Crypto and Insurance: A New Frontier Emerges in Financial Innovation
The convergence of cryptocurrency and the life insurance industry is rapidly gaining momentum, sparking discussions about the future of financial products and the regulatory landscape needed to support them. Recent insights from industry leaders suggest that blockchain technology and digital assets are poised to reshape insurance operations and offerings, despite ongoing complexities.
A panel discussion at the American Council of Life Insurers annual meeting in October highlighted the potential of crypto-based technologies within the insurance sector. The conversation, featuring experts from Wyoming and Bermuda, underscored the growing interest in leveraging these technologies to address inefficiencies and unlock new opportunities.
Wyoming Leads the Charge with Stablecoins and Smart Contracts
Wyoming is emerging as a frontrunner in the digital asset space, proactively establishing a regulatory framework to accommodate innovation. The state not only passed legislation allowing insurers to hold cryptocurrency, but also launched its own stablecoin, the Frontier Stable Token (FRNT). A stablecoin, designed to minimize price volatility, is “a type of digital token, pegged to the value of another asset (such as a currency), that is designed primarily to facilitate payments,” according to panel discussions.
FRNT’s value is directly tied to the U.S. dollar, backed by a 102% reserve of short-term Treasury bonds and U.S. currency. Notably, the interest earned on these reserves is legally mandated to support Wyoming’s public schools.
The state also piloted a program utilizing FRNT and smart contracts to streamline payments to state contractors. This initiative dramatically reduced processing times, slashing the approval and verification period from 45 days to mere seconds. “Smart contracts are self-executing programs, coded on a blockchain, that can offer automation of processes, reduced costs, security, transparency, and comprehensive audit trails,” a senior official stated.
Bermuda’s Regulatory Sandbox Fosters Innovation
Bermuda has long been recognized as a hub for innovative insurance concepts. In 2018, the Bermuda Monetary Authority (BMA) established an insurance regulatory sandbox and innovation hub. This initiative provides a controlled environment for businesses to test new ideas, offering regulatory exemptions and support for development before broader market implementation.
To date, the sandbox has supported seven businesses, including an insurer currently offering bitcoin-based life insurance, where premiums, loans, and benefits are all transacted in bitcoin. Bermuda’s appeal stems from its early adoption of digital asset legislation, a favorable tax code for cryptocurrency transactions, its position as a global leader in reinsurance, and its established infrastructure for complex insurance businesses.
Despite the progress in states like Wyoming and jurisdictions like Bermuda, the U.S. regulatory environment for digital assets remains a significant hurdle. The lack of comprehensive cryptocurrency regulation and the involvement of multiple regulatory bodies create challenges for developing crypto-based insurance products. Furthermore, digital assets are currently classified as property under U.S. tax law, subjecting almost all transactions to taxation.
Emerging Products: Crypto Index-Linked Annuities
Despite these challenges, insurers are beginning to explore products with crypto exposure. One promising avenue is the crypto index-linked annuity (CILA). These products aim to attract a new generation of investors by combining the tax advantages of annuities with potential exposure to cryptocurrency returns. While the structure and regulatory considerations – including hedging and reserving – are still under development, initial CILAs are expected to be linked to a bitcoin-based index, offering a balance between potential gains and reduced volatility through the incorporation of “caps” and “floors.”
Smart Contracts: A Potential Game Changer
According to the panel, smart contracts represent the most promising application of crypto-based technologies for insurers. Beyond public blockchain options, consortium blockchains, such as the RiskStream Collaborative, are exploring ways to streamline workflows and data verification in multi-party transactions.
Regardless of which innovation ultimately gains traction, blockchain- and cryptocurrency-based financial products are gaining momentum and warrant close observation as they reshape the future of the insurance industry.
