Insurance broker leads digital assets across the final frontier

Cryp­tocur­ren­cies are gain­ing accep­tance among main­stream asset man­agers. Ray Dalio, founder of the world’s largest hedge fund, Bridge­wa­ter Asso­ciates, said last year that he owns bit­coin, hav­ing pre­vi­ous­ly expressed doubts about the future of cryp­to.

Even more sig­nif­i­cant­ly, US Pres­i­dent Joe Biden issued an exec­u­tive order on 11 March prepar­ing the ground for fed­er­al reg­u­la­tion of cryp­to. Biden also asked the Fed­er­al Reserve to explore whether the cen­tral bank should cre­ate its own dig­i­tal cur­ren­cy. The move should help legit­imise the dig­i­tal asset indus­try and fur­ther encour­age pro­fes­sion­al investors to explore the poten­tial of diver­si­fy­ing into cryp­to. Insur­ance for the dig­i­tal asset indus­try is now the final fron­tier stop­ping cryp­to from ful­ly enter­ing the main­stream of finance, says Ben Davis, team leader, dig­i­tal assets at Super­script, the first UK insurtech com­pa­ny to become a Lloyd’s bro­ker.

Davis says: “Dig­i­tal asset com­pa­nies lack insur­ance options sim­ply because insur­ers feel like they don’t real­ly under­stand the sec­tor or the risks it faces. Yet, insur­ance is crit­i­cal if cryp­to is to enter the main­stream of the invest­ment world. With­out it, the biggest play­ers are left unreg­u­lat­ed, and their cus­tomers unpro­tect­ed.”

Super­script has built a ded­i­cat­ed dig­i­tal assets team, led by Davis, to bridge the gap between insur­ers and the dig­i­tal assets space. He adds: “I have been involved in dig­i­tal assets for many years and insur­ance for even longer, and so have all my col­leagues – we are from the cryp­to com­mu­ni­ty and are advo­cates for that com­mu­ni­ty. We under­stand the lan­guage they speak, share their con­cerns and ambi­tions, includ­ing a ded­i­ca­tion to accel­er­at­ing the main­stream adop­tion of dig­i­tal assets. We believe the key is allow­ing cryp­to entre­pre­neurs to take risks, safe in the knowl­edge that we will catch them if they fall.”

The deep con­nec­tions between Super­script and the dig­i­tal asset ecos­phere are vital, giv­en the latter’s dynam­ic and diverse nature. The sector’s stake­hold­ers range from cus­to­di­ans (which look after the dig­i­tal assets), cryp­to exchanges, stu­dios involved in non-fun­gi­ble tokens (NFTs), decen­tralised finance plat­forms and pro­to­cols, to the ven­ture cap­i­tal­ists and hedge funds that are invest­ing in cryp­to.

Davis’ team is engi­neer­ing a com­pre­hen­sive suite of insur­ance prod­ucts for Web 3.0 busi­ness­es, specif­i­cal­ly designed to meet their com­mer­cial insur­ance needs. These prod­ucts are already avail­able, with more to fol­low lat­er this year. Super­script has built up a mul­ti-stream of pre­mi­ums from scratch.

“We’re work­ing with some of the biggest names glob­al­ly in the dig­i­tal asset indus­try, which is real­ly excit­ing, and the busi­ness is gain­ing momen­tum,” says Davis. While 200 dig­i­tal asset busi­ness­es applied to Super­script for insur­ance in 2021, that fig­ure has risen past 100 already this year.

A key chal­lenge is a lack of the infor­ma­tion required to assess and price risk. Super­script is exploit­ing lead­ing-edge tech­nol­o­gy, such as machine learn­ing and big data, to pro­vide insur­ers with all the data they need to prop­er­ly assess risk. Dan Ross, tech­ni­cal lead – dig­i­tal assets at Super­script says: “We have devel­oped a pro­pri­etary mod­el that allows us to cross-ref­er­ence the risks fac­ing a busi­ness against 2,000 data points.” That allows insur­ers to feel com­fort­able tak­ing on the busi­ness bro­kered by Super­script. Ross helped Super­script become the first Lloyd’s bro­ker to be accept­ed into Lloyd’s Labs – cohort 7 – to devel­op the machine learn­ing algo­rithm that is used to aid their tech­ni­cal risk analy­sis.

Spread­ing knowl­edge about the dig­i­tal asset indus­try with­in the insur­ance sec­tor is vital, argues Davis, because insur­ers hold a num­ber of mis­con­cep­tions. Chief among these is that the risks fac­ing this new­ly emer­gent tech­nol­o­gy are fun­da­men­tal­ly dif­fer­ent from those that chal­lenge tra­di­tion­al busi­ness­es. In real­i­ty, many of the risks – includ­ing cyber attacks and the asso­ci­at­ed prob­lems of data breach, ran­somware and busi­ness inter­rup­tion – are the same. Just like oth­er com­pa­nies, cryp­to firms also require pro­fes­sion­al indem­ni­ty insur­ance to cov­er breach­es of con­tract, or errors and omis­sions. There are, how­ev­er, some risks that are spe­cif­ic to cryp­to, such as the theft of pri­vate keys (pass­words that allow own­ers to access their assets) and intel­lec­tu­al prop­er­ty infringe­ment relat­ed to NFTs.

Davis says: “Most under­writ­ers think cryp­to is incred­i­bly com­plex and they will nev­er be able to under­stand dig­i­tal assets, when in real­i­ty the major­i­ty of the risks are real­ly no dif­fer­ent from those they already insure in many oth­er sec­tors. More­over, we can act as pathfind­ers, lead­ing them through those areas that do require spe­cial­ist exper­tise.”

Oth­er myths include the impact of cryp­to on the envi­ron­ment. Despite the head­lines, Davis says, min­ing of bit­coin only accounts for 0.14%, of glob­al ener­gy con­sump­tion, where indus­tries like man­u­fac­tur­ing make up 77%. He adds: “Christ­mas lights around the world con­sume rough­ly the same amount of ener­gy as the bit­coin net­work.”

Illic­it activ­i­ty is anoth­er con­cern. Yet Davis points out that it has been proven many times that bit­coin is not the instru­ment for illic­it activ­i­ty that peo­ple make it out to be, with ille­gal uses account­ing for less than 1% of all activ­i­ty on the bit­coin blockchain.

Final­ly, the argu­ment that cryp­to is just a bub­ble that will soon burst and is there­fore not worth pur­su­ing seems less cred­i­ble every day. The fact that the Fed­er­al Reserve (which issues US Trea­sury bonds, the bench­mark against which all invest­ment risks are cal­cu­lat­ed) has now been instruct­ed to explore the cre­ation of a dig­i­tal cur­ren­cy sure­ly shows that cryp­to is here to stay.

Over the past five years, Davis says, the Super­script team has coun­tered every argu­ment that insur­ers have put for­ward to stay out of the sec­tor. Superscript’s com­bi­na­tion of pro­pri­etary machine-learn­ing tech­nol­o­gy, data sci­ence, under­writ­ing exper­tise and part­ner­ships with lead­ing under­writ­ers and dig­i­tal asset com­pa­nies will ensure the com­pa­ny plays a promi­nent role as dig­i­tal assets move into the lime­light in the com­ing years.

Those insur­ers that have entered are find­ing busi­ness very prof­itable. While prices of cryp­to will almost cer­tain­ly remain volatile, there is clear­ly high and grow­ing demand for busi­ness­es util­is­ing and gain­ing expo­sure to dig­i­tal assets and then ulti­mate­ly for insur­ance solu­tions. That, Davis adds, means that the wider finan­cial indus­try has an oblig­a­tion to under­stand the sec­tor and pro­vide solu­tions that will allow the indus­try to flour­ish and devel­op in a secure envi­ron­ment.

Get in touch, see how Super­script can help find you the right insur­ance for your dig­i­tal asset busi­ness, gosuperscript.com/advised

Pro­mot­ed by Super­script