Digital asset insurers are in the ‘Goldilocks zone’

Fintech entrepreneurs continue to struggle with a capacity gap for finding insurance to enable them to function as businesses although solutions are being developed, the Bermuda Tech Summit heard yesterday.

But conventional re/insurers may miss an opportunity to develop innovative insurance solutions if they ignore the fast-growing sector, said panelists at a session called “Insuring Continuity:  Safeguarding the Future of Digital Assets”.

Kerem Kolcuoglu, managing partner of Penrose Partners, which advises the Bermuda government on financial technology, said Bermuda was “in the Goldilocks zone” because it could offer regulatory clarity to the fintech market while taking experience from the re/insurance industry and applying the same principles to fintech.

Joseph Ziolkowski, the founder of digital insurer Relm, added: “There is not another jurisdiction where we could have been as successful since starting in 2019,” he said. “There is a ton of regulatory knowledge around insurance but there is also an understanding of digital assets.

“In Bermuda we are years ahead. It is one thing to have legislation, but it is another to have risk focused companies looking to help digital companies.”

Ziolkowski said the digital assets sector faced a capacity shortage for the kinds of insurance that were necessary for businesses to function successfully.

He said Bermuda-based Relm had started by offering  directors and officers’ insurance and excess liability cover.

He said both the technology itself and the companies behind the technology needed insurance to raise money and to come to market. The insurance requirement also made the companies more conscious of risk management rather than being solely focused on “amazing technology”.

To raise capital, start-ups needed independent directors, but he said no credible director would join a board without D&O cover. He noted as well that to be licensed by the Bermuda Monetary Authority, a company was required to have insurance cover.

But he said “much of the headline risk” meant traditional insurers looked the other way.

Relm and other insurers like Bermuda-based Chainproof have filled some of the gap, Ziolkowski said, noting Relm is now writing across many professional lines and has insured companies “in 35 countries around the world in every subset of the digital asset ecosystem.”

One of the challenges for a young industry seeking insurance cover was the lack of historical data, the panellists agreed.

Sebastian Banescu, chief executive officer of Chainproof, said the insurers struggled to price certain kinds of risk given the newness of the technology.

He said Chainproof was formed to enable non-custodial smart contract risks to be insured and was able to develop using the Bermuda Monetary Authority’s regulatory sandbox.

He said the company had developed ways to measure the risk in areas like where a bug in software running on the blockchain could lead to an insurance claim, but he said there was still insufficient capacity to cover the value of crypto assets.

Ziolkwski added: “To say we need more capacity in the market is not enough. Nor is saying we need more products enough.

“Insurance is a backwards looking industry in terms of severity and frequency. One of the things we set out to solve was going into the sector understanding we were subjecting ourselves to an exciting market but it was going to be volatile.

“In time, we have developed enough data to price the product. It is a traditional insurance problems – we aree working to build that digital asset dataset to put the industry on a solid basis.”

Adam Adamson, head of business development at Bermuda-registered Nayms, which offers insurance products denominated in stablecoins, said finding reinsurance capacity was essential to the success of the industry.

He said Nayms had created an ILS structure which tokenised the risk and enabled individual investors to come in with smaller amounts to provide reinsurance support which “can flow through to grow the ecosystem”.

He said Nayms was about to launch an investor 2.0 scheme which could enable investor to provide capacity to insure risks with funding as low as $500, which would be impossible in the conventional insurance market.

Asked by moderator Suzanne Williams Charles of the Association of Bermuda Insurers and Reinsurers  if regulators were keeping up with the industry, Ziolkowski said that globally regulators were struggling although he said the BMA was an exception.

But he said some of the turmoil in the industry in the last 18 months as a result of the high profile failures of businesses like FTX had forced the “rapid maturity” of companies.

“They are doing their risk management because their stakeholders will demand it,” he said.

Banescu said when digital asset insurers talked to regulators in Europe and US, having the regulatory sandbox licence in Bermuda “mattered a lot”.

He said the BMA was taking the lead in doing the due diligence on insurers and other regulators were given comfort that it had approved them.

He said Bermuda’s DABA legislation and innovative insurer licences gave the island the edge over other domiciles like Malta and Singapore.