Since April, some insurers have been allowing their policyholders to pay their premiums in Bitcoin. Why are insurers doing this?
One hundred million people are now using Bitcoin. They are buying a diverse range of products including software, food, clothes, holidays and cars.
AXA Switzerland has concluded that this growing demand represents an opportunity and has become the first large insurer to support Bitcoin premium payments.
Bitcoin payments differ from those in other currencies in that they are irreversible. Insurance, once bought, cannot be cancelled mid-term and premiums returned to the policyholder. Transaction fees are low. These are benefits to the insurer, but the principal reason that insurers are accepting Bitcoin is that their customers want them to.
A Bitcoin payment option could appeal to current customers, attract new ones, and, while it remains a novelty, generate publicity for the insurance companies which offer it.
One reason that insurers are willing to receive payments in Bitcoin is that they need the currency to pay claims. A recent US survey from technology and financial services firm NYDIG found that half of respondents wanted to receive insurance claims payments in Bitcoin. Over 75% expressed interest in Bitcoin annuities and life insurance.
Cyber criminals who infect computer systems with malware often demand ransoms in Bitcoin. Some cyber insurance covers ransomware attacks. No insurance organisation publicly declares that they are offering insurance to pay the cyber hackers, but organisations which fall victim to ransomware and choose to pay the ransom are asking their insurers for claims payments to be made in Bitcoin.
Finally, insurers are looking to protect against exchange rate risk. When insurers underwrite risk denominated in Bitcoin with fiat (i.e. government-backed) currencies such as dollars or sterling, they expose themselves to currency movements. This threatens to leave them over-exposed or under-exposed as Bitcoin, which is known for its volatility, changes in value. This is a problem for insurers paying cyber claims in Bitcoin and those offering coverage for crypto assets.
The first movers
Insurance companies are trialling different approaches to Bitcoin as they address demand and try to discover the best use cases for Bitcoin.
AXA Switzerland announced that it was accepting premium payments in Bitcoin for all non-life products from the start of April this year.
AXA is using inapay’s platform for the transactions. The price is converted from Swiss francs into Bitcoin with an exchange rate that stays valid for a short time, protecting the policyholder against exchange rate risk. The payment goes to crypto broker Bitcoin Suisse and is converted into Swiss francs before being passed on to AXA, so AXA does not hold cryptocurrency on its balance sheet. AXA says it intends to support more payment options going forward but will not accept other cryptocurrencies yet. It has not indicated any plans for claims to be paid in Bitcoin.
Others accepting or planning to accept Bitcoin payments are specialist or regional insurance companies in the US. These include INGUARD, which has accepted Bitcoin since 2013, Universal Fire & Casualty Insurance Company and motor insurers Premier Shield, Metromile and E Auto Coverage.
Liberty Mutual, Starr, New York Life and MassMutual are among the insurance companies which have invested in NYDIG. The firm is intending to “bring Bitcoin to the insurance industry,” according to its CEO Robert Gutmann. MassMutual also purchased $100 million in Bitcoin for its general investment account last December, with NYDIG facilitating the transaction.
Discussions are underway in other companies to establish their approaches to Bitcoin.
Insurance companies are facing pressure to avoid Bitcoin. The environmental impact of the cryptocurrency is raising concern. Bitcoin mining has a carbon footprint comparable to large countries. A recent Cambridge University study found that Bitcoin uses more electricity every year than Argentina. With increased requirements to report on their environmental credentials, insurers will be penalised for Bitcoin exposure.
Several governments have taken action to restrict or ban the use of cryptocurrencies in any transactions. China has explicitly banned financial institutions from using cryptocurrencies as payment or settlement for insurance or other financial services. Turkey, Nigeria and Bangladesh have outright bans on cryptocurrency transactions.
The US treasury is concerned that cryptocurrencies facilitate tax evasion and plans strict new regulation. All high-value transactions will need to be reported to its Internal Revenue Service. India also threatens restrictive measures.
Insurers are weighing up the risks associated with transacting in Bitcoin.
Storing cryptocurrency comes with exposure to being hacked. Exchanges and platforms have had large amounts of Bitcoin stolen. Phishing is another security risk. Cryptocurrency wallets do not have the same protection as bank accounts and transactions are irreversible.
Bitcoin is also extremely volatile. At the start of 2021, one Bitcoin was worth $30,000, and its value has since more than doubled before falling below $30,000 again. Until Bitcoin exchange rates stabilise, insurers may be reluctant to hold the currency themselves. Although ‘stablecoins’, cryptocurrencies with a value tied to an external reference such as the US dollar, could be a solution to this, they are not yet widely used.
Allianz warns in its latest Financial Services Risk Trends report that financial institutions involved in trading and storing digital assets are exposed to numerous potential liability and regulatory risks.
Until Bitcoin is accepted by businesses more widely, it is also poorly suited to many claims payments. If a flood damages the home of a policyholder who has chosen to receive Bitcoin payouts, it is unlikely that they can pay for the necessary repairs in Bitcoin, exposing the policyholder to exchange rate risk.
Despite the uncertainties of how Bitcoin and other crypto currencies evolve, it is generally expected that concerns will be addressed through regulation, innovation and experience. Crypto is here to stay.
Insurance companies are motivated to find ways to manage the risks, and some are willing to be first movers. AXA Switzerland’s approach—holding no cryptocurrency itself and accepting payments, not paying claims, in Bitcoin—limits its own and the customer’s exposure to extra risk. Insurance policies are also now being offered which cover the risks associated with cryptocurrency transactions and holding digital assets (see my article on insuring NFTs).
Different approaches will be taken, with some insurance companies directly offering cryptocurrency payment options, some investing in technology companies that do so and others entirely rejecting cryptocurrency for the time being. We’ll be continuing to monitor this evolving space and updating you on the emerging trends. This is a fast-moving world, so look out for more real-life case studies, and our profiles of the companies entering this space.
Sign up below to follow our insights into cryptocurrencies and blockchain. If you’re innovating in this area or would like to know more, you can also reach out to Henry Gale on LinkedIn.