RIDING THE NFT WAVE – A GUIDE FOR INSURERS

Non-fungible tokens (NFTs) seem to have exploded in the Web3 community (with millions showing excitement to ‘own’ a digital collectible); and content creators and brands are unlocking various customer engagement mechanisms via NFTs.

This was aptly reflected in the NFT market valuation, which stood at $3 billion in May 2022 and is forecasted to reach $13 billion by 2027. Global brands (such as Nike, D&G, Tiffany, Gucci, Adidas, Time Magazine, McLaren, Pepsi, Starbucks, and many others) have already acknowledged the market potential of NFTs through branded NFT drops. Despite the recent NFT market crash, the next up cycle is expected to bring a fundamental shift with utility-focused NFTs taking precedence over artwork.

For the uninitiated, an NFT is a digital asset that represents real-world objects such as art, music, in-game items, and videos. In terms of characteristics, an NFT is rare/unique, limited, and immutable. Essentially it is a digital stamp that certifies ownership via distributed ledger technology (DLT). The most expensive NFT collection ever sold amounts to about $91.8 million (The Merge).

Entry points for insurers

In the formative years of the NFT market, content creators and brands in consumer goods, retail, travel, and automotive industries took the early steps to launch digital collectibles. However, the increased valuation of these collectibles brought financial services players into the game. There are possibly three primary avenues for insurers to enter the NFT space, namely:

New products: Insuring new risks related to NFT ownership

While NFTs ensure ownership, they are susceptible to risks related to identity theft and malfunction.

• Identity theft: Hacking/phishing by cyber attackers can make users lose access to their NFTs and cost the global NFT marketplace millions of dollars (E.g., in February 2022, OpenSea platform users lost $1.7 million in NFT tokens in an apparent phishing attack).
• Malfunction of smart contracts: A smart contract (a digital code on a blockchain which executes when certain conditions are met) is the backbone of an NFT. A malfunction of this code can lead to an undesired outcome.

Risks such as these open avenues for insurers to launch new products and acquire a whole new segment of Web 3.0 customers. Insurers such as Uno Re, YAS micro insurance (in partnership with Generali Hong Kong), and OneDegree (in collaboration with Munich Re) have become early movers in insuring digital asset-related risks.

Value-added services (VAS): VAS through the management of purchased NFTs

Insurers can provide different value-added services complementing NFT and digital assets insurance.

• Custodian Solutions: Insurers have the potential to become custodians of purchased NFTs and provide a bundle of associated services.  Various digital asset custodians have already forayed into the market by offering insurance coverage e.g., Aegis, Bitgo.
• NFT authenticity verification: Millions of users are susceptible to scams related to purchase of fraudulent NFTs (NFT rug pulls). These scenarios do not translate to insurance claims, as the purchase is initiated by the user. Insurers can help users take preventive actions by offering algorithms that check the metadata of NFTs, thereby helping  validate  authenticity of a digital asset.
• Beneficiary management: In case of an NFT owner’s demise, the transfer of ownership rights can be a grey area. Insurers can become custodians of transferring the NFT ownership rights to the beneficiary.

Customer engagement: Creating utility-driven NFTs, which help to build communities

Traditionally NFTs have been viewed as static collectibles (similar to an expensive image)however, the next era of NFTs will be utility-driven. The smart contracts will soon be sophisticated enough to change the state of the collectibles and unlock rewards based on customer actions throughout their lifetime.

A utility-focused NFT is beneficial for insurers in more than one way. It can promote customer interaction, reduce policy lapses, and provide avenues for cross selling. An Insurtech player launched a set of artwork-NFT collectibles in 2022however, there was no utility value to be unlocked from the collection.

Conclusion

 It is evident that keeping digital assets safe is increasingly becoming the need of the hour. Depending on the entry point chosen insurers need to  focus on a few key areas pertaining to their NFT strategy:

• Devising the right risk evaluation approach: The NFT market provides a largely untapped opportunity for the insurers. But underwriting this growing digital asset class can be challenging, as uncertainty remains in establishing the correct valuation for NFTs which have no underlying (tokenized) physical asset. The original NFT purchasing price for virtual assets may not help in appropriate risk level definition during bear markets. Till the digital asset regulations mature, insurers can reduce such uncertainties by selectively covering popular launches and partnering with mature NFT marketplaces.
• Crafting a winning launch strategy for NFTs: From recent market launches, it is evident that players offering utilities to their NFT collection, stand out from the competition. Thus, formulating a sound initial and follow-on launch strategy is crucial in building a community or ecosystem, coupled with a strong community engagement approach. Insurance is expected to be embedded in different metaverse worlds in the future; so brand recognition through an insurer initiated NFT launch, could go a long way in reducing policy lapses during the initial years of coverage.
• Formulating the right technology strategy: Irrespective of the entry point chosen, insurers would need a strong technology capability supporting these new-age products and operations.  An Insurer’s existing IT organization and its suppliers may not be equipped with adequate DLT skills and experience. Hence onboarding the right technology partner would be of strategic importance.