[SPEAKER_01]: Welcome to AMBEST audio.
[SPEAKER_02]: The growth potential for ensuring cryptocurrency-related products is considerable given the market's current capitalization level of over three trillion dollars.
[SPEAKER_02]: But a recent AMBEST report takes a closer look at some of the issues that ensures are navigating with respect to underwriting coverage for digital assets.
[SPEAKER_02]: I'm Lori Chordes, Brand Best TDA.
[SPEAKER_02]: And joining us today is Edin, I'm sure of it's a director at AM Best and the author of this new report.
[SPEAKER_02]: Edin, welcome.
[SPEAKER_02]: So great to see you.
[SPEAKER_02]: Thank you so much for joining us.
[SPEAKER_00]: Thank you for having me.
[SPEAKER_02]: Edin, what are some of the challenges in quantifying the overall crypto market?
[SPEAKER_00]: Yeah, sure.
[SPEAKER_00]: At the moment, the overall global crypto market calculation, as you mentioned, is over three trillion dollars, which is sort of relatively straightforward to track.
[SPEAKER_00]: The tricky part is that this figure excludes digital assets, like NFTs, tokenized real world assets, and defy assets.
[SPEAKER_00]: And those are much harder to quantify, which makes it difficult to come up with comprehensive figure for the entire digital asset ecosystem.
[SPEAKER_00]: And then adding to this, there's a wide range of estimates on percentage of use population that actually owns crypto.
[SPEAKER_00]: So for example, there's a survey from Federal Reserve Bank of St.
[SPEAKER_00]: Louis that estimates that over four percent of use households own crypto.
[SPEAKER_00]: But then you have various other surveys often from different exchanges that put this figure at a much higher percentage.
[SPEAKER_00]: And then estimating the insurance penetration for this space is even more complex, right?
[SPEAKER_00]: So according to some of the surveys around ten percent of global crypto holders have insurance coverage.
[SPEAKER_00]: But the actual figure might be considerably lower as many individual clip to holders value anonymity and privacy, sometimes even to the point of not disclosing their holdings at all, let alone ensuring them.
[SPEAKER_00]: And plus the institutional investors who are more likely to report their holdings and ensure them, they tend to be overrepresented in surveys.
[SPEAKER_00]: And that can actually skewed the numbers and make it seem like the coverage is more widespread than it actually is.
[SPEAKER_02]: How would you characterize the insurance industries overall appetite toward this area?
[SPEAKER_02]: And is there any reluctance to wait in?
[SPEAKER_00]: Yeah, absolutely.
[SPEAKER_00]: So the traditional insurers, right?
[SPEAKER_00]: They generally have shown a limited appetite for digital asset coverage.
[SPEAKER_00]: But that's gradually changing.
[SPEAKER_00]: The reluctance to offer coverage, as you can imagine, stems from the fact that these assets are non-traditional, they're intangible, extremely volatile.
[SPEAKER_00]: And there's very little actual data or claims history to guide the underwriting.
[SPEAKER_00]: And then on top of that, a big issue is the regulatory uncertainty, right?
[SPEAKER_00]: That's been one of the main things that's been holding insurers back from getting more comfortable with this space.
[SPEAKER_00]: And then what also adds to the hesitation is this high risk of cyber attacks with these assets, right?
[SPEAKER_00]: So in fact, some insurers have even been reluctant to offer traditional coverage, like, for example, denolibility to crypto firms because of all of the regulatory uncertainty.
[SPEAKER_00]: So given all of that, only a very limited number of traditional insurance that are actually writing digital asset coverage right now, and when they do it, as you imagine, usually through surplus lines or niche specialty markets.
[SPEAKER_00]: But having said that, the insure app that is actually slowly picking up, right?
[SPEAKER_00]: So there, as you imagine, several loads indicate like arch, hium, abesely, and kind of abuse among others that offer this type of coverage.
[SPEAKER_00]: And then there are a few major traditional insurers like Axa, AIG, and Chabamong, some of the other ones that underwrite relatively small amount of digital asset risk.
[SPEAKER_00]: And maybe it's also worth mentioning that brokerages and by them most notably Marsh and Aeon have also expanded dedicated digital asset insurance facilities.
[SPEAKER_00]: So for example, Marsh recently launched facilities specifically for digital asset custodians, including financial institutions with coverage capacity of up to eight hundred and twenty five million.
[SPEAKER_00]: And then finally, maybe it's also worth mentioning that there is a whole host of digital focused insurance startups trying to fill in this gap, right, left by traditional players.
[SPEAKER_00]: And most of these are still very small and very much in the early stage mode.
[SPEAKER_00]: And interestingly, also it's very interesting to me, at least you also have some very, a few experimental
[SPEAKER_00]: Cryptonative ventures that operate fully on chain and are using blockchain in very creative and innovative ways, sort of aiming to reimagine the insurance model from the ground up to make the entire value chain more transparent and efficient.
[SPEAKER_02]: And in what role do federal policies and even some regulatory approaches have to play in growth of crypto related insurance products?
[SPEAKER_00]: In absolutely, the regulatory clarity is absolutely critical, right, for the future growth of digital asset, really an insurance.
[SPEAKER_00]: And the issue is that, at least currently, at the moment, agencies like the SEC, CFTC and IRS have all provided sort of conflicting positions, which is adding to uncertainty.
[SPEAKER_00]: And today, there's been very little regulatory clarity.
[SPEAKER_00]: And as you know, the Senate has recently confirmed poll atkins as the chair of SEC.
[SPEAKER_00]: And he's been sort of an advocate for clear regulatory frameworks for digital assets.
[SPEAKER_00]: So we may potentially see more clarity from Fed in a coming years.
[SPEAKER_00]: And we're seeing quite a bit of activity in this front.
[SPEAKER_00]: For example, Genius Act, which is all over the news now, if passed, we'll establish a comprehensive Unified Regulatory Framework for digital assets.
[SPEAKER_00]: And there's another proposed legislation that's worth looking for called Security's Clarity Act.
[SPEAKER_00]: And that would create actually a new asset category called an investment contract asset, which is a digital asset sold through an investment contract that wouldn't necessarily be treated as security once in circulation.
[SPEAKER_00]: And so if this particular bill comes to fruition, it could significantly reduce legal uncertainty by ensuring that the tokens once operational and decentralized aren't forever treated as securities.
[SPEAKER_00]: And beyond these efforts, there's a growing number of early stage legislative proposals that are emerging to address the regulation of the digital assets.
[SPEAKER_00]: But despite all of this increased activity, significantly illegal and regulatory research, this still remains pretty much across the entire asset digital space.
[SPEAKER_02]: The report notes that some individual states in the US have taken steps to draw in crypto business.
[SPEAKER_02]: Can you take us through some of those efforts?
[SPEAKER_00]: Yeah, absolutely.
[SPEAKER_00]: So as you know, state level approaches the very significantly, right?
[SPEAKER_00]: And while no state at the moment offers a digital asset licensing framework that's comparable to Bramuda, for example, right, Wyoming, notably stands out as it allows insurance to treat digital assets as permissible investments.
[SPEAKER_00]: What's also interesting is Wyoming also created a legal framework for a decentralized autonomous organizations and they have even passed legislation to explore a state-issued stable calling.
[SPEAKER_00]: And then there is Vermont, right, which stands out in a different way.
[SPEAKER_00]: While Vermont has not passed digital assets, specific insurance laws, it does offer a highly flexible capital insurance regime that could appeal to digital asset entities looking to self-insure.
[SPEAKER_00]: Vermont also launched an insurance regulatory sandbox, I believe, back in the end of the year, and they did give its insurance commission an explicit authority to explore blockchain applications.
[SPEAKER_00]: Some other states, the state in our Texas and Florida, Texas is formally recognized digital assets in their state law, and Florida has coupled its financial innovation sandbox.
[SPEAKER_00]: with potential broader ambitions to become a digital asset hub.
[SPEAKER_00]: And these types of efforts may eventually pay the way for more structured regulatory clarity.
[SPEAKER_00]: And maybe what's mentioning is Hawaii as well and Hawaii has shown signs of support for FinTech and digital asset innovation, particularly to its captive insurance division, which is already being used to cover digital asset related risks.
[SPEAKER_00]: And then finally, maybe it's also worth noting that there are numerous other states that include Arizona, Utah, Kentucky, Kentucky, South Dakota, and West Virginia among others that have launched these regulatory sandboxes that could potentially help foster innovation in the space.
[SPEAKER_00]: But despite all of these early efforts, I think it's probably again, fear to say that we're still along with ways off from seeing comprehensive digital asset insurance licensing frameworks at the state level.
[SPEAKER_02]: And how does the pricing volatility of digital assets come into play here in terms of affecting insurance risk appetite?
[SPEAKER_00]: You know, absolutely.
[SPEAKER_00]: So the pricing volatility creates a critical role in shaping insurance risk appetite, right?
[SPEAKER_00]: So when the digital asset markets like when they experience a sharp downturn or there's a major scandal, insurance tend to pull back fast, right, either by tightening coverage or stepping away from high risk segment altogether, right?
[SPEAKER_00]: So a clear example of this was FTX collapse, after that a lot of insurers became even more cautious with many limiting new policies for clients that had any kind of exposure to FTX or any similar firms.
[SPEAKER_00]: And we also saw this wave of broad exclusions being added to policies, specifically for claims that were tried to that event.
[SPEAKER_00]: I really didn't stop the air.
[SPEAKER_00]: I mean, if you look at the broader crypto fallout back in twenty- twenty-two and twenty-three that included terralunical apps in addition to the FDX bankruptcy, the insurance market hardened significantly.
[SPEAKER_00]: The premiums went up, the policy terms got tougher, and insurance demanded much more from the applicants in terms of their internal risk controls.
[SPEAKER_00]: And actually one of the interesting outcomes is that insurers have actually become better at distinguishing between different types of digital asset risks.
[SPEAKER_00]: So after FTX, the underwrite is significantly stepped up their due diligence, closely examining things like an exchanges internal controls, for example, their reserve management and the depth and sophistication of their regulatory compliance.
[SPEAKER_00]: And as a result, insurers have become more sophisticated in how they analyze and underwrite risky digital asset exposures.
[SPEAKER_00]: And maybe it's also worth noting that on a flip side, when digital asset prices go up, they have to insert and ensure it's faced a different challenge, the risk of under insurance.
[SPEAKER_00]: So if asset values jump quickly, policy limits can actually fall behind.
[SPEAKER_00]: So to stay ahead and ensure it's often used, things like floating limits or ratio of regular endorsements to make sure the coverage stays aligned with the rising asset values.
[SPEAKER_02]: Edin, it's always a pleasure.
[SPEAKER_02]: Thank you so much for taking the time to speak with us.
[SPEAKER_00]: I'll thank you for having me.
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