How Crypto Could Disrupt Insurance

Today, technology continues to be a catalyst for change in all areas of business and industry, altering human activity at a fundamental level. However, insurance, somehow, has been relatively slow to be impacted by the effects of the digital age and still remains largely untouched by technological change. Thanks to its outdatedness, the industry is thought to be the next big opportunity for a revolution in financial services.

I was lucky enough to interview Timofey Volkov, CEO of CryptoIns, the first online service for insuring cryptocurrency developed by a traditional insurance company. Volkov is a skilled insurance professional with more than 25 years of experience, who is now eager to shake up the crypto world and disrupt the insurance industry.

Insurance seems to be a conservative industry, full of conservative people. You spent 25 years in the insurance industry before suddenly deciding to move to the crypto industry. How did that come about?

T: The idea to make an insurance product for the crypto market emerged in the summer of 2017: the market was essentially free of insurance offers, so there was huge potential. We focused on a product we knew would work and decided to use our own funding to develop it on our own platform as a token-free insurance product. This is how the CryptoIns platform was created. What we do is a completely new thing. We insure traders’ funds on cryptocurrency exchanges, accepting insurance premiums and making settlement disbursements in cryptocurrency. No one else has done it to date.

You entered a new market that was unknown to you to a large extent. Were there any things you discovered as an entrepreneur?

T: In regards to the industry, we faced a lack of clear rules in the crypto world: there is no insurance legislation, no regulations, and the market itself is very disparate, both in terms of the people and the companies. And you understand that this is the right time to occupy a niche of your own. Of course, the path of what to do and how to achieve success is often unclear. But lulls in activity are necessary too — running like a hamster on a wheel is not helpful. Now, I am much calmer when lulls occur, but they used to drive me crazy in the past. When a slow period occurs, I know how to turn it into a positive thing that helps me see what else I can be doing. And then I can continue to move forward.

Who is your target audience?

T: We estimate there is approximately 3.6 million bitcoins in user accounts on cryptocurrency exchanges. Our customer profile is a man between 26 and 55, who keeps a USD equivalent of up to $50,000 on his cryptocurrency accounts. The risk we cover is exchange collapse, for example, if it were to stop operating due to overwhelming hacker attacks or fraudulent activities on the part of the staff. If the exchange is not operating and a trader is unable to withdraw their money within 30 days, we will indemnify.

What were the key challenges you faced when you set out to develop an insurance product for the crypto market?

T: Lack of reliable insurance statistics was the first issue. No one else has attempted to insure the market before, meaning we didn’t have loss ratios or any other parameters. So it’s impossible to calculate insurance rates accurately. We decided to focus on cyber risk insurance rates. This includes, among other things, monetary losses due to hacker attacks. We took the upper limit and added a premium on top of it to cover potential unperceived risks in the cryptocurrency market. But we will adjust our rates as our portfolio develops. The second challenge we had was cyber security analysis of the exchanges.

How do you assess exchanges?

T: We developed a scoring model in partnership with Group IB, a well-known company with a long history in cyber security. They are one of the leaders in their field in Eastern Europe. Based on this scoring model, we deemed 24 exchanges and wallets eligible to be insured. Obviously, they are fairly large exchanges with extensive customer bases and high traded values. As for the other exchanges with an unclear level of risk, we have developed a special approach to form an insurance fund at the expense of the exchange, which functions as a franchise. In the event of a loss, this fund will initially be used to cover it, with subsequent indemnification from the insurer. It gives the exchange incentive to ensure stable operation.

When a person deposits money into a bank, they know they will be indemnified if something goes wrong. Why are even the large exchanges not willing to offer insurance to their customers, similarly to what the banks do?

T: There are several reasons. First, exchanges are not insurers, customer insurance is not their primary business. In addition, insurance services require an outside insurance fund comparable to the total customer assets of the exchange. The traditional insurance market is very wary of the cryptocurrency exchanges because the risks are too high. And last but not least, until recently the market lacked a finished product that the exchanges could offer to their customers. Thanks to our enormous experience and networks in the traditional insurance field, we have created it — CryptoIns. It covers the risk of a total collapse of an exchange due to overwhelming hacker attacks or fraudulent activities on the part of the staff.

Everyone knows that from a legal point of view there are a lot of questions about the majority of projects in the crypto industry. You also face strict insurance regulations on top of that. What legal issues did you have to solve?

T: Our platform is backed by a clear legal entity — Swiss insurance broker ASPIS SA. Finding a suitable insurance company was one of our main goals. The traditional insurance market is very tightly regulated by local authorities in different countries. This includes licensing, extremely tough requirements for the storing of reserves, insurance rates, reporting and much more. As a result, there are very few companies who are both legally able and willing, because of the inadequate legislation among other things, to form reserves, and receive and make payments in cryptocurrency. But we found such a company — Selecta Insurance and Reinsurance Company (Caribbean) Limited, who is able to perform all of the above operations using cryptocurrency according to local legislation. Additionally, our insurer is interested in developing new insurance products for new markets.

It is clear that the insurance market is highly regulated, but why haven’t the global insurance giants entered into crypto insurance? What’s the problem?

T: First of all, the cryptocurrency market is too volatile. Second, as I mentioned before, the legislation and regulations in many countries don’t permit the use of cryptocurrency for insurance purposes. Despite some large insurers expressing interest in the cryptocurrency market, no one actually looks into it. Traditional insurance markets are exponentially larger than those in the crypto industry. Another issue is high risk being associated with any financial market, as a principle, and even more so in a market like cryptocurrency. Any insurance is a risk management action, and the insurer has to understand very clearly what can happen in the market it insures.

What are your plans for developing the platform?

T: We are ambitious. Our goal is to completely change the approach of the insurance industry, raising the bar to a game-changing high-tech level. Right now, we are actively working to create a universal digital platform that will allow us to implement a whole line of insurance products, both niche (such as our first product, which insures customers’ funds in cryptocurrency exchanges) and more traditional ones. The latest technologies enable complete automation of many business processes, such as the introduction of AI, big data, machine learning and many other technologies, which allow businesses to quickly change and grow.

The use of AI technology can be used to make decisions about insurance payments, the formation of individual insurance products, and rates. This will allow insurers to simplify internal processes and significantly cut costs, as well as make the process as user-friendly as possible. Customers can easily use insurance services without leaving their homes. Our job is to make an insurance service you would want to use.