“The challenge for many insurance
companies is to determine the best
way to leverage technology to achieve
strategic vision and business objectives.”
John Huff, ABIR
UK crypto fears
Bermuda’s emphasis on being open to cryptocurrencies comes at an
interesting time for the market in these products.
In the UK the Financial Conduct Authority (FCA) is proposing rules
to address harm to retail consumers from the sale of derivatives and
exchange-traded notes (ETNs) referencing certain types of cryptoassets.
In January 2019, the FCA issued a Guidance on Cryptoassets (CP19/3)
to clarify what types of cryptoassets fall within its current regulatory
perimeter, which closed on April 5, 2019. The FCA expects to publish
its final Guidance on Cryptoassets later in the summer, and has reflected
feedback to that consultation in its proposals for crypto-derivatives.
In a statement the FCA said that it considers these products are
ill-suited to retail consumers who cannot reliably assess the value and
risks of derivatives or ETNs that reference certain cryptoassets (cryptoderivatives).
This is due to:
• The inherent nature of the underlying assets, which have no reliable
basis for valuation;
• The prevalence of market abuse and financial crime in the secondary
market for cryptoassets (eg, cyber theft);
• Extreme volatility in cryptoasset price movements; and
• Inadequate understanding by retail consumers of cryptoassets and the
lack of a clear investment need for investment products referencing
These features mean retail consumers might suffer harm from
sudden and unexpected losses if they invest in these products.
As a result the FCA is consulting on banning the sale, marketing
and distribution to all retail consumers of all derivatives (ie, contracts
for difference CFDs, options and futures) and ETNs that reference
unregulated transferable cryptoassets by firms acting in, or from,
the UK. A spokesperson for the FCA told Bermuda:Re+ILS that the
proposed ban would not apply to British Overseas Territories.
Could this lead to Bermuda’s being able to exploit a possible opening
in the market? The FCA announcement was made as Bermuda:Re+ILS
went to press, so the implications of the UK’s move for Bermuda
remain unknown for the time being, but the government of the Island
is, no doubt, watching events closely.
off? After watching this space for four years, I’ve yet to see even the
germ of a transformational solution.”
According to Johansmeyer, blockchain can’t change the re/insurance
world “because it’s plumbing, not a solution”.
“One would use blockchain to build something that changes the
world, and that ‘something’ has been in short supply,” he explains.
“The industry needs to think more about the use cases, and less
about the bits and bytes. What are the problems that require the key
advantages of blockchain, such as record permanence, fraud resistance,
and reliable audit trails?
“Most of the efforts I’ve seen so far have been attempts to rehash
industrywide solutions, ostensibly improving them through the use of
blockchain,” he says.
“However, such attempts have fallen short of solutions that have
attained broad adoption and enjoyed years of enhancement through
focused end-user feedback. The ability of blockchain prototypes to
overtake established solutions is likely to remain constrained by a
disconnect between the benefits of blockchain and the specific business
needs of the re/insurance community.”
Johansmeyer says that reinsurance placement tools are stuck
competing with nimble startups that can help with the placement and
management of risk without the rapidly growing overheads associated
with record immutability. Claim repositories for fraud detection lack
the rich functionality informed by decades of evolving organised threats.
There are more examples—the predictable outcome of the blind
application of technology to a client’s problem rather than the targeted
application of thought.
“Blockchain is a promising technology, but it needs to be brought
the right use cases to make a meaningful difference in the worldwide
risk transfer market,” Johansmeyer concludes. “Rather than use
blockchain to mimic rules-based platforms, it makes more sense to
invest in solutions for audit trail, record permanence, and trusted
UK crypto 31
SHUTTERSTOCK / NICOLE R YOUNG