Insurance for the Uninsured: Web3 edition

Insurance for the Uninsured: Web3 edition

The Web3 insurance industry is set to soar in the coming years. There are two major dimensions to this.

The boom in decentralized finance, digital assets, and Web3 has, possibly, the potential to completely upend the global financial system. 40 million people in the US, reports consulting giant Oliver Wyman, reported investing, trading, or using cryptocurrencies in 2021 (as compared to 5 million in 2015).

Venture capitalists are increasing their investments in crypto infrastructure and Web3 companies. The US is developing a comprehensive policy framework. An increasing number of insurers are entering the space, and new decentralized autonomous organizations (DAOs) are being founded every day.

Interestingly, however, of the $1 trillion in crypto assets, under 1% have adequate insurance coverage.

Insurance for the Web3 economy

The Web3 economy refers to the broader financial system being birthed by the new branch of the internet inspired by blockchain technology with the express purpose of decentralization in processes and decision-making. There are two major aspects to consider here:

Image: The two dimensions of the Web3 opportunity; Source: Oliver Wyman
  • The Web3 economy is majorly underinsured and has huge potential for future growth:

There is significant unmet demand for this from businesses and both institutional as well as retail investors. The key question, in this regard, are the kind of risks that firms can prudently underwrite and perhaps, more importantly, the scale at which they do so.

The scope of ‘insurable’ Web3 risks have been rising steadily, and are only expected to increase over time. Whilst many players are expected to enter this field soon, the winner of this race will be the one who achieves scale to operations.

Plus, we must consider the kind of growth that the Web3 economy is set to experience. Oliver Wyman writes, “there is a substantial opportunity to ensure the fast-growing Web3 economy. This includes a wide range of Web3-related assets (e.g., digital currencies, NFTs) and liabilities (e.g., business liability, professional liability of Web3 companies, and risks). The taxonomy of potential risks awaiting cover is also broad.”

  • Web3 can be a pivotal moment for the Insurance value chain:

Another major dimension in the Web3-based class of business models and propositions is noting that this technology and the capabilities thereof can be used not only in the meta Web3 economy but also in the real economy.

In fact, insurers have already started experimenting with this across both dimensions. A number of cryptocurrency exchanges, for example, have, for a limited number of covered risks, contracted very large theft insurance policies to protect themselves. Smart contracts are becoming an integral feature of this, especially in the automation of policies for certain specific risks, especially where third-party data is being used for real-time evaluation of claims.

Oliver Wyman makes an interesting point, in this regard: “in the future, we expect the scope of “insurable” Web3 assets and risk types to increase as insurers deepen their understanding of the risks involved. We are starting to see examples of insurance for smart contracts, but it would also be possible to imagine providing insurance for houses in the metaverse. There are also significant opportunities for business model innovation. For example, imagine creating a fully decentralized insurance platform similar to the Apple App Store where anyone could submit their own insurance product.”

As insurers around the now sift through the possibilities of the Web3 economy, the point of focus should remain on the technology, and the specific consumer problem the solution for which it provides. Insurers, says Oliver Wyman, “will also need to consider their distribution strategy, including the tactical details for how these policies can be purchased and how claims will be paid.”

[Suggested further reading: ‘Will Web3 reinvent insurance?’, Oliver Wyman]

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