Digital asset insurers are in the ‘Goldilocks zone’

Bermuda’s ability to combine insurance and fintech expertise gives it a competitive advantage over other insurance centres and domiciles competing to attract fintech companies, say entrepreneurs building Bermuda digital insurers.

Conventional re/insurers may miss the boat on developing innovative insurance solutions if they ignore digital currencies and the fintech sector, according to some of the insurance entrepreneurs in the sector.

There is also an opportunity for re/insurers to fill a capacity gap which is hindering fintech entrepreneurs building their business due to lack of available insurance.

Those were two of the messages from entrepreneurs who are building insurance companies in the fintech space when they spoke at the Bermuda Tech Summit in October.

Kerem Kolcuoglu, managing partner of Penrose Partners, which advises the Bermuda government on financial technology, said Bermuda is “in the Goldilocks zone” because it can 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, agreed, saying: “There is not another jurisdiction where we could have been as successful since starting in 2019.

“It is one thing to have legislation, but it is another to have risk-focused companies looking to help digital companies.” Joseph Ziolkowski, Relm

“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.”

He said the digital assets sector faced a capacity shortage for the kinds of insurance that were necessary for businesses to function successfully and Relm moved to fill the gap by offering directors and officers (D&O) insurance and excess liability cover.

“The technology itself and the companies behind the technology all need insurance to raise money and to come to market,” said Ziolkowski. “The insurance requirement makes the companies more conscious of risk management rather than being focused solely on their ‘amazing technology’,” he said.

As one example, he noted that to raise capital, startups need independent directors, but no credible director will join a board without D&O cover. A digital assets business also has to have insurance cover before it can be licensed by the Bermuda Monetary Authority (BMA).

But, he said, “much of the headline risk” means traditional insurers look the other way, especially in the wake of much publicised scandals such as the bankruptcy of cryptocurrency exchange FTX.

“There is still insufficient capacity to cover the value of crypto assets.” Sebastian Banescu, Chainproof

Filling the gaps

Relm and other insurers such as Bermuda-based Chainproof have filled some of the gap, Ziolkowski said, noting that 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 is the lack of historical data, the panellists agreed.

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

Chainproof was formed to enable non-custodial smart contract risks to be insured and was able to develop using the BMA’s regulatory sandbox.

“The company has found ways to measure risk in areas such as a bug on software running on the blockchain which could lead to an insurance claim, but there is still insufficient capacity to cover the value of crypto assets,” Banescu said.

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

“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 that it was going to be volatile.

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

“Finding reinsurance capacity is essential to the success of the industry.” Adam Adamson, Nayms

Reinsurance support

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

Nayms has created an insurance-linked securities structure which tokenised risk and enabled individual investors to provide reinsurance support which “can flow through to grow the ecosystem”.

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

Asked by session moderator Suzanne Williams Charles of the Association of Bermuda Insurers and Reinsurers whether regulators were keeping up with the industry, Ziolkowski said most regulators are struggling but the BMA is the exception.

Banescu added: “When digital asset insurers talk to regulators in Europe and US, having the regulatory sandbox licence in Bermuda ‘mattered a lot’.

“The BMA is taking the lead in doing the due diligence on insurers, and other regulators were given comfort that it had approved them.”

Bermuda’s Digital Asset Business Act and innovative insurer licences give the Island the edge over domiciles such as Malta and Singapore, he added.

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