The cryptocurrency market is still very much immature and anyone looking at performance within it can only describe it as having the ‘yo-yo’ effect. Indeed, these constant peaks and troughs make it quite a volatile asset class for institutional investors such as insurers.
Capco cyptocurrency lead and principal consultant Romal Almazo says however, that “once the taxonomy for digital assets is better understood and universally agreed by regulators, expect mainstream adoption to accelerate”.
“Cryptocurrency should be viewed as a 10 to 20 year project which will definitely become a mainstream asset class for global insurers,” Almazo adds.
“Insurers are currently in what I would refer to as an exploratory phase. The insurance industry will be impacted by crypto assets in two major ways. Firstly, as insurance products and services move onto the blockchain, there will be an increasing need for tokens. Put simply, customers will need crypto tokens to access insurance services on the blockchain. This is currently being driven by smart contracts with a well- publicised range of use cases from smart pricing to automated insurance premium renewals. Also expect big data and the Internet of Things to play a central role in future developments.
“Secondly, due to the inherently risky nature of storing cryptocurrencies insurance companies are expected to play a leading role in mitigating this risk. Right now, as Tier 1 banks and financial institutions prepare themselves to enter the market, the two main things that are holding them back are the lack of regulation and the risks associated with digital custody. This will mean a huge opportunity for insurers to get into the market and partner with digital custodians and digital storage providers. Before banks start investing in Cryptocurrency, they will require a secure storage facility with low settlement risk. Expect to see major partnership announcements between crypto exchanges and big insurance names later this year and next.”
iCash CEO and founder Will McDonough emphasises the diversification angle for mitigating risk within an investment portfolio, but also recognised that as this moment in time allocations will be small.
“Cryptocurrencies are an asset class and I believe any well diversified portfolio should have exposure to as many asset classes as possible. One could argue that cryptocurrencies are an uncorrelated asset class which
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CLIENT: iCash SOURCE: Insurance Asset Management DATE: 13 July 2018 MEDIA: Online
would be even more reason global insurers should get exposure to them. To be clear, I don’t think they warrant a massive allocation yet, but having 1% to 3% of your portfolio exposed to the explosive growth of
the asset class, gives the opportunity to double your total overall assets if the growth persists at this scale, while only risking a small portion. That’s an excellent risk reward in my book.
“As we believe cryptocurrencies should and will be recognised as an investable asset class, the decision to not invest, is akin to an active investment decision to short cryptocurrency as an asset class.”