Insurance market use of crypto assets deserves special attention
06 May 2021
The European Insurance and Occupational Pensions Authority (EIOPA) has recently published a discussion paper on blockchain and smart contracts plus the use of crypto assets in insurance.
The EIOPA believes the use of crypto assets in the insurance sector deserves special attention “given that their use is already relatively extended in financial markets compared to other blockchain use cases that are mostly at a proof-of-concept stage.”
Crypto assets are cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology (DLT) and can be transferred, stored or traded electronically.
One possible use of crypto assets in insurance is the investment in crypto assets, either directly by purchasing crypto assets as an investment, or indirectly by investing in financial instruments with crypto assets as underlying assets.
Based on EIOPA’s analysis of Solvency II data, a very limited number of European insurance undertakings already count with such types of investments, fundamentally via unit-linked life insurance products where the risks (and benefits) are borne completely or partially by the consumer.
In September 2020 the European Commission published a legislative proposal for a regulation on markets in crypto assets (MiCA)3. Insurance undertakings have been explicitly excluded from the scope of MiCA (Article 2(3)), but this is not the case for insurance intermediaries and pension schemes.
EIOPA conducted a survey of National Competent Authorities (NCAs) and only one reported the case of an insurance undertaking in its jurisdiction allowing customers to pay insurance premiums or receive loss refunds with crypto assets.
Blockchain and smart contracts
The aim of the EIOPA paper is to provide a high-level overview of risks and benefits of Blockchain and smart contracts in insurance from a supervisory perspective as well as to gather feedback from stakeholders. According to data from the recent Smart Contracts Market Research Report by Market Research Future, the global smart contracts market will reach approximately $300 million by the end of 2023.
Blockchain has the potential to deliver key digital opportunities, however, it may also trigger new risks to insurers, supervisors, and consumers. This is due to the fact Blockchain technology is still evolving which means several challenges are emerging. Experts believe Blockchain smart contracts in insurance can be a remedy to the industry’s many challenges.
The UK Government announced a Taskforce in March 2018 as part of its wider Fintech strategy and in response to the Treasury Select Committee’s investigation into digital currencies. The Taskforce concluded that while DLT is at an early stage of development, it has the potential to deliver significant benefits in financial services and other sectors in the future.
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