Who’s afraid of blockchain?

As blockchain-related businesses flourish, they are finding a lukewarm reception in the insurance market. Regardless of the company’s coverage needs, most traditional insurers are reluctant to release capacity and often decline to offer any level of coverage. Let’s look at current challenges facing blockchain-related businesses in procuring insurance, providing a guideline to improve the chance of securing necessary commercial insurance coverage.

Blockchain technology is still in a relatively early stage of development. Simply defined, it is a digital, decentralized ledger that keeps a record of all transactions that take place across a peer-to-peer network. The following perceived risks are attached to it:

• Lack of mature infrastructure
• Lack of scalability
• The potential for fraud through collusion, especially at the doorways to the blockchain
• Unanswered questions around regulation and legality

The insurance industry’s reluctance to engage with companies pushing into new frontiers of cryptocurrencies and blockchain technology can be attributed to both a misconception of these business models and a lack of understanding of the technology.

Clive Bird, Account Executive, Axis Insurance Group

These technical challenges are compounded by the fact that the industry typically relies on long established methods of using historic data to determine appropriate rating models commensurate with the probable risk.  In this way, the two industries are somewhat at odds. At the same time blockchain companies are pushing boundaries and creating new opportunities, insurers are relying on actuarial data, historic loss statistics, understanding of legal precedents, and damage awards to sustain profitable risk assessments.

Insurers are therefore reluctant to use their capacity to take on these uncertain risks. Underwriting capacity refers to the insurer’s ability to retain risk.

• Regulators prevent insurers from underwriting an unlimited number of policies to ensure that policyholders are protected.
• An insurer’s capacity to earn premiums is underpinned by its capital. Factors determining the use of capacity include pricing strategy, adequacy of reserves, assets, and the volatility of the risk pool.
• Insurers treat underwriting capacity as a finite resource that is drawn against as new policies are underwritten (similar to a line of credit).

Several other factors influence an insurer’s reluctance to release their unused capacity for blockchain risks. To transfer their risks to insurance, businesses offering products and services based on blockchain technology need to demonstrate their commitment to risk mitigation, regulatory compliance, and the highest standards in procedures and protocols related to their business mode.

Read the full article in the Digital Edition of the March 2018 Canadian Underwriter.

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Clive Bird, Account Executive, Axis Insurance Group