Parametric coverage for cannabis growers? Read on. Joe Ziolkowski, CEO of cryptocurrency, cannabis, and psychedelics insurer Relm, talks to Emerging Risks about the risks and rewards associated with insuring these emerging markets.
Can you fill us in a little on your background for those that might not have come across you before?
We just began our third year of operations as a fully regulated, Bermuda-domiciled, commercial insurer with a business plan that has been built around providing capacity to emerging sectors where the insurance and reinsurance traditional marketplaces have avoided, for one reason or another.
We spent all of 2018 working with the Bermuda Monetary Authority to get them comfortable with our proposition, authorising and regulating new capacity to provide coverage for sectors that are not well understood, and for which there is no real underwriting or track record. We have been building a proposition with management competency to move into these spaces meaningfully, and to provide solutions for those companies that have almost nowhere else to turn to satisfy their insurance requirements.
We launched with a licence in December 2019, and we began underwriting early in 2020.
What sectors are you providing coverage for?
There are really three sectors. You have companies that are working across the crypto and blockchain system on a global basis. That includes retail institutional exchanges; OTC trading desks; asset managers launching crypto-orientated funds; crypto-mining operations – which are really the new version of data centres; payment remittance platforms; cross border payment networks; token issuers that are active in the defi space working to specific protocols to develop coverage around their token issuances.
For the crypto sector we are writing directors & officers’ liability (D&O); professional indemnity cyber-crime; and we also have some product development initiatives that we’ve launched. So, for blockchain infrastructure providers we launched a slashing insurance policy. Slashing is where, if you are in the proof of stake infrastructure within blockchain you have to run these nodes, and these nodes exist to validate the transaction.
These nodes are computing to calculate the security and accuracy of these transactions, and if those nodes experience any amount of network downtime, or if there is a double signing event where you have these nodes signing on the same transaction together, there are slashing penalties. And all of the capital that is committed behind this node is at risk in the event that these nodes don’t operate in the way that they are supposed to.
We also work with the two largest proof of infrastructure companies, Blockdaemon and Figment, and have worked hand in hand with them to develop this cover.
Guessing that a lot of insurers are wary of writing this sort of cover because they don’t fully understand the crypto space, and are still very wary of the risks. Crypto is not failsafe, is it?
Not at all. There has been $15 billion worth of crypto that has evaporated. There has been the influence of bad actors. There have been frauds. There have been money laundering initiatives. There has been financing of terrorism. There have been entire drug networks that have been facilitated with cryptocurrency. But the reality is that fiat is used for the exact same purposes. The USD, GBP and EUR are used in much more nefarious ways to facilitate all of this bad stuff than crypto is.
So our proposition is that we want to make sure we have clarity with regard to who these companies are: how they are being operated and run, looking at their strategy and compliance, before we make an underwriting decision.
We take the same approach to underwriting for these other two sectors we focus on: cannabis; and psychedelics & alternative therapeutics. So in the cannabis space we are writing a lot of D&O, both private company and public company. We are working with companies listed on more than a dozen national exchanges in the US, Canada, Israel, Germany, Australia and Jamaica.
We also have certain unique product development propositions within the cannabis space as well. If you look at federal crop insurance in the US, you can’t buy federal crop insurance if you are growing a crop that is federally illegal. But does that mean that cannabis growers shouldn’t have access to a living plant-type coverage? And so we are working with a platform called Arbol and one called Chainlink to provide a parametric form of living plant coverage for cannabis growers.
Why is parametric good for this sector?
Parametric coverage is programmatic. It shouldn’t require any real human involvement, so no lawyers and is basically binary: if a,b,c and d happen, then you should receive a claim payment. That’s the theory. And smart contracts are a programmatic contract, and these triggers are informed by data.
Certainly this can be supported by traditional insurance, and we are happy to support that, but the opportunity exists to have this type of cover available so that they can have absolute transparency that when events take place, there is coverage and no involvement from the insured or the insurer.
Is there a sufficient data set to enable parametric cover for cannabis growers?
The majority of those data sets are the same as for soya bean growers, as they are for corn, as they are for all kinds of other agricultural industries that are able to obtain and purchase living plant coverage for decades. Our starting point is there, and it’s going to involve working with some of our insureds that have an appetite for that type of coverage, to ensure that whatever the remaining two or three percent of data points that need to be tracked specific to cannabis growing operations are incorporated into the model.
You work with the crypto, cannabis and psychedelic sectors. Why have carriers been reticent to insure them? A concern with data, a lack of understanding of these markets, or a bit of both?
I think it’s three things. One is data. If you can’t point to ten years of loss data to put your actuaries in a position to confidently predict a future ten years of loss data, the conversation is over.
The second reason is more of qualitative, reputational and ethical concerns surrounding the perception of large, publicly-traded companies that could be supporting industries where there are potential ethical and money laundering concerns. Ultimately when it comes to satisfying your reputational committee, it’s a non-starter.
The third reason is that these insurance companies have many more commas on their balance sheet than we do and are generating a ton of premium from regular industries, insuring regular products, all of which are rooted in tons of data. To grow their book by a tiny little bit in GWP is just not worth the effort. But for us, the opportunity is massive because our book is focused on these sectors.