on NFTs is that fine art insurance policies are designed for physical loss or damage only to physical objects, she said.
The risks associated with NFTs primary revolve around a need for technology-related solutions and due diligence, Reid added. For example, some very important key points for collectors would be: settling up multi-key verification for wallet recovery keys, having secure storage for digital asset back-ups, pinning the underlying digital asset yourself so that you have control over the NFT image’s accessibility, and properly reviewing the NFT licensing agreement to understand allowed reproduction abilities.
Overall, she said, this space is in its very early stages and the surrounding legal, regulatory, tax, and insurance implications will take some time to work out. Dennis Lawrence (pictured immediately above), intelligence analyst, Aon Cyber Solutions, emphasised another area of concern with regards to this marketplace - an NFT collector will likely face counterfeit and custody risks.
“For example,” he said, “hackers have recently conducted tests to expose how a bad actor can create highly sophisticated counterfeit NFTs that appear legitimate on the blockchain. As a result, conducting due diligence on NFT artwork will help mitigate some of this risk. With respect to custody, solutions that address decentralised storage, backups, and mitigation of risks associated with a user’s private key will help prevent against loss or theft.”
