According to industry sources, popular U.S.-based cryptocurrency exchange Coinbase is looking to establish its own insurance company.
Speaking with CoinDesk on July 10, anonymous sources familiar with the situation told the outlet that Coinbase is in the process of setting up a “captive” insurance company with the help of insurance brokerage Aon. According to the report, Aon has been establishing captive companies in the Cayman Islands since the start of the year and is expanding its offering to a handful of cryptocurrency exchanges.
“Captive” insurance subsidiaries are commonplace among Fortune 500 companies. The corporation being insured owns the subsidiary outright, which allows them a method for reducing costs and improving their access to reinsurance markets.
Thus far, access to insurance for cryptoassets has been limited, with the majority of exchanges setting aside personal funds to cover the cost of losses incurred during hacks. However, the process is informal and unregulated, leading to investor uncertainty about the amount of coverage actually offered by an exchange.
Sources told CoinDesk that Aon and Coinbase are experimenting with captive subsidiaries as a way to alleviate the insurance burden on crypto. The subsidiaries are subject to regulation and auditing, allowing crypto exchanges to obtain coverage from the reinsurance market if needed.
Subsidiaries also provide an alternative route for coverage in the event of overly expensive insurance being charged through commercial markets. Crypto exchanges can lean on their subsidiaries as an augmentation of self-insurance with more regulation.
Jacqueline Quintal, a managing director with Aon, explained the advantages of using captive subsidiaries,
"If a firm is self-insuring, they’ve accepted responsibility for funding 100% of any loss. Captives, in comparison, provide a means through which firms can access insurance or reinsurance, while also pre-funding self-insured loss amounts in a more formal way than simply setting aside capital.”
Quintal said that the lack of insurance availability for crypto exchanges has forced companies to get creative with alternative solutions.
While neither Aon or Coinbase would comment on the rumored partnership, the companies have a history of working together. In April, the insurance brokerage played a role in attaining a quarter-billion dollars in coverage for Coinbase’s hot wallets, which amount to only 2 percent of the exchange’s total crypto holdings.