When Mark Zuckerberg renamed his company Meta in late 2021 to better exploit an emerging 3D digital universe, some saw the move as fanciful.
The Facebook founder may have anticipated our seemingly insatiable desire to share content digitally but his prediction that the Metaverse would be mainstream by 2030 looked like a stretch.
Since then Meta has had its travails but the interconnected augmented and virtual reality digital worlds that make up the Metaverse have moved beyond the preserve of gamers, and the insurance industry is taking notice.
To protect... digital assets from a wave of threats, insurance will be essential
Employee-owned insurance broker and wealth manager IMA Financial Group made headlines last year when it launched IMA Web3Labs, in Decentraland, a virtual world based on blockchain technology, with an initial remit to explore risk mitigation for non-fungible tokens (NFTs).
Garrett Droege, SVP of innovation and digital practice risk leader at IMA, believes most, if not all, physical assets will eventually be backed by virtual tokens, with luxury brands leading the field in this regard.
“To protect these digital assets from a wave of threats, insurance will be essential to bringing this concept to reality,” he says. “It’s imperative to understand how to insure digital assets (whether NFTs or cryptocurrency or otherwise) needs today, rather than wait until the problem occurs.”
Alongside insurance products covering Metaverse-specific risks like NFTs and Bitcoin wallets, Accenture’s Kenneth Saldanha, global insurance lead, expects smart contracts in areas such as containers, refrigerated transportation, domestic devices and health wearables, facilitated by Internet of Things (IOT) technology. IOT is a key pillar of the Metaverse, since it unites the real world with the digital one. It’s already being used in smart contracts for crop insurance, for example, to indemnify vineyard owners when temperatures drop below freezing point.
DAC Beachcroft lawyer Alexander Dimitrov adds that both Metaverse platform providers and the companies that use them will also have significant insurance needs.
A failure of Web2 is rarely catastrophic, but with Web3 where a company is reliant on your operation it would be more than just an inconvenience
“A failure of Web2” – the current incarnation of the Internet – “is rarely catastrophic,” he says. “But with Web3 where a company is reliant on your operation it would be more than just an inconvenience.”
Event cancellation is one such opportunity, given the vast scope for events offering an immersive 3D experience to go wrong. On the liability side, Dimitrov points to public liability insurance in relation to advertising regulation compliance; intellectual property insurance – the Metaverse is seen as fertile ground for copyright and patent disputes; and employers’ liability. Here, Metaverse threats range from employee injury while using virtual headsets to harassment claims. Dimitrov warns that policing the behaviour of avatar-employees could prove tough.
It’s important to note, of course, that some existing products could address Metaverse insurance needs. In addition, as with silent cyber, it is possible that insurers are already covering Metaverse mishaps unknowingly. Michelle Chia, Zurich North America’s professional liability and cyber head, says that the question of insurers’ role in the Metaverse forms part of the bigger issue of insurable versus uninsurable/systemic cyber risk.
She adds, “Adopting digital technology without evaluating risk will create operational vulnerabilities so cyber security is an area of concern. Without appropriate measures in place, adopting this cutting-edge digital technology – in my opinion – increases the cyber risk.”
Operational benefits
Operationally for insurers, the Metaverse offers some clear wins. Accenture’s Saldhana notes that the industry has for some time been using virtual and augmented reality to simulate natural or man-made catastrophes. He expects digital twins, replicas of physical assets at risk, to gain traction early, both for the provision of risk control services and scenario-based premium setting and underwriting. Training and distribution are other areas with the potential to be radically transformed by the Metaverse, Saldhana predicts.
Zurich North America’s Chia calls the Metaverse a great equalizer. She says, “There are only so many people on my team I can send to any one conference because of the carbon footprint and the cost but if the conference exists in the Metaverse we can decrease our carbon footprint but increase the number of individuals that can access it.”
Regulatory lag
Regulation lags the development of the Metaverse to the point that basic definitions are unclear, including, notes DAC Beachcroft’s Dimitrov, a definition of the Metaverse itself.
Without appropriate measures in place, adopting this cutting-edge digital technology – in my opinion – increases the cyber risk
Zurich’s Chia adds, “If I create an avatar, who has ownership? Is it me, or am I just licensing it from the entity that gives me the ability to mix and match the components, or is it the platform? There are so many questions and I don’t know if we have enough framework whether societally or regulatorily or legislatively to unpack them right now.”
Also unclear is how insurers can value Metaverse assets and indemnify against losses, particularly given regulatory restrictions on the use of crypto. Indemnification formulas for NFTs are particularly challenging given that they are by definition unique and non-replaceable.
Accenture’s Saldanha says, “The dust hasn’t yet settled on how we even define some of these interests so insuring them is another layer of regulatory question.”
“If ownership and insurable interest and valuations for indemnification are not clear there’s not a lot of room to win.”
Metaverse-specific regulation is yet to be developed, although in the UK the upcoming Online Safety Bill attempts to address some questions. In the EU, some clarity could be coming as a result of a recently launched consultation. One pressing issue is the application of GDPR data regulation on the Metaverse, including who – an individual or their avatar – holds their Metaverse privacy rights, DAC Beachcroft’s Dimitrov notes.
In the US, global industry association GSMA predicts the Biden administration will adopt a “wait and see” approach to Metaverse regulation, after last year’s CHIPS and Science Act to promote innovation such as immersive technology.
Even when the regulatory picture becomes clearer the issue of whose rules apply in a borderless world could prove contentious. Other challenges for insurers in the space include a lack of expertise, a very real problem given the difficulties they have had finding staff for digitalization. Accenture’s Saldhana also warns of the issue of adverse risk selection as Metaverse products are adopted.
The dust hasn’t yet settled on how we even define some of these interests so insuring them is another layer of regulatory question
All this said, given heady growth forecasts for the metaverse – data provider Statista predicts a Metaverse market worth $936.6 billion by 2030, up from $65.6 billion in 2022 – it looks sensible for insurers to dip their toes in the water early.
IMA Financial’s Droege believe his firm’s early engagement has both given it a better understanding of the ecosystem and the risks it presents, and raised awareness.
“The industry took notice when we launched web3Labs. There have been numerous media opportunities, which ultimately create more understanding about this emerging industry. Confusion and ignorance are the biggest obstacles for digital assets, blockchain and the Metaverse.“
IMA Financial is collaborating with trade association The Institute's Risk Stream Collaborative and a number of its working groups, and sharing its findings with the industry. Droege describes the environment as “much more positive than negative, overall”.
But he adds that “most in the industry don’t embrace change willingly. The current state is reminiscent of the cyber market 20 years ago. Most carriers and brokers viewed this as a small, insignificant risk that insureds would opt not to buy. Flash-forward to today: cyber is one of the top two or three risks facing every industry.”
Accenture’s Saldanha concurs. “The Metaverse lends itself to a lot of hype but that doesn’t undermine the great potential that sits within it. This is technological innovation and that curve tends to get steeper exponentially. It won’t be easy to do a fast follow and catch-up.”
