What Do Cryptocurrencies and Tokenized Assets Mean for Captives?

Whether it’s blockchain, artificial intelligence, or the internet of things,  companies are being exposed to new technologies and are facing a rapidly changing risk profile. The expansion of cryptocurrencies, and tokenized assets, add further complexity to the emerging technology, cyber, and financial risks that companies must manage daily.

What Are Cryptocurrencies and Tokenized Assets?

One of the key benefits of blockchain is the ability for multiple parties to work together to record ownership of assets with no single party able to change or tamper with the records. Because of this, the registration of data on a blockchain can actually serve to “create” an asset. This is called “tokenization.”

Tokens can become a very efficient way to manage information or assets. Because blockchain makes it possible to have just one copy of data, provably scarce digital assets can be created. A digital file, such as an image, a song, a movie, or even a cyberpet, can be made scarce with blockchain ensuring that only a single copy of the asset exists.

And that’s essentially how cryptocurrencies work. Each “coin” is nothing more than a digital file that cannot be copied and that retains value due to its scarcity. 

What Do Cryptocurrencies and Tokenized Assets Mean for Risk Managers?

How widespread cryptocurrencies and tokenized assets will become is yet to be seen. Regardless, the steps that risk managers can take to prepare for cryptocurrencies and tokenized assets align closely with the best practices any company should take to prepare for an increasingly digital world. Risk managers, CTOs, and CIOs must work together and should evaluate the company’s cybersecurity practices and cyber liability and how emerging technologies, such as blockchain, may impact the company’s risk profile. With a thorough understanding of this risk profile, risk managers can proactively look for solutions from both the commercial insurance market and from their captive insurance companies.

How Do Captives Fit?

Like any other emerging technology risks, cryptocurrency and tokenized asset risks may be difficult to insure in the commercial insurance marketplace. A combination of factors contribute to this including, but not limited to:

• The technology is too new and the exposures are not well understood.
• Negative press surrounding cryptocurrencies has created a reputational risk problem for the commercial insurance market.
• There are a wide variety of tokenized assets, which brings a wide variety of exposures.

Companies faced with cryptocurrency and tokenized asset risks may find that the commercial insurance coverage available may have too many gaps and may not be affordable; a problem that we are already seeing for companies whose business model heavily relies on cryptocurrencies or tokenized assets.

Captives can be a solution to this problem.

Today, we are working with our clients with cryptocurrency and tokenized asset risks to explore how a captive may afford them:

• The ability to access affordable coverage that is tailored to their unique risks.
• The ability to offer proof of insurance for their clients’ and prospects’ peace of mind by:
  • Offering proof that the risks are formally funded.
  • Offering admitted and rated paper through fronted reinsurance.
• The opportunity to collaborate with the commercial insurance market to:
  • Share in the risk and potentially create capacity that would otherwise be unavailable.;
  • Incentivize loss controls to create a “better” risk.
  • Address the commercial market’s reputational risk fears.
• The ability to directly access the reinsurance markets for additional capacity.

Marsh Captive Solutions believes that the flexibility and control that captives offer will continue to play an important role in addressing cryptocurrency and tokenized asset risks. Risk managers, CTOs, and CIOs have the opportunity to proactively address these risks today with a captive at the core of the solution.