Cryptocurrency insurance is a rare aspect that many wizards of the financial universe haven’t been able to decipher.
There are a few projects that have shown that it is possible to ensure digital assets despite the high risks and uncertainties that exist in the cryptocurrency industry.
Many projects in their bid to have a straight jacket solution have tried and stopped along the way.
A few though, have been able to cross the rubicon and make an entree within the space.
We reached out to Joe Ziolkowski who is the CEO of Relm insurance to explain this fascinating aspect of the cryptocurrency space.
His depth in the cryptocurrency insurance industry astounded us and we were amazed at the facts and concepts presented.
Joe Ziolkowski CEO at Relm Insurance
E-Crypto News:
How does cryptocurrency insurance work?
Joe Ziolkowski: That’s a broad question with a broad answer, but generally speaking, it could go 1 of 2 ways.
Number 1, it’s providing insurance coverages that are traditional, such as D&O, professional liability, cyber,
and crime to companies that are operating in the crypto space.All companies that are creating products or providing services to help expand the crypto ecosystem need insurance, and there are traditional insurance products that we have tailored to meet the needs of these companies’ operations.
The second type is insurance of the various fungible and non-fungible cryptos. So, for individuals, or for entities that are holding crypto assets, we have insurance products that provide protection against different causes of loss such as theft, hacking, or destruction of property that could render those assets unrecoverable.
There are also scenarios in decentralized finance where people are locking up a significant amount of capital in smart contracts, and if those smart contracts fail, there’s a severe and real potential for financial loss, so we provide
insurance for things like smart contract failure.So, insurance comes in 1 of 2 forms, we’re either insuring companies that are operating in the crypto space, or we’re actually insuring the digital assets themselves, whether that takes the form of fungible cryptocurrencies such as bitcoin, or non-fungible cryptocurrencies such as various NFTs representing digital art such drawings or music.
Related: The New World of NFT Merchandise -Cryptopunktees, Tokenframes and more
E-Crypto News:
Can you tell us about Relm’s crypto insurance products?
Joe Ziolkowski: We have a suite of both traditional and non-traditional insurance products and have been
writing directors and officers liability insurance, professional liability insurance, cyber and commercial crime
since early 2020.In addition, in 2021 we launched some more innovative products.
This includes slashing insurance, which is a first of its kind and is a form of protection for infrastructure providers that are managing validating nodes on different proof of stake networks.
We’ve also launched a form of regulated smart contract failure insurance that provides a source of financial recovery in the event that a smart contract is either hacked or exploited due to vulnerabilities.
E-Crypto News:
How do your cryptocurrency asset risks get calculated?
Joe Ziolkowski: That’s a good question. I mean, it’s an evolving topic but pricing for our core products is rooted very much in traditional insurance product rating models that have been tailored to account for exposures arising from these emerging industries and the sectors within which our insureds are operating.
Price sometimes has to do with the blockchain on which the cryptocurrency assets exist whether there is an
appetite to purchase insurance with a limit that’s denominated in fiat, or if there is an appetite and a realistic way to provide coverage denominated in a cryptocurrency.So for example, if you’re a Bitcoin holder and you want to purchase insurance against theft of your Bitcoin, you prefer a limit that reimburses you in Bitcoin instead of USD.
So we have a fully regulated commercial insurance company that has the flexibility with our regulatory authorization to denominate limits in fiat and non-fiat to the extent it makes sense.
E-Crypto News:
How does volatility get factored in?
Joe Ziolkowski: It is generally perceived that cryptocurrency insurance is high-risk, but one of the ways that we de-risk that whole concept is by building reserves that are denominated in the same currency in which those limits are denominated.
So, if we’re denominating in US dollars, we have reserves in US dollars, if we want to denominate in BTC, then we’re going to hold reserves in BTC.
As soon as you discuss the asset liability matching principle of keeping limits and reserves in the same currency, it effectively renders the conversation related to volatility somewhat moot.
E-Crypto News:
How do premiums get calculated?
Joe Ziolkowski: Well, I mean, we begin by going through the same basic exercise that any traditional
insurance company would.We have pricing models for each line of coverage that we underwrite, and those pricing models take into account the merits and unique facts and circumstances of each account, and that rate gets flexed up or down based on those favorable or unfavorable characteristics.
Additionally we have tailored these rating models to account for the exposures arising from these emerging industries and the subsectors within which our insureds are operating.
E-Crypto News:
How do claims get calculated and dispersed?
Joe Ziolkowski: So, first of all, as a general point of reference from our claims payment infrastructure, we have a cross class global third party administration agreement with a company called ESIS, which is a wholly owned subsidiary of Chubb, and they give us the ability to pay claims globally for our growing network of insureds.
As far as valuation, it really depends on the policy and the valuation principles within those policies, it becomes particularly relevant when you’re talking about identification for crime related losses, and we make sure that we have a valuation provision in our policies that provides a referenceable and agreed upon means by which losses are valued and whether the loss will be paid out in fiat or crypto.
E-Crypto News:
Please can you tell us about crypto collateralized reinsurance?
Joe Ziolkowski: So the idea of launching Relm II was an acknowledgment that today there’s just nowhere near enough primary or reinsurance capacity in the market to meet the needs of the crypto space.
And although we’ve managed to write across the crypto ecosystem, and we’ve developed what we think is a great book of business, there’s been limited appetite from the traditional reinsurance marketplace to provide Relm with its own form of insurance.
And so utilizing a collateralized reinsurance facility enables us to work with our investors to raise capital in support of our book, and do it in a way that’s going to provide more flexibility than we may otherwise encounter in the traditional reinsurance capacity space.
Now the ability to raise that collateral in crypto allows us to do a couple of really cool things, number 1, it taps into the crypto capital market, which is booming, and they’re looking for, I think, opportunities to participate in initiatives that are going to support the growth and the credibility of the crypto economy at large, and insurance is a critical piece of that puzzle.
And the other reason crypto collateralized insurance is important is because there are absolutely tangible reasons for us to be denominating policy limits in crypto.
We should be issuing commercial crime insurance denominated in BTC for BTC Holder’s; high value NFT insurance is likely more easily facilitated with a crypto denominated limit.
Smart contract failure is another example of an exposure that has a lot of high severity, that really commands a significant amount of capacity, and that capacity may be more aligned with the risk, if we can raise it in non-fiat.
So it really gives us the ability to access new sources of capital and then also to build reserves behind limits denominated in crypto, and do it through fully regulated insurance infrastructure.
Finally, I think this facility also gives traditional capital denominated in fiat an opportunity to gain exposure to the burgeoning crypto ecosystem without having to hold crypto directly.
E-Crypto News:
Why did you choose to focus on crypto and Web3 niche?
Joe Ziolkowski: Innovation moves fast, insurance moves slower, and there are very good reasons for that.
However, it was apparent that there was a growing momentum of very credible crypto-related initiatives thatwere managed and founded by individuals that had significant traditional finance pedigree, and had sophisticated caps tables with investor participation, and were launching compelling products or services, and had a sensitivity for compliance.
And when you see these types of initiatives and you disregard the fact that they are participating in this crypto economy which is new and different, these companies are insurable and they deserve capacity and they deserve an insurance company that’s going to help support their business model and allow them to scale their business.
And once you see enough of those opportunities running up against brick walls in their attempts to find insurance capacity, it was just one of those light bulb moments where really the only solution here was to launch an informed and dedicated capacity provider, and that’s what we did in 2019.
E-Crypto News:
Is there any pathway for mainstream insurance businesses to enter the digital asset space?
Joe Ziolkowski: Absolutely, I think the easiest pathway is traditional insurance products that are already being issued to traditional financial institutions, and scaling that underwriting mentality to financial institutions participating in the crypto space.
And I think what you’ll see is, and what we’re already seeing now, is there are a number of traditional financial institutions that are branching out and beginning to offer products and services in the crypto space.
So I think that’s going to be the easiest opportunity for traditional insurance to find their way into the crypto space through products that we all know, and are familiar with, and have underwritten but just for a different type of financial institution.
E-Crypto News:
How will crypto asset insurance help mitigate the risks associated with the marketplace?
Joe Ziolkowski: Well, I think one of the biggest challenges for institutional adoption is the need for traditional forms of risk management and protection.
So if you look at institutional capital, there’s a lot of demand to participate in decentralized finance but in the absence of contract certainty and insurance policies that are issued by regulated insurance companies with limits that are sufficient enough to move the needle, that capital is going to remain on the sidelines.
So from that standpoint, generally speaking, the availability of insurance capacity through regulated insurance infrastructure is only going to enhance the ability for these companies to scale their business model, which will allow institutional investors, and high net worth investors, or those investors that are more risk averse, to find a level of comfort and protection, and begin participating.
E-Crypto News:
Does Relm have any products for DAOs and similar corporate structures?
Joe Ziolkowski: There are certain examples of legislation that has come out recently that allows DAOs to be insurable. If you look at the legislation in Wyoming for example, a DAO can now be tied to an LLC, so now there’s a legal entity that can be listed as the named insurer, and that can ultimately pay premium.
So at a high level, there’s different legislation in the corporate space, if you will, that is enabling these DAOs to actually have a legal identity whilst still maintaining a significant element of decentralization, and we’ve worked with companies that are operating in jurisdictions like this, or are contemplating operations in jurisdictions where DAOs actually do have legal structure to provide insurance solutions.
E-Crypto News:
How do liquidity-generated events get insurance cover from you?
Joe Ziolkowski: So as far as liquidity-generated events go, whether that’s an IPO, or an acquisition, or a
merger, in all instances that’s effectively representing a change of control, and it will always trigger the need for insurance.Now, the problem is when you look at crypto companies that are IPOing, there’s a limited appetite from the traditional insurance space to provide directors and officers liability insurance that you would need in order to take a company public. If you look at any one of a number of these crypto venture equity funds, they’re building a portfolio of companies that are being groomed for acquisition, or a liquidity event, and almost always the acquiring company is going to require the target company to have insurance at the time of the acquisition, that will provide coverage for events leading up to the transaction, but that arise following the close of the transaction.
And so we’ve worked with a number of the crypto venture and equity managers in the space to ensure that these portfolio companies that are in the process of being acquired have adequate insurance, and in some cases writing policies that provide run off from inception, which is a pretty non-standard approach for providing insurance for some of this M&A activity.
And then there’s also demand for reps and warranties coverage where you have the acquiring company requiring transaction liability related insurance, and a lot of these transaction liabilities and representations, or misrepresentations, are similar to that of a traditional transaction, but just because of the space in which these companies are operating, they can’t find the capacity.
And we certainly have an appetite, a demonstrable appetite to provide support for transactional related-insurance coverages.
E-Crypto News:
How does insurance help the mass adoption of digital assets?
Joe Ziolkowski: Yes it’s just providing a form of protection that is familiar, and in some cases required.
So you may not understand exactly how these crypto transactions are being facilitated, you may not have a really in-depth understanding of the differences between one blockchain or another, but if you know that you can participate in the crypto economy, and also have a form of regulated insurance protection that will provide a level of comfort, then it’s going to enable people that are currently sitting on the sidelines with the ability to actually begin participating.
And then in the institutional space there’s almost a prohibition in some cases for these companies to begin committing capital into the crypto economy in the absence of regulated insurance.
And the more of that capacity that comes online, the more protection that’s going to be available and I think the more credible the ability for these companies to participate in the crypto economy becomes.
E-Crypto News:
Can you tell us about crypto-insurance compliance and regulation, and how does it help improve digital asset insurance?
Joe Ziolkowski: Relm is a fully regulated commercial insurance company.
I mean, we’re subject to the same solvency reporting, financial and statutory audits, that any other traditional commercial insurance or reinsurance company is subject to.
And the element of regulation is critical because if you look at insurance regulation, it’s all about ensuring that an insurance company has the ability to fulfill its obligations when claims arise.
We’re licensed in Bermuda which is the second largest insurance and reinsurance jurisdiction in the world, where you have a very sophisticated group of regulators, a very evolved insurance regulatory framework that is risk based, and it puts us in a position to go to market with a solution that is more credible than some of these unregulated insurance solutions that exist in the marketplace today.
So ultimately regulation is an important hallmark. If you can provide an insurance product through a regulated facility, it comes with it a stamp of approval regarding the company’s ability to fulfill those obligations.
E-Crypto News:
Are there any plans for DeFi insurance?
Joe Ziolkowski: So we’re already providing insurance for DeFi related exposures, and it comes so far in two forms. Number 1 slashing insurance.
We issued and developed this product through two of the largest infrastructure providers in the crypto space last year, which provides a source of protection for investor capital that’s staked on these validator nodes that are operated in support of securing various blockchains.
Number 2 is smart contract insurance in a couple of different forms.
We’ve worked with developers of some of the largest DeFi protocols to provide them with a form of technology professional liability that includes an expanded form of coverage arising from smart contract failure, and then we’ve also worked with investors participating in DeFi seeking financial protection in the event of financial loss arising from smart contract failure.
And there are other product development initiatives that we have in the works, specifically related to these unique exposures arising from decentralized finance.
Related: What Is DeFi 2.0 in 2022…and How Does It Work?
E-Crypto News:
What do you think the future holds for the crypto-insurance industry?
Joe Ziolkowski: Well, we are certainly bullish on the opportunity.
I mean if you look today, in DeFi there’s $240 billion worth of total value locked in decentralized finance, that number is only going to increase and the number of traditional finance companies participating in what was considered to be a very fringe form of finance is becoming more and more present.
There are more publicly traded companies that are participating.
There are more traditional financial institutions that are finding a way to provide products and services in the crypto space.
And all of it is going to require insurance, and right now there’s an absolute mismatch between the demand for coverage and insurance support of crypto related exposures, and the available capacity.
So yes we see it as a great opportunity to develop a great book of business, work with really credible and great partners within the space, and do everything that we can to continue solving problems.
Related: Best DeFi Coins to Buy in 2022
