Too long to read version (TLDR):
- According to industry insiders, Coinbase is working on establishing its own "exclusive" insurance company.
- Earlier this year, insurance brokerage company Aon began to establish a proprietary company in the Cayman Islands to work with several cryptocurrency companies.
- Aon Insurance said that a proprietary self-insurance structure can help companies get extra insurance at a more reasonable price.
- Cryptographic insurance is still scarce, and mainstream exchanges Kraken and Firecoin say they can only make up for the losses caused by theft or hacking by setting aside funds.
According to industry sources, the cryptocurrency exchange Coinbase is negotiating with the establishment of a compliant, exclusive insurance company with the help of insurance broker Aon.
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The establishment of a dedicated insurance subsidiary, wholly owned by the insured, is a way for companies to reduce costs and improve the import of the reinsurance market (an insurance purchased by insurance companies to reduce risk). According to an article published by the CPA Journal in December 2018, Fortune 500 companies and thousands of medium-sized companies have almost exclusive companies.
According to sources, Coinbase and An Yi believe that this structure may be part of the reason for the lack of insurance services for encrypted exchanges. Usually, these companies only self-insure by reserving a portion of the currency (self-insurance is a special form of risk retention, in which the company can pay for losses through the establishment of funds) to prevent customer funds from being stolen or lost. . The problem with this approach is the lack of a formal structure that tends to entice investors to use funds for other purposes, and the insurance coverage that a company actually has is ambiguous.
In addition, with a proprietary company, these funds are separated and stored in a regulated, audited tool that helps the company get more insurance from the reinsurance market.
Both Aon Insurance and Coinbase are reluctant to comment on this matter. However, Aon said that earlier this year, the company established the industry's first cryptocurrency exclusive insurance for an unnamed customer. The broker said the exclusive Cayman company will write a "crime" policy that includes hacking hot (online) wallets and "special" insurance for offline cryptocurrencies in cold storage.
The two companies have also worked together before: In April of this year, Aon set up about $255 million in insurance for Coinbase's hot wallet. During the 2017 bull market, the exchange held $25 billion in cryptocurrency.
Aon said that a small number of cryptocurrency customers of the company are considering adopting a proprietary company approach and added that it is expected that the Bermuda Islands and some major US payment facilities will soon follow the Cayman Islands.
Jacqueline Quintal, General Manager of the Aon Group and Head of Practice at Financial Institutions, said:
“There is a lack of market capacity. Some people are worried about the existing products on the market and are looking for other solutions. I think that for most people, the way is to buy a certain amount of traditional insurance first, then explore other structures. May include a dedicated self-insurance – we are making more and more such conversations."
What is a proprietary insurance company?
Exclusive self-insurance is an insurance company created by another company and designed to provide insurance for itself. This is a compliant alternative to self-insurance that can go directly into the reinsurance market and act as an investment vehicle.
If the pricing of the commercial insurance market is too high, or if no insurer is willing to take on the company's risk, “exclusive self-insurance” is used to formalize self-insurance for reporting capital and reserve requirements.
When it comes to the use of exclusive self-insurance rather than simple self-insurance, Quintal says:
“If a company adopts a self-insurance approach, they will have to bear 100% of the losses. By contrast, exclusive self-insurance provides a way for companies to get insurance or reinsurance, in a more formal way. Raise funds in advance for the amount of self-insurance loss, rather than simply reserve funds."
Quintal added that this more formal and regulated approach can help create more productivity in the market, and through more control over the company's insurance plans, exclusive self-insurance can gradually reduce the cost of risk financing.
Ward Ching, general manager of Aon's exclusive self-insurance department, said that even for a cryptocurrency company, the exclusive self-insurance company must store most of the claim reserves in the form of legal currency, but the cryptocurrency may be used for surplus (additional Reserve funds to prepare for accidents).
Ching said that they also discussed adding cryptocurrencies to the Cayman Islands' proprietary insurance activities.
“All of this is to show the regulators at the place of registration that incorporating cryptocurrencies into asset classes can meet regulatory requirements while providing financial flexibility in a constructive and secure manner.”
Mainstream exchange self-insurance scheme
It is no secret that many large cryptocurrency exchanges only self-insure against hacking and related losses.
The problem that has always existed is that the cost of cryptographic insurance is prohibitively high, the scope is too limited, and it is extremely tricky in actual claims. Therefore, cryptocurrency companies have to choose cold storage (the private key is disconnected from the Internet and locked on a piece of hardware in a hardware device or safe) to cope with the loss.
San Francisco-based Kraken admits that it has its own insurance fund, said Jesse Powell, chief executive of the exchange:
“The balance sheet can also be called an insurance fund.”
Powell said that Kraken has reserved "far more than $100 million" of funds, most of which is bitcoin, to avoid the company having to go to the open market to buy bitcoin when the customer's bitcoin needs to be redeemed.
Similarly, in February 2018, the Singapore-based fire currency stocked 20,000 bitcoins, which was a backup protection mechanism when security breaches occurred. It was called the “fire coin security reserve”. In addition, it has reserved a “protection fund” to repurchase its tokens by 20% of the transaction fee each quarter.
Josh Goodbody, Head of European and American Business, Global Sales and Institutional Business of Fire Coin, said:
"If we add up our protection funds and reserve funds, we are talking about protection measures far exceeding $400 million."
Powell criticized the insurance terms for cryptocurrency companies. He said that over the years, his company has repeatedly received ridiculous and ridiculous quotes from insurance companies.
Goodbody also explained that Firecoin has been looking for a reliable insurance plan. In fact, he suspects that hundreds of millions of dollars of insurance that some companies boast may not be available for hot wallets.
Is it useful to set up an exclusive self-insurance company?
Powell said that the exchange is often more relaxed about how to conduct self-insurance.
“I think basically these funds are kept on the balance sheet of each exchange, and they use this part of the funds for investment or company operations. As far as I know, no one has provided an audit or a clear statement stating these How money is segregated and stored in different entities is like this is really a third-party insurance company."
Still, Powell said he doesn't think it would make a big difference to set up a separate, self-insurance company.
“I just thought it was like transferring money between different accounts of the same entity. I really don’t understand how this helps consumers get more protection. The source of funding is the same, I don’t know why this is better than direct Finding an insurance broker is more advantageous."
Goodbody of the fire coin is more optimistic, saying that Aon's plan is "very interesting and very beneficial to the market."
Some innovative companies in the insurance sector, such as Nexus Mutual based on Ethereum, propose to take further measures instead of setting up a separate proprietary self-insurance mechanism, instead bringing together multiple cryptocurrency reserve funds into a reinsurance system.
Powell agrees that this seems to have greater value for the industry, but he questions its usefulness.
“You can imagine a collective insurance transaction between exchanges, just like cooperation. But you have to let your competitors review everything. I think everyone is too smart, doesn’t do that, and is too paranoid. ""
Ching of Aon Insurance agrees that it makes sense to bring together a group of cryptocurrencies self-insurers. The problem, he said, is that these companies are different:
“They have different risk tolerances, different capital structures and different security mechanisms. Unless they are coordinated, it is difficult to bring them together; it is not that it is impossible, it will be very difficult.”