2021 has been a boom for the NFT industry with Beeple’s 5,000 days being sold for in excess of $69m at Christie’s auction house.

We have seen collections such as Bored Ape Yacht Club reaching a market cap in the billions of USD. This inflow of money into a nascent, unregulated industry has caught the attention of opportunistic thieves and scammers, including well organized crime.

NFT holders, founders and developers should protect themselves against financial loss. Insurance is a financial product that can limit your downside, for a premium. This article looks at several insurance policy considerations within the NFT space.

Article Outline:

• Background
• Considerations
• Existing Cover
• Closing Remarks

Background:

Frozen NFT assets are receiving more attention as attempts from opportunist thieves spike. Punk9059 posts about the number of frozen assets from high profile collections on Opensea. This illustrates the number of compromised NFTs that are currently being investigated.

The requirement to self custody your assets in a crypto wallet has lead to numerous “fat fingered” mistakes with some high value assets being sent to inaccessible wallet addresses in error.

This deliberate misappropriation or human error has created a desire for insurance for these novel high value assets. But how can actuaries price the premiums for these assets with minimal historical data, and in a market where valuation of the asset is volatile and problematic? Let’s take a look at several considerations.

Considerations:

1/Be Specific About What to Insure

Ultimately the prospective policyholder will need to be specific about what they would like to insure against. The lack of specificity could lead the insurer to factor in an additional buffer for the premium for a general policy, but some of the coverage may not be relevant.

• Is the policyholder insuring the Token (ERC-721 or ERC-1155) or are you protecting the metadata describing the NFT or are you protecting, the image alone (JPEG)?
• Are you guaranteeing that the token, metadata and image are always accessible?
• Are you guaranteeing that the metadata and image have not been compromized?

These questions may lead to further inquiries about how the data is stored. If it is fully on-chain then there is lower risk of it being lost, whereas if the token is on-chain, but the image is on a centralized server then there is a greater risk and perhaps a higher premium.

2/ Is a passive yield associated with the NFT or are royalties from secondary sales?

If there is a form of yield then there could be a desire for income protection from the policyholder which may lead to a separate policy or wider scope and higher premium.

Owners should also consider protecting themselves against smart contract failure which could mean financial loss if royalties couldn’t be captured or a flaw in the contract causes these royalties to cease.

There may be benefits in terms of reduced premiums to policyholders on contracts that have been verified or audited - thus promoting best practice behaviour in the industry and in turn benefiting both parties through lower risk of claims being incurred and prevalence of malicious contracts.

3/ What category of existing insurance product will this fall under?

Today’s standard commercial property policies are triggered by “direct physical loss” to “Covered Property“. NFTs do not fall under this category given their intangible nature.

The NFT insurance could be considered as an extension to the existing cyber security product offerings which may also include professional indemnity insurance for developers in the event of a law suit being raised against them.

4/ Can “Execution risk” be mitigated through an insurance policy?

There are concerns raised around projects delivering against their roadmaps (Execution risk). The term “Rug-pull” is thrown around, although the definition is somewhat subjective. Surety bonds offer a solution to this whereby insurance is taken out to cover against the losses incurred in the event commitments for future work are not undertaken.

5/ Not your keys, not your crypto?

Being able to transfer the token to an heir/benefactor after death is another consideration. If the private keys are unobtainable, then the asset cannot be controlled. This could dissolve responsibility, of the issuing insurer, in the event of an insurance event? The clauses in the contract need to be reviewed carefully as this may fall under the responsibility of the insured.

Responsibilities will need to be established and embedded into the clauses of the contract to assess whether there are certain actions, by either party, that could be considered negligent and hence nullify the policy.

Michael Giusti (senior writer at insurancequotes.com) makes a valid point about NFTs that are connected to real world assets:

"Just because someone sells an NFT doesn’t mean they necessarily owned the underlying asset ... It would be like someone standing in front of their neighbour’s house with a counterfeit deed. Just because someone paid money for that deed doesn’t mean they now own the house."

While most know an NFT to be digital art, the use case are yet to be discovered with the ability to tokenize real world assets. This then poses further questions about what is being insured - the real world asset or the token representing the real world asset?

6/ Policyholder due diligence - what is reasonable?

How diligent should a policyholder be in terms of security in the event of a claim to be rejected? The legal framework is probably not yet developed enough to have the expertise to provide guidance on this yet. Sharon Henley (vice president of research and development at Coincover) provides some illustrative points in this regard:

“Check out the details of the NFTs, review the metadata, look at the URLs of the metadata as well as the URLs for the JPEGs,” said Henley. “It’s easy to switch out URLS and think you are purchasing an NFT that you are not. ... Ensure that you purchase NFTs on a trusted site ... and again do your due diligence."

This could then drive positive consumer behaviour - if assets are held in a cold wallet then insurers could offer a discounted premium to policyholders to represent a lower risk of a claim being incurred. An existing example of this is within the car industry whereby black boxes are installed to monitor driving behaviour to reduce car insurance premiums while promoting safer roads.

A1rport.Eth provides a good NFT due diligence guide that can be used as a robust framework when operating within the NFT space.

Existing Cover

There is cover available, although the scope of cover and products being offered are relatively limited at the moment. To caveat this is for information purposes only and is not an endorsement of any of these product offerings.

1/ Insurance Finance defines itself as the first two-sided digital asset insurance marketplace. There is an ability to request and provide insurance on a broad array of digital assets.

2/ Nexus mutual is more akin to a decentralized form of insurance offered through what is known as a “mutual” in the web2 world. It is a self governed organization that uses tokens to help drive its governance protocol.

3/ Nimble Insurance aims to create a future where insureds, underwriters, actuaries, LPs, assessors, appraisers and all players in the insurance system can work anonymously and autonomously to create profitable and efficient risk pools.

Closing Remarks

The ball has been set in motion and insurers are now beginning to offer bespoke products, predominantly via Lloyd’s of London who specialize in customizable risks. This means it is only a matter of time before claims are made and precedents are set via the courts which in turn will lead to a whole new market share for insurance companies to expand service offerings into. Data is the key and blockchain offers an immutable, verifiable solution to harnessing the wealth of information in the exponential age.

While this article focuses on NFT Insurance as a product we have also looked at blockchain and NFTs as a means of disrupting the insurance industry. Blockchain can boost transparency, aid better compliance with regulations, and build excellent products and markets. It can also drive a positive change in consumer behaviour to better benefit the wider society.

At OriginsNFT we leverage data-driven decision making, educational resources, and proprietary analytics to remain ahead of the curve with respect to blockchain tech and specifically NFT’s. To find out more, please visit our website or Twitter.

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