October 29, 2021 • 7 mins
Episode seven of KPMG in Canada’s state of cryptoassets podcast series is all about insurance. Host Adam Rodricks, National Lead, Digital Services welcomes back Kareem Sadek, Partner, Technology Risk Consulting; Mitchell Nicholson, Senior Consultant, Technology Risk Consulting; and Kenneth Viegas, Consultant, Technology Risk Consulting to talk about cryptoasset insurance from the perspectives of both organizations and insurers.
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Transcript
Episode Transcript
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(00:00):
Hello everyone and welcome to the 7th episode of KPMG in Canada’s State of Cryptoassets podcast series! Before we get into today's episode, I want to remind our new listeners to also check out episodes 1 through 6 of our series. Yes, we have been busy. Speaking of busy, I'd love to introduce some very busy people that I am eternally grateful could make time for us today.
(00:24):
I am pleased to welcome back Kareem Sadek, Ken Viegas and Mitch Nicholson. Since you are all repeat guests and well, quite frankly, veterans of the space by now, let's just jump right into it. Mitch, to kick off the episode, could you walk us through some of the reasons why an organization may want to invest in crypto asset insurance?
Yes, thanks, Adam. Really happy to be back here. To answer your question, many service providers in the crypto asset space act as the custodian for their client's assets. So, one example is cryptoasset exchanges will hold users’ assets while trading on their platform. As a result, these institutions are often targeted by hackers who are trying to steal the funds held in custody. Since 2014, we've seen large hacks in excess of hundreds of millions of dollars happen almost annually. But in the last few years, as we've seen more institutional grade custodial services, we've seen a sharp reduction in both the number of incidences and the value of cryptoassets stolen.
(01:31):
That's great Mitch and let me add, the trend we're seeing in late 2020 and early 2021 are exploits of DeFi applications. In general, we're seeing frequency of incidents increasing and this will probably be due to the possibilities given the rise of crypto adoption. But we're also seeing less value lost per incident and this is due to better risk management processes.
I want to also add (01:56):
it's important to note that these thefts are a result of not safeguarding one's private keys and does not directly relate to the Bitcoin protocol.
That is critical to note. Thank you, Mitch, and thank you, Ken. This is great. Maybe now we can shift over to the insurer’s perspective. Kareem, how are insurers getting involved with cryptoassets?
(02:20):
Good question, Adam. So, there are many ways to be very honest with you, but maybe let me just focus on two or three of them.
Treasury investments is a major aspect. There's another thing around allocating to crypto as maybe an alternative asset class, or even just exposure to underwriting insurance policies from crypto custodians. Maybe I'll talk a little bit about each one of them.
(02:45):
The first one is pretty easy. So, we've seen these treasury investments from several large insurance firms in the U. S. and I think we're going to continue to see more and more of that.
The other thing when I talked about where it's the long-term liabilities where the insurers have to have them financed by investments, so now some are beginning to allocate to crypto as an alternative asset class. I truly believe and we believe as a team that trend is likely to continue with these other large investors coming in and maybe even such as pensions that are likely going to start to allocate to that too.
(03:23):
And then the last thing, if you think about the exposure in terms of the other area, in terms of underwriting insurance policies for crypto custodians. We talked about theft, which is a very important concern. The custodians have begun to obtain large insurance policies; I mean, basically, they're trying to protect their client's assets. So, these are sort of two or three quick ones that we can talk about.
(03:49):
Quick, but informative. Kareem, at this point, we need to just get you a classroom and a chalkboard because you are perpetually taking me to school as the teacher of all things crypto. Now, you touched on something that I would love to go deeper on, and that is underwriting insurance policies for crypto custodians. Ken, what types of insurance offerings are available for crypto custodians today?
(04:11):
Well, there's been a rise in institutional investors entering the space and the trend for these institutional investors is to use a crypto custodian to safeguard their assets. Major custodians now offer coverage across a wide variety of accidents, such as external and internal thefts as well as natural disasters. This can include lightning, floods and earthquakes to name a few. But let me say, when assessing a crypto custodian, it's important to review their insurance policy, understand the coverage, and compare the offerings across custodians.
(04:42):
That's great Ken, thank you so much. It sounds to me like the insurance industry is ready for crypto assets to take off here in Canada. Maybe I'll open up my last question to the group. What are some of the future opportunities for cryptoasset insurance? Kareem, why don't you start us off?
Yeah, I'd love to do that, and I think it's simple. I mean, for me, if you look at insurance and what's happening, the emphasis should be as you start thinking through different things, or the future of it, is around insurance for individuals, specifically individual's cryptoasset holdings.
(05:17):
So, if I think about myself, if I hold crypto, which are valuable assets to me, then I want to have a policy on them or include them maybe as part of my home insurance policy. I mean, that would be that would be great for me.
The main thing is many crypto adopters, they self-custody, right? And having insurance or some form of vetted storage procedures could improve the safety so that's the prime thing that I can think of.
(05:48):
Thanks, Kareem and to maybe to take an even more futuristic example, I can talk briefly about smart contracts and their application to insurance for flights. So typically, with flight insurance, a user would pay a premium and then be compensated if the flight was either delayed or canceled. Now, with smart contracts, I could pay the smart contract directly from my premium. The smart contracts can check with the external world through what is called a data oracle observe and that data oracle can provide information about delays or cancellations of flights. If those events occur, then the smart contract could pay out the claim to me immediately. The beauty of this approach is that it is automated, which may improve the efficiency and reduce the cost, plus it expedites the resolution for insurance claims.
(06:42):
Mitch, fantastic example! Certainly a lot of opportunity, particularly for insurers. Unfortunately, we are already out of time for today's episode. I want to thank everyone for joining us today. Join us next time on KPMG in Canada’s PodBytes series on the state of cryptoassets when we'll be talking about cybersecurity and cryptoassets. You won't want to miss it. Bye for now and thanks so much for listening.
Hello everyone and welcome to the 7th episode of KPMG in Canada’s State of Cryptoassets podcast series! Before we get into today's episode, I want to remind our new listeners to also check out episodes 1 through 6 of our series. Yes, we have been busy. Speaking of busy, I'd love to introduce some very busy people that I am eternally grateful could make time for us today.
(00:24):
I am pleased to welcome back Kareem Sadek, Ken Viegas and Mitch Nicholson. Since you are all repeat guests and well, quite frankly, veterans of the space by now, let's just jump right into it. Mitch, to kick off the episode, could you walk us through some of the reasons why an organization may want to invest in crypto asset insurance?
Yes, thanks, Adam. Really happy to be back here. To answer your question, many service providers in the crypto asset space act as the custodian for their client's assets. So, one example is cryptoasset exchanges will hold users’ assets while trading on their platform. As a result, these institutions are often targeted by hackers who are trying to steal the funds held in custody. Since 2014, we've seen large hacks in excess of hundreds of millions of dollars happen almost annually. But in the last few years, as we've seen more institutional grade custodial services, we've seen a sharp reduction in both the number of incidences and the value of cryptoassets stolen.
(01:31):
That's great Mitch and let me add, the trend we're seeing in late 2020 and early 2021 are exploits of DeFi applications. In general, we're seeing frequency of incidents increasing and this will probably be due to the possibilities given the rise of crypto adoption. But we're also seeing less value lost per incident and this is due to better risk management processes.
I want to also add (01:56):
it's important to note that these thefts are a result of not safeguarding one's private keys and does not directly relate to the Bitcoin protocol.
That is critical to note. Thank you, Mitch, and thank you, Ken. This is great. Maybe now we can shift over to the insurer’s perspective. Kareem, how are insurers getting involved with cryptoassets?
(02:20):
Good question, Adam. So, there are many ways to be very honest with you, but maybe let me just focus on two or three of them.
Treasury investments is a major aspect. There's another thing around allocating to crypto as maybe an alternative asset class, or even just exposure to underwriting insurance policies from crypto custodians. Maybe I'll talk a little bit about each one of them.
(02:45):
The first one is pretty easy. So, we've seen these treasury investments from several large insurance firms in the U. S. and I think we're going to continue to see more and more of that.
The other thing when I talked about where it's the long-term liabilities where the insurers have to have them financed by investments, so now some are beginning to allocate to crypto as an alternative asset class. I truly believe and we believe as a team that trend is likely to continue with these other large investors coming in and maybe even such as pensions that are likely going to start to allocate to that too.
(03:23):
And then the last thing, if you think about the exposure in terms of the other area, in terms of underwriting insurance policies for crypto custodians. We talked about theft, which is a very important concern. The custodians have begun to obtain large insurance policies; I mean, basically, they're trying to protect their client's assets. So, these are sort of two or three quick ones that we can talk about.
(03:49):
Quick, but informative. Kareem, at this point, we need to just get you a classroom and a chalkboard because you are perpetually taking me to school as the teacher of all things crypto. Now, you touched on something that I would love to go deeper on, and that is underwriting insurance policies for crypto custodians. Ken, what types of insurance offerings are available for crypto custodians today?
(04:11):
Well, there's been a rise in institutional investors entering the space and the trend for these institutional investors is to use a crypto custodian to safeguard their assets. Major custodians now offer coverage across a wide variety of accidents, such as external and internal thefts as well as natural disasters. This can include lightning, floods and earthquakes to name a few. But let me say, when assessing a crypto custodian, it's important to review their insurance policy, understand the coverage, and compare the offerings across custodians.
(04:42):
That's great Ken, thank you so much. It sounds to me like the insurance industry is ready for crypto assets to take off here in Canada. Maybe I'll open up my last question to the group. What are some of the future opportunities for cryptoasset insurance? Kareem, why don't you start us off?
Yeah, I'd love to do that, and I think it's simple. I mean, for me, if you look at insurance and what's happening, the emphasis should be as you start thinking through different things, or the future of it, is around insurance for individuals, specifically individual's cryptoasset holdings.
(05:17):
So, if I think about myself, if I hold crypto, which are valuable assets to me, then I want to have a policy on them or include them maybe as part of my home insurance policy. I mean, that would be that would be great for me.
The main thing is many crypto adopters, they self-custody, right? And having insurance or some form of vetted storage procedures could improve the safety so that's the prime thing that I can think of.
(05:48):
Thanks, Kareem and to maybe to take an even more futuristic example, I can talk briefly about smart contracts and their application to insurance for flights. So typically, with flight insurance, a user would pay a premium and then be compensated if the flight was either delayed or canceled. Now, with smart contracts, I could pay the smart contract directly from my premium. The smart contracts can check with the external world through what is called a data oracle observe and that data oracle can provide information about delays or cancellations of flights. If those events occur, then the smart contract could pay out the claim to me immediately. The beauty of this approach is that it is automated, which may improve the efficiency and reduce the cost, plus it expedites the resolution for insurance claims.
(06:42):
Mitch, fantastic example! Certainly a lot of opportunity, particularly for insurers. Unfortunately, we are already out of time for today's episode. I want to thank everyone for joining us today. Join us next time on KPMG in Canada’s PodBytes series on the state of cryptoassets when we'll be talking about cybersecurity and cryptoassets. You won't want to miss it. Bye for now and thanks so much for listening.
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