Redefind launch & interview with Chartered Institute of Insurance (CII)

Here is an excerpt from an upcoming CII handbook, where the Redefind team were interviewed on the topic of digital asset insurance.

General Questions about Their Role

Can you describe your role as an underwriter in the digital assets space?

I am Richard Daws (RD). I fulfil the role of CEO/CUO of Redefind, a digital asset insurance MGA. My role is to identify gaps in the market and build insurance solutions that fulfil the needs of clients and the needs of risk carriers. This includes being responsible for R&D, product design, rating and capacity liaison, with a healthy mix of commercial strategy and operational responsibility in addition to the origination of our proprietary products.

My co-founder Connor Edward (CE) fulfils the role of Chief Product Officer, he takes responsibility for technical design and delivery of our product. Connor is a Crypto native. He has spent his entire career as one of the world's leading blockchain architects in addition to running the European foundation for a pre-eminent crypto currency (top 30 coin by market cap) from the mid 2010’s until joining me on this project in early 2022. Without Connor’s deep technical understanding of the sector and technical capabilities, Redefind would not be in the position to become the world’s leading digital asset insurance provider.

How did you get into underwriting for digital assets?

RD - I have a strong pedigree in underwriting and have been engaged with the digital asset space for 10 years as a result of previously founding a payments business. Having a strong understanding of both digital assets and insurance industries, and caring deeply about the advancement of web3, lead me to create products that would not otherwise exist. My background in niche consumer insurance from both an underwriting and broking perspective has led us to create solutions that benefit the most adversely impacted participants in the crypto assets sector; the end consumer.

CE - Having spent almost 10 years in the fast paced and rapidly evolving blockchain and digital asset industries, I have always been keen to identify missing elements of the sector and help bring them to life. As a result of working in the web3 industry and being paid in native cryptocurrencies, I was unfortunately a victim of a blockchain network bug in 2021, which led me to experiencing first-hand the harrowing experience of a significant digital asset theft (from the notorious Lazarus group). I believe that for the web3 sector to truly become the future of finance as many predict it will be, it needs thought leaders like Richard with experience from outside of Crypto to engage and provide essential infrastructure. I was delighted to join at the earliest stage of Redefind’s journey and am excited about being part of the London Insurance market.

What unique challenges are you faced with compared to traditional insurance providers?

(RD) The principal challenges are:

• the price volatility of digital assets
• the pseudo anonymous nature of the digital asset owner
• the lack of reliable digital asset theft data (we have been incredibly fortunate to be provided with the broadest data in the sector, by some of our partners
• in recognition of what we are bringing to the ecosystem)
• it is not possible to ever verify that a cryptoasset theft is genuine or not
• transacting in a high fraud exposed environment

The biggest issue in the industry was (until we built our proprietary technology) that there was no way of immutably proving digital asset ownership (the principle of insurance being that you have no insurable interest without this proof).

Finally, although not unique to the digital asset space, a big frustration has been the confusion caused by businesses with no real right to play and people without an understanding of the sector trying to ‘shoehorn’ existing insurance products that do not meet the unique demands of clients. This has impacted the adoption of insurance and held the digital assets industry back in its move to mass adoption.

Risk Assessment Process

How does the risk assessment process for digital assets differ from traditional assets?

(RD) The risk has to be addressed entirely differently from previous processes. Furthermore, the volatility and pseudo anonymous nature of transactions creates a huge exposure to risk carriers which has manifested itself in incredibly limited cover being offered so far.

What specific factors do you consider when assessing the risk of underwriting crypto exchanges?

(CE) Principally, we consider: what, where, whom and why and rely heavily on knowing and understanding our exchange customers.

What are the key considerations? (RD)

These are numerous but also commercially sensitive.

Is experience gained in the cyber insurance industry of use to an underwriter in this field, or is it too dissimilar?

(RD) It doesn’t do any harm, and potentially points to an understanding of the sector but the considerations are broader.

Challenges and Complexities

What are the biggest challenges you face when underwriting digital assets?

(CE) - Anonymity, price volatility and a lack of credible theft data create the insurance equivalent of the ‘blockchain trilemma’. Our unique approach to insuring digital assets however provides a solution to all of these issues simultaneously. Another challenge is that it is not possible to ever verify that a cryptoasset theft is genuine (one can see for a digital asset theft is a transaction moving on the block explorer but one has very little information as to what the true reason/motivation behind that transaction was, typically not much more than what the insured claims occurred). I experienced this challenge first hand when reporting my cryptoasset theft event to Action Fraud & the UK police in 2021 - as a direct result of their lack of experience in dealing with these crimes, their focus was directed at myself, resulting in me being interviewed for false reporting, rather than the crime itself (victim of a sophisticated Lazarus hack).

Given the volatility of digital currencies, how do you set your premiums?

(RD) We have proprietary data that allows us to accurately evaluate risk and build a myriad of rating factors that allows us to respond to changes in a very precise way and not expose our carriers to volatility.

How do you stay updated with the rapidly evolving regulatory landscape for digital assets?

(CE) We have a phenomenal network of contacts with regulators and advisors who keep us abreast of forthcoming changes.

Is lack of technical knowledge of digital assets an issue for the insurance market generally?

(RD) Yes, an enormous challenge, but in context we have to remember that in 2023 the market cap for the global digital assets space was significantly less than that of Amazon so not many insurance businesses have committed the necessary resources to develop a granular understanding and appreciation of the sector.

Have there been a sufficient number of claims in this space to calculate an adequate premium and expose the flaws in the policy coverage ?

(RD) Yes, this is evolving rapidly and many of the early stage policies are now being found lacking, the mindset of ‘clients are lucky to have what we give them’ needs to change, which is why we have built our products with a client first narrative.

How do you assess the risk profiles of different cryptocurrencies and blockchain projects when developing policies?

(RD) To do this well is labour intensive and I am fortunate to have crypto natives and blockchain developers in the team. Redefind has the broadest digital asset compatibility of any insurance solution and is also the only provider globally that can insure cryptoassets in self-custody (the reason crypto was invented is to empower people via self custody). Other providers have focused on Bitcoin and Ethereum only, don’t support self-custody, and don’t verify ownership meaning that the risk carrier is unwittingly open to a number of fraudulent activities.

Technical Aspects

Did you have a standard proposal form to gather information, and if so, how many questions would you ask? Do you ask about security audits?

(CE) For our consumer product, we have an online, detailed dynamic proposal form related to key metrics which impact crypto security (e.g. VPN usage and what the user does with their cryptoassets to name a few). For our corporate clients, VASPs are always required to conduct an audit, but this is not a requirement for corporate clients simply holding cryptoassets on their balance sheet.

How do you assess the credibility and security measures of your Insureds?

(CE) We have a thorough understanding of the digital asset space having a team that has worked in the sector previously (approaching two decades collectively) and have a number of tools that we can deploy and experts that we work with.

Is it difficult to get information regarding the security set up of a potential policyholder?

(RD) No, we have found the sector to be incredibly open and collaborative, the ecosystem is actively looking for credible insurance products.

Do you ask about prior issues re security lapses/hacks in the past (e.g. vulnerability exposed or exploited)

(CE) Yes, but in some instances this can have a positive impact on the pricing, experiencing a security failure can leave a lasting impression on the victim and be a catalyst to change in both behaviour and security processes.

Are there any technological tools or software that you rely on for underwriting digital assets?

(CE) Yes, we have our own proprietary technology supplemented by vetted third party tools.

How do you assess the security of digital wallets and exchanges when underwriting these platforms?

(RD) We have a thorough understanding of the digital asset space having a team that has worked in the sector previously (approaching two decades collectively) and have a number of tools that we can deploy and experts that we can call on.

Legal & Compliance

How do you navigate the legal complexities surrounding digital assets in different jurisdictions?

(RD) We have a phenomenal network of contacts with regulators and advisors who keep us abreast of forthcoming changes.

What are some common compliance issues you encounter in the digital asset space?

(RD) There are no consistent patterns. However, once we identify poor governance, we broadly make a business decision to walk away from the risk.

Future Trends and Advice

From your perspective, how is the digital asset market evolving, and how does this impact underwriting?

(RD) We see a polarisation in the sector between ETF and non-ETF participants, leading to opportunities that need to be addressed differently. The widespread uptake of CBDCs will put further expectations on the insurance industry.

What future trends in digital assets do you think will pose new challenges or opportunities for underwriters?

(RD) I think that adequate provision of capacity at scale will be a challenge. I also worry that some of the poorly thought out solutions in the market will attract undue regulatory scrutiny. We have already identified that some other digital asset insurance provider’s misunderstanding of various assets, most notably UTXO coins, will put them in an immediate compliance breach when (or if) their products are sold.

However, there are some incredibly exciting and rapidly evolving opportunities in the digital assets sector that we expect to come to market in 2025. We are excited to be a part of this infrastructure.

Mitigation Strategies

What strategies do you employ to mitigate risks when underwriting digital assets?

(CE) We have a dynamic and continually evolving risk rating and management model based upon my time running a crypto foundation.

How do you determine the appropriate premiums for insuring digital assets?

(CE) Our premiums are based on data and forensic understanding of the sector. We evaluate the technological function of all digital assets, and are unique in this regard.

Client Interaction and Education

How do you educate potential clients about the risks and protections related to digital assets?

(CE) Our onboarding and rating engine undertakes dynamic risk management and advice, good behaviours are encouraged through better pricing. Our retail product provides users with cutting edge digital asset security recommendations, tools and advice, alongside educational community events.

What do clients typically misunderstand about insuring digital assets?

(RD) The disconnect is more around the client’s expectation of what should be possible and the insurance market being slow or reluctant to adequately respond.

What advice would you offer to businesses seeking to protect their digital assets through insurance?

(RD)

Proof of Work:

• Find a regulated provider who can demonstrate their expertise in the digital asset industry (and as such a right to play) in conjunction with offering rated carriers.
• The best advice is to choose a provider who is solely dedicated to your sector, avoid businesses who offer a solution as a small part of their broader business. Ask yourself if they will be there for the long term, and if something looks too good to be true it almost certainly always is!

Trust but verify:

• Firstly, beware of scams, they are out there! Although Lloyd’s and the FCA are working hard to force these entities to come clean, there are providers who still ‘dine out’ on their illegitimate reputation as Insurance providers.
• Do your own due diligence and if the provider cannot demonstrate their expertise, walk away. The most expensive insurance that you will ever buy is the one that doesn’t activate as you expect it to.

Personal Reflections

What do you find most challenging and rewarding about underwriting digital assets?

(CE) The biggest reward is the challenge. The fact that no one globally could immutably prove digital asset ownership had the potential to make insuring digital assets simply not possible, and so we had to build this technology ourselves. Developing brand new technology such as this is both exciting and rewarding.

(RD) From a personal perspective, I am passionate about supporting the digital asset sector. Enabling web3 businesses to operate in a way that they wouldn't be able to without insurance is incredibly satisfying. Redefind is at heart, a digital asset infrastructure business creating products from the ground up, not as outsiders looking in. We are a proudly pro-crypto team, building industry infrastructure to help the sector continue to thrive, as opposed to simple commercial opportunists overpromising and under delivering for the sector.

(CE) Having witnessed a number of significant thefts over the past 3-years, including my own, the Redefind team are all truly dedicated to making the digital assets space safer, and supporting user confidence and the move to broader adoption. I think what makes us unique in the space is that we genuinely care - I want our customers to be as safe as possible (which we deliver through education), but simultaneously have true confidence in the fact that we are there if something bad happens.

What common misconceptions do people have about insuring digital assets, and how do you address them?

(RD )The playing field has been muddied for far too long by opportunists who do not understand the sector and/or the insurance market. This has created a lot of misunderstandings that we are helping to unwind through engagement and education in the digital assets community.