Coinbase and Aon believe that owning a proprietary insurance subsidiary (also called captive) could represent the solution for the shortage of insurance presented by crypto exchanges. In most cases, the exchanges just store in a separate wallet a part of the funds to cover the losses of a hack. But the lack of a formal structure can lead to misappropriation of the funds and the users do not exactly know the coverage of the assets.
A captive subsidiary keeps the funds separate in a regulated, audited account, which allows the firm to get more cover from the reinsurance market.
No other declarations have been made by both companies regarding their interest in captive insurance.
In April, Aon aided Coinbase in securing 255 million to cover its hot wallets. The exchange stores aside only 2% of user funds in hot wallets, having $25 billion worth of crypto when the market hit its high in 2017.
“There is a lack of capacity and some are uncomfortable with what is available in the marketplace and are looking to alternative solutions,” said managing director at Aon Jacqueline Quintal. “I think the path for most will be to buy some amount of traditional insurance first and then to explore alternative structures, potentially including a captive — and we are having more and more of these conversations.”
Quintal points out the advantages of a captive over self-insurance: “If a firm is self-insuring, they’ve accepted responsibility for funding 100% of any loss. Captives, in comparison, provide a means through which firms can access insurance or reinsurance, while also pre-funding self-insured loss amounts in a more formal way than simply setting aside capital.”
Taking this more formal and regulated approach, Quintal added, can help create more capacity in the market, and “by having more control over a firm’s insurance program, captives can bring the price of risk financing down over time.”
Most of the insurance funds would be in fiat, even for crypto firms, but crypto could be used as a surplus, said Ward Ching, managing director at Aon Captive Insurance Managers.
“It’s all about doing the math and showing the domicile regulatory leadership how the inclusion of cryptocurrency as an asset class both satisfies the regulatory mandate and provides financial flexibility in a constructive and safe manner,” said Ching.
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