Predictions are always hard, especially about the future. One of the hardest decisions to make is whether Bitcoin is more likely to fail or to rise in value over the coming decades. There are strong arguments on either side. That said, Bitcoin is not cryptocurrency. It is simply one form of cryptocurrency. An easy hedge would be to concede that Bitcoin’s fate may be uncertain, but the future of cryptocurrency is very bright. Cryptocurrencies are volatile, unstable, and difficult to use in mundane transactions. However, cryptocurrencies are trust-based, immune to quantitative easing/loosening, and provide a higher degree of privacy than trading with traditional fiat.
Insurance companies pay claims. Claims are generally paid out in traditional currencies, such as dollars or Euros. There is no requirement for this to be so. Cryptocurrencies can serve as the medium of claims payment just as easily as any other currency. The big advantage is that the transaction would be recorded on a blockchain, which eliminates all banking and extraneous bookkeeping. Further, some lines of insurance can be linked to sensors (such as high-end cars) such that claims could be adjusted instantly based on the most probable cost of the loss with the cryptocurrency deposited into the insured’s wallet before leaving the scene of the accident.
Cryptocurrencies are here to stay, and they offer a true advantage for the progressive insurance company.
The virtual anonymity of cryptocurrencies creates another unique feature. Insurance companies operating with certain types of cryptos can accept premiums and pay claims to perfectly anonymous individuals. Although underwriting an anonymous person can be a challenge, there are certain lines of insurance that basically follow the laws of large numbers. Renters insurance and personal property insurance are two relatively simple examples where the underwriting would be feasible given the lack of data.
Of course, cost is always a consideration. How much premium will a 21-year-old college student pay an insurance company to insure an iPhone? Obviously not very much, so profits exist only in the aggregate. The broadest market possible would be through the captive insurance angle. Captives can write third party coverage. A captive domiciled in a low-cost domicile could offer coverage via website portal and accept cryptocurrency as the payment of premium. Claims would be submitted online and paid via cryptocurrency. Although legal names would be ignored, each insured would have a unique identifier in a blockchain to reduce the possibility of fraud and preclude uninsurable clients from signing up under a different anonymous identification.
Anonymous insurance products are not just for drug dealers. Never forget that most countries outside of the US and the developed European countries have significant amounts of poverty. Poverty breeds desperation and kidnapping and ransom is a very real exposure to the wealthy in second and third world countries. The possibility of anonymous insurance provides an opportunity to engage in sophisticated insurance transactions with a lower probability of detection. Discretion increases safety and reduces the risk of disclosure of the insured’s true net worth.
Of course, there are logistics with the establishment of a crypto insurance company. For example, how does the insurance company invest its reserves? Reserves are generally invested in a portfolio of stocks and bonds with low volatility so as to grow the principal without incurring the risk of loss during a down swing. Cryptocurrencies are nothing if not volatile. In the short term, the crypto assets would need to be converted into standard fiat and then invested in the conventional sense. Then, when distributions are made from the investments, the fiat would purchase the crypto currency and distribute the dividends or claims to the proper party. Given the volatility of cryptocurrencies this could create a problem. However, some cryptocurrencies are pegged to the dollar and other stable currencies. Pegging the cryptocurrency to another stable currency may be the best solution until the market matures.
What’s fascinating about the future of insurance is that the forms of insurance may look very different in the future. Underwriting may need to accommodate a faceless party seeking an insurance policy for pennies per month. But with modern technology, many simple lines of insurance can be automated. Over time, so will the more complex P&C lines be underwritten by machines. This will lower the overall costs of carrier administration. As costs plummet the possibilities for insurance blossom.
About J. Matthew Queen
Insurance Executive with a history of working in captive insurance & specialty risks. Skilled professional well-versed in risk financing, tax consulting, insurance brokering, and corporate governance.
Insurance Executive with a history of working in captive insurance & specialty risks. Skilled professional well-versed in risk financing, tax consulting, insurance brokering, and corporate governance.
