29 August 2019

Cryptocurrencies and the quantum of risk

In the case of Allgeyer v Louisiana the US Supreme Court established that you have the right to procure insurance from any insurance carrier you want, including alien, non-admitted insurance carriers. Buyer beware applies, but the buyer has the right to get insurance from unregulated entities.

“Individual units of currency can be broken down into smaller bits until actuaries are manipulating the quanta of risk.”

This is the bedrock of captive insurance transactions: a company in Georgia may procure insurance from a small insurer domiciled in the Turks and Caicos, and the Georgia Department of Insurance may not stop it—although it may tax it.

Given that companies may independently procure insurance from alien, non-admitted carriers, there is no requirement that premiums be paid in dollars. Realistically, there is no prohibition in any domicile from insurance carriers accepting cryptocurrencies as premium and holding reserves in a basket of cryptocurrencies. Most regulators would probably prefer to see a larger letter of credit on standby due to the inherent volatility of the crypto markets, but the concept fundamentally works.
Thus, we see the legal foundation for a cryptocurrency-based insurance company. From a practical perspective a crypto-captive would need to be domiciled in an offshore jurisdiction, as every US and EU regulator would scoff at the concept. Yet, this development may usher in new types of insurance and larger insurance markets.

Welcome to the future of insurance

Cryptocurrency insurance companies open the door to quantifying units of risk at their fundamental level. Individual units of currency can be broken down into smaller bits until actuaries are manipulating the quanta of risk. This allows for better calculations of premium, because dollars are less exact than cryptocurrencies.
Whole systems of risk, such as the risk of loss by a hurricane across a coastal territory, could be quantified and traded as a currency. The value of these currencies would float like the value of cat bonds, creating new market for investors.

Further, there are new insureds waiting to purchase insurance. Countless people in undeveloped countries have access to the internet but lack meaningful risk financing, because they lack the ability to underwrite their risks or to pay in a standard currency for their insurance policy. Cryptocurrencies are very popular with developing nations and an online forum to purchase insurance with digital underwriting would open the insurance market up to billions of people who currently lack access to it.

Clearly, these risks are not likely to include general and professional liability, but they might include insuring the value of a laptop or a cellphone.
A handful of companies are already wading into this territory. Ryskex, for example, currently operates a model leveraging cryptocurrencies. As market uncertainty grows, investors will be looking to diversify their holdings, which could invite more participants into the market.

The petrodollar’s status as a reserve currency is solid for the foreseeable future, but it does depend on the world’s status quo remaining as it is. Unfortunately for China and Russia, neither the yuan nor the rouble is likely to replace the dollar as the world’s reserve currency.

Rather, as we enter a multipolar world with more options for merchants, it is more likely that cryptocurrencies will fill the vacuum left by the decline of the dollar. While this may not lead to a Bitcoin revolution, there will be a large and dynamic market trading in alternative currencies.

Matthew Queen is general counsel at Venture Captive. He can be contacted at: