In October, the American Council of Life Insurers annual meeting featured a panel titled “Crypto, Life Insurance, and Regulation: The Next Frontier in Financial Innovation.” The panelists, including the author of this article, previewed potential applications of crypto-based technologies in the insurance product context. This panel, which also included Wyoming Commissioner of Insurance Jeffrey Rude and the Bermuda Monetary Authority’s (BMA) chief fintech officer Moad Fahmi, seemed to strike a resonant chord with its audience.
Rude and Fahmi, in particular, have had front-row seats to digital asset innovation. For example, Wyoming not only recently became the first state to pass legislation permitting insurers to hold cryptocurrency but also the first state to issue its own stablecoin: the Frontier Stable Token (FRNT). A stablecoin is a type of digital token, pegged to the value of another asset (such as a currency), that is designed primarily to facilitate payments. Traditional payment systems are dependent on intermediaries and can be expensive and slow. Stablecoins were created as a more direct payment alternative that has the speed and security of other cryptocurrency transactions but reduces the volatility in value. FRNT’s value is pegged to the U.S. dollar and is reserved at 102% with short-term Treasury bonds and hard U.S. currency. Interest on the reserves is earmarked by law to fund Wyoming’s public schools.
Additionally, Wyoming, in concert with blockchain startup Hashfire, ran a pilot program this past year that used FRNT to pay state contractors. This rockstar program automated the approval and contract verification process for payments using a smart contract, which reduced the time to process payments from 45 days to mere seconds.
Fahmi also had marquis-worthy insights, with Bermuda having long provided a stage for innovative insurance ideas. In 2018, the BMA created its insurance regulatory sandbox and innovation hub, which grants regulatory exemptions and provides businesses a venue to test and improve ideas before taking them to the larger market. So far, the sandbox has graduated seven businesses, including an insurer that is transacting bitcoin-based life insurance. Life insurance premiums, policy loans, and insurance benefits are all denominated and paid in bitcoin.
Bermuda is a unique arena to advance cryptocurrency, as it:
- Is one of the first jurisdictions to enact comprehensive legislation dealing with digital assets.
- Has a tax code that makes most cryptocurrency transactions tax-free.
- Is a world leader in reinsurance and home to many insurers and reinsurers.
- Has the expertise and infrastructure to support complex insurance businesses.
The U.S. regulatory environment for digital assets remains complicated. The lack of comprehensive cryptocurrency regulation and the multitude of regulators involved makes crypto-based insurance products hard to develop. Digital assets are also treated as property under U.S. tax law. Accordingly, almost any cryptocurrency transaction in the United States is subject to taxation.
Even with potential regulatory and tax concerns, however, a handful of insurers have started developing U.S. products with crypto exposure. One product with potential is a crypto index-linked annuity (CILA). The hope is that such products’ favorable tax treatment and crypto exposure will appeal to the next generation of investors. The potential structure of and regulatory concerns (such as hedging and reserving) about these products are still being explored. However, the first CILAs will likely be linked to a bitcoin-based index. Though not supported by bitcoin directly, such a CILA would allow for the tax advantages of an annuity, with some of the upside returns of cryptocurrency, while smoothing out volatility by incorporating both a “cap” and a “floor.”
Nevertheless, according to the panel, “smart contracts” might be the top performer among crypto-based technologies for insurers. Smart contracts are self-executing programs, coded on a blockchain, that can offer automation of processes, reduced costs, security, transparency, and comprehensive audit trails. In addition to public blockchain options for smart contracts, consortium blockchains, such as the RiskStream Collaborative (made up of several large insurance companies), are looking to create efficiencies by streamlining workflows and verification of data in multiparty business transactions. Blockchain offers a lot of promise.
Regardless of what may be their greatest insurance hit, blockchain- and cryptocurrency-based financial products are on the road to popularity and therefore should be watched carefully.
