The Web3 economy is currently under-insured and has huge potential for future growth.
While there is some hype surrounding digital assets, decentralized finance, and Web3, there is also substance that has the potential to fundamentally transform parts of our modern financial system. We believe it’s time for insurers to pay attention. Today, out of $1 trillion in crypto assets, less than 1% are insured.
How should insurers navigate the rapidly evolving Web3 landscape? What follows is the latest edition in our Oliver Wyman Reinventing Insurance series. We share a practical guide for insurance executives to help separate hype from reality, including Web3 insurance opportunities and risk considerations. Below is an excerpt of our report, for the full version, please click the PDF below.
Web3, why it's time to pay attention
We believe it's time for insurers to pay attention. 40 million people in the US reported investing, trading or using cryptocurrencies in 2021 (as compared to 5 million in 2015).¹ Venture capitalists are increasing their investments in crypto infrastructure and Web3 companies. The US is developing a comprehensive policy framework.² An increasing number of insurers are entering the space, and new decentralized autonomous organizations (DAOs) are being founded every day.
What is the Web3 economy
The industry refers to Web3 as a new version of the Internet that is inspired by blockchain technology, often with the purpose of enabling decentralized processes and decision-making. We think this definition is too narrow — and prefer to use the concept of the Web3 economy, which represents the broader financial ecosystem associated with Web3.
There are many scenarios for how the Web3 economy will evolve, especially with reference to data in this rapidly changing market. This paper seeks to go beyond the “headline of the day,” or prospects for any individual cryptocurrency or digital asset, and explores the broader Web3 opportunity for insurers.
Web3 opportunity for insurers
We see two main dimensions of the Web3 opportunity.
First, the Web3 economy is currently under-insured and has huge potential for future growth. Today, out of $1 trillion in crypto assets, less than 1% are insured.³ There is significant unmet demand from retail and institutional investors, as well as businesses. The key questions are what risks companies can prudently underwrite — and what companies will win the race to achieve scale.
Second, companies can leverage Web3 technology to reinvent the insurance value chain, creating propositions and business models that are better, faster, and cheaper. In the near-term, Web3-based propositions can help insurers reach new customers and address unmet customer needs. In the longer-term, Web3 offers the potential to reimagine business models that radically challenge what an insurer can look like.
Web3 has attractive growth potential in insurance
There is a substantial opportunity to insure the fast-growing Web3 economy. This includes a wide range of Web3-related assets (e.g., digital currencies, NFTs) and liabilities (e.g., business liability, professional liability of Web3 companies and risks). The taxonomy of potential risks awaiting cover is also broad. Below we show, closer in and further out opportunities across the Web3 landscape.
The second dimension is the opportunity to develop new Web3-based propositions and business models. It’s worth noting that Web3 technology and capabilities can also be used to provide insurance in the “traditional economy,” as well as in the “Web3 economy.”
Insurers have already begun experimenting across both dimensions. For example, a number of cryptocurrency exchanges have contracted large theft insurance policies that protect them and their users (for a limited number of risks). Insurers have also begun using “smart contracts” to automate policies for certain types of risks where third-party data can be used for the real-time evaluation of claims (for example, travel insurance).
In the future, we expect the scope of “insurable” Web3 assets and risk types to increase as insurers deepen their understanding of the risks involved. We are starting to see examples of insurance for smart contracts, but it would also be possible to imagine providing insurance for houses in the metaverse. There are also significant opportunities for business model innovation. For example, imagine creating a fully decentralized insurance platform similar to the Apple App Store where anyone could submit their own insurance product.
As insurers consider developing new Web3-based value propositions, it will be important to focus on the specific customer problems that are being addressed, and why Web3 capabilities are necessary. Insurers will also need to consider their distribution strategy, including the tactical details for how these policies can be purchased and how claims will be paid. Below, we share a case study on Nexus Mutual that illustrates Web3 and insurance business models.
Anyone can become a Nexus Mutual member if they pay a membership fee and go through an identity verification process. Nexus Mutual members hold NXM tokens, which allows them to vote on claims assessment and governance issues (see illustrative example below). They can also become risk assessors and earn rewards by staking their tokens (essentially, contributing tokens to a pool that is used when a payout occurs). In less than five years, the company has exceeded $400 million in coverage (footnote 43)
Coverage can be customized by amount, time period, and currency (policies can be denominated into cryptocurrencies or stablecoins). Policy types include:
- Custodian cover (e.g., if the custodian is hacked or withdrawals are halted for more than 90 days)
- Yield token cover (e.g., the yield-bearing token drops in value by more than 10%)
- Protocol cover (e.g., cover failure in protocol code, economic design, governance set-up or oracles)
Web3 Primer - Five key questions
Inside our report, "Will Web3 Reinvent Insurance?" we expand on these key questions that can apply to Web3 across industries.
Below, we share four key takeaways from this report. At Oliver Wyman we have been helping clients understand Web3 and what it means for insurers — framing Web3 strategies (near-term and long-term), and launching new customer-focused Web3 insurance products. We welcome the opportunity to have a conversation with you on this topic.
Takeaway 2: When insuring the Web3 economy, prudent underwriting will be critical. Insurers will need to be thoughtful about what risks are covered, and to communicate this to internal and external stakeholders.
Takeaway 3: Insurers can leverage Web3 technology for innovation but need to focus on how they will create customer value.
Takeaway 4: Web3 offers the potential to reimagine new insurance business models — including new forms of mutuals or platforms. Companies do not need to restrict themselves to replicating traditional insurance in a Web3 context.