Can insurance brands expand their client base, reaching new customers in the Metaverse? This piece by Srikumar Ramanathan, Chief Solutions Officer at Mphasis, takes an in-depth look.
There is much discussion about the metaverse and the promise it holds for ‘real world’ businesses to grow in new ways. It is such a new space that opinions vary about its evolution, but most agree that the opportunity will be a significant one. JPMorgan expects the metaverse to infiltrate every sector in some way in the coming years, estimating the global market to reach over $1 trillion yearly. Citi, meanwhile, predicts that the metaverse economy could be as big as $13 trillion by 2030.
It’s clear that now is the time for organisations to prepare for operating in this new virtual realm. When it comes to the traditional insurance industry, how will the foray into the metaverse look, and what are the key considerations?
The metaverse encompasses a vast array of digital assets, bringing with it the potential for higher volatility and risk – we have all seen evidence of this in the fluctuations of the crypto and NFT markets this past year. Insurance can help to manage that risk more effectively, and insurers are watching this space closely, albeit cautiously. Overall, the space is significantly under insured and has considerable growth potential, but it’s vital to understand how to address the potential risks.
Understanding the new risk landscape
The metaverse has similar assets and liabilities at risk as the real world, such as identity theft, cyber risks, and the need to protect assets like crypto currencies, in-game tokens, virtual property and digital art. Other risks include loss of virtual assets, online reputational damage, personal and corporate metaverse data breaches, and failure to comply with regulatory requirements. Many of these apply to the real world too. However, analysis and mitigation of these risks will be unique. When it comes to identity and data ownership, interoperability and privacy rules, the governance and regulatory framework for the metaverse remains at a nascent stage.
There will also be new emerging risk. For example, the key to access a digital property is very different from the key to physical property. In the metaverse the key grants complete ownership and control over the underlying asset while, in the physical world, this wouldn’t lead to someone claiming ownership of the property. Other examples are Deepfakes, social engineering attacks and malicious use of avatars.
Many industry experts expect to use loss data from cyber insurance to begin underwriting metaverse risk. Yet underwriting NFTs in the metaverse requires a unique approach and the need to consider loss estimation, assessing the value of the NFT, the wallet used to secure the NFT, security of the smart contract, regulatory compliance, the security of the blockchain used to issue the NFT and more. Arriving at a valuation for an NFT for loss estimation will involve assessing the liquidity and scarcity of the NFT, its utility value and the rate at which it has been appreciating.
So, what are some of the critical questions we should consider as a first step? Insurance is enforced through contracts, and therefore the legal precedent of the contract interpretation will need to evolve for products to become mainstream. Further, we will need to overcome the regulatory and governance scepticism in a sector rife with privacy and cybersecurity risks. And, unlike the physical world where the absence of absolute data has led to the creation of proxies for the risk written, the metaverse will provide an excess of data. The challenge is creating the infrastructure and capability to gather and process that information and develop predictive models. However, if approached in the right way, the opportunities can be truly extraordinary.
Insurers must be ready to grasp the opportunities
The insurance industry cannot ignore the metaverse nor, critically, the transformational technologies that underpin its evolution. Applying these to transform and digitise functions such as underwriting or claims, and introducing new products such as continuous binders, can enable insurers to be more future-ready. Insurers can engage in sales and distribution as well as claims adjudication through avatars and immersive experiences to build risk awareness and advise on the coverage need; develop risk management services for the new asset classes within the metaverse; and facilitate premiums and claims payments through crypto assets.
Some fintechs and insurtechs are already innovating in the space. In the UK, early movers include Nexus Mutual, a peer-to-peer discretionary mutual insurance model built on the Ethereum blockchain, which is looking to bring back the mutual ethos to insurance by creating aligned incentives through smart contracts (which can strip out many administrative, governance and regulatory costs). Then there is usage-based insurance broker hubb, the Scottish challenger that is leading the way by installing VR devices and hybrid on-boarding infrastructure to prepare for a shift to the metaverse.
One major way the metaverse can benefit the insurance industry is by opening the door to building new experiences, including the use of the blockchain to implement smart contracts, AR / VR technologies for remote risk surveys as well as customer engagement, and utilising sensor data through smart property management systems for continuous risk monitoring. Traditional organisations can expand into the metaverse by building new ways of working, developing creative and tailored new product offerings for risks faced by users in the metaverse, and innovating their business model. This will enable them to better connect with the next generation of users, as Vista research shows that over 70% of UK adults expect the metaverse to be most popular with millennials and Gen Z users.
Insurance provides the fundamental resilience to recover from loss for individuals and corporates and will be a critical component of the metaverse ecosystem to enable it to enter the mainstream.
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