Navigating the Uncharted: Insurance in the Metaverse

When insurance people think about emerging markets, what they usually have in mind is high growth economies in Asia or Africa, for example. But lately, with the rapid advance of the internet, a less tangible emerging market has come into insurers’ sights – welcome to the Metaverse.

The Metaverse could generate economic value of up to $5 trillion by 2030, which is roughly the size of Japan’s economy, according to an Aon Transformative Trends report. The U.S. technology group Meta is spending at least $10 billion annually on Metaverse development, the report says.

The Metaverse is characterised by blockchain-based virtual assets, such as cryptocurrency, gaming tokens and so-called non-fungible tokens (NFTs) which can be digital artwork or music.

Effectively the next, revolutionary iteration of the internet, the Metaverse promises to bring a more immersive and interactive digital environment for consumers and businesses alike.

If Web 2.0 is where we are now, with people uploading content for social media etc, the Metaverse is essentially Web 3.0, according to Wouter Bosschaart, Director, Strategy and Technology Group, Aon, speaking at Insider On Air webinar Navigating the uncharted – insurance in the metaverse. Crucially, it is decentralised and distributed framework allowing content to be shared securely and transparently, he said.

Cryptocurrency is the highest profile example of how ownership of digital assets has taken off, but NFT based assets are also growing. An asset or intellectual property “that doesn’t change” is prime NFT material, according to webinar speaker Justin Shattuck, CISO at Resilience.

Shattuck cites the headline grabbing craze for trading in digital “stickers” like the Bored Ape Yacht Club. But other more prosaic examples include smart contracts or real world assets membership to a club.

As well as entertainment and e-commerce, businesses are also looking to use the Metaverse and virtual reality for training, marketing, events, remote collaboration and product design.

The biggest insurance product related to Metaverse activity is around NFTs, the authentication of the unique digital asset and the loss of the ownership of it. It points to a to a growing market where people are purchasing more digital assets like artwork or digital real estate. It sounds like an oxymoron, but virtual real estate is digital property that exists in online spaces, also known as virtual worlds.

Old fashioned terms like insured values, losses and claims take on a new dimension in the virtual world. But as webinar speaker Armin Satzger, Market Risk Analyst, Group Risk Management at Swiss Re pointed out, there’s actually more transparency in the Metaverse. When data is in a blockchain based environment, it is available to everyone - whereas data quality and availability is often a problem for insurers in the real world, he pointed out.

The source of claims in the Metaverse could relate to the loss of fungible or non-fungible assets themselves or could be due to the technical services that support them, Satzger added.

In terms of insuring technical services, the loss could refer to loss of funds through a criminal exploit or just plain negligence. The webinar participants agreed that the quality of custodial practices is growing in terms of both user friendliness and security level. As the market is immature today the pricing is attractive to insurers but is likely to become more competitive as the market grows.

For illiquid assets like smart contracts, Satzger references the development of technology to price and support their use. An automated market maker (AMM), allows digital assets to be traded without permission and automatically by using liquidity pools instead of a traditional market of buyers and sellers. Compared with a traditional exchange platform where buyers and sellers offer up different prices for an asset, an AMM could help insurers determine the value of virtual assets and claim amounts.

Notwithstanding the fast development of Metaverse risk management and transfer technology, the narrowing of the insurance gap depends on more regulation. Scandals in the cryptocurrency business and the loss of consumer assets has focussed regulators’ attention on that sector. Their widening focus into the less travelled corners of the Metaverse is a positive, Aon’s Wouter Bosschaart reckons.

Insurers themselves are heavily regulated making them rely on supervision in the Metaverse before committing substantial risk capital, he said. As a result, insurers will initially sample the commercial segment of the virtual world where real, regulated companies are active. But by 2030, Boschaart predicts that personal property-casualty, lines will be a reality. Indeed, as consumers become more active in an expanding Metaverse, regulated insurance cover will be a necessity not an option, he said.