According to news reports, Coinbase, a Cryptocurrency exchange platform is in the process of setting up its regulated insurance firm with the assistance of insurance broker firm Aon.
Coinbase and Aon regard this initiative as hypothetically a fraction of the solution to the scarcity of insurance accessible to crypto exchanges, the news reports added. Whereas Coinbase has attained more exposure than most, time and again, exchanges simply self-insure by putting aside a couple of coins to conceal losses in the event of a hack or loss of client funds. The issue with that method, however, is the absence of a formal network, establishing the enticement to gain access to the funds for other uses and vagueness about how much exposure a firm actually has. Aon has been a key player in the crypto insurance space. If you remember back in June, Aon had formed a crypto custody insurance agreement with Metaco.
By means of a captive-insurance subsidiary-, on the other hand, the funds are separated and kept in a controlled, reviewed vehicle, which can help the firm get out there and get more coverage from the reinsurance market. It is worth mentioning that the captive is intended to insure only its parent company, and not competitors. Aon revealed that few of its crypto patrons are chewing over the captive opportunity, adding that Bermuda and some leading U.S. on-shore residences are likely to follow the Caymans soon.
Managing director and the financial institutions practice leader at Aon- Jacqueline Quintal-is of the opinion that there is the absence of capacity and some firms are not at ease with what is obtainable in the marketplace and are looking to alternative solutions, she added that the route for most firms will be to buy some amount of long-established insurance first and then to delve into alternative structures, potentially including a captive — and that Aon is having more and more of these conversations. Aon also revealed that it established the industry’s first crypto captive earlier this year for an unnamed client.
Types of Captive Insurance
For clarity, a captive is an insurance company fashioned and entirely owned by another company to provide coverage for itself. It’s a structured substitute to self-insurance which can provide direct access to reinsurance markets and function as an investment vehicle. Captives are used to validate self-insurance with reporting on capital and reserve requirements, especially if pricing is on the high side in the commercial insurance markets or no underwriters are ready to protect a firm’s risk.
Quintal, when speaking about the advantages of using a captive rather than simple self-insurance, revealed that If a firm is self-insuring, it implies that they’ve accepted to take charge of funding 100% of any loss. Captives, in comparison, offer a means through which firms can gain access to insurance or reinsurance, while also pre-funding self-insured loss amounts in a more organized way than simply putting aside capital.
Quintal added that taking this more formal and regulated approach can help foster more capacity in the market, and by having more control over a firm’s insurance program, captives can lower the price of risk financing over time. Ward Ching, managing director, Aon Captive Insurance Managers has also revealed that even for a crypto firm, a captive would have to keep most of its claims’ replacement in fiat, but crypto could possibly be used for the extra.