EU insurance regulators: Insurance companies must have 100% capital coverage for holding encryption assets, which have high fluctuation risk.

The European Insurance and Occupational Pensions Authority (EIOPA) recently proposed a new recommendation to the European Commission, asserting that insurers involved in underwriting businesses related to encryption companies, or directly or indirectly holding encryption assets, must cover 100% ( of capital to guard against the potential risks posed to policyholders by significant fluctuations in encryption assets.

The risk of encryption assets is high, EIOPA recommends adopting the strictest capital requirements.

In the technical advisory report submitted by EIOPA to the European Commission on March 27, the regulator stated that due to the inherent risks of encryption assets and high fluctuations, it recommends imposing capital requirements on insurance companies that are significantly higher than those for other asset classes.

EIOPA also provided an example in another statement, indicating that the capital coverage ratio for equity assets ranges from 39% to 49%, while real estate is only 25%. In contrast, EIOPA recommends implementing a 100% capital requirement for encryption assets, demonstrating its cautious approach:

Implementing 100% capital coverage for encryption assets under the current standard formula is a prudent and appropriate choice.

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Four policy options, 100% coverage with the strongest support.

In the report, EIOPA presented four policy options to the European Commission:

Maintain the status quo and take no action.

Impose an 80% asset coverage requirement on encryption assets.

Impose a 100% asset coverage requirement on encryption assets.

Broaden the consideration of risks related to tokenized assets.

EIOPA clearly states that the third option is the most appropriate, reason being that "80% asset coverage is insufficient to cope with the potential risks of encryption assets," while the 100% stress level is closer to the capital requirement regulations in )CRR( regarding the transitional treatment of encryption assets:

Bitcoin )BTC( and Ethereum )ETH( have previously plummeted by 82% and 91% respectively, proving that encryption assets carry extreme fluctuation risks, and explaining why diversification cannot effectively mitigate the related impacts.

Strengthen the protection of policyholders without causing excessive burden.

Although this suggestion represents a higher capital cost for insurance companies, EIOPA still states that it "will not bring substantial costs" to policyholders and will not place an excessive burden on the industry. On the contrary, this move will help enhance the stability of insurance products and the protection of policyholders.

The capital requirement must fully capture the risks of encryption assets. If the risk level increases in the future, it will have a positive effect on policyholder protection.

Encryption assets currently have a very low market share, with the greatest influence from Luxembourg and Sweden.

According to the data from EIOPA cited for the fourth quarter of 2023, the total value of cryptocurrency assets involving European insurance companies is only 655 million euros, accounting for 0.0068% of the overall assets, which can be considered very little.

In terms of regional distribution, insurers in Luxembourg and Sweden will be the most affected, with the two countries accounting for 69% and 21% of encryption asset exposure, respectively. Other countries like Ireland and Denmark account for 3.4% and 1.4%, respectively.

Most insurance companies hold their encryption asset positions through funds such as ETF ), and the actual beneficiaries of these assets are the policyholders of unit-linked policies (.

Real Challenges: Reasons Why Insurance Companies Are Reluctant to Insure Encryption Assets

Although this policy is well-intentioned, hoping to enhance financial stability and protect policyholders, in reality, most insurance companies tend to avoid encryption assets, primarily due to the following reasons:

High fluctuation and unpredictability: The prices of encryption assets fluctuate dramatically, making it difficult to quantify and predict risks.

Lack of historical data and model support: Traditional insurance relies on historical statistics and actuarial models, while encryption assets lack a long-term data foundation.

Regulatory and legal risks are unclear: Countries have inconsistent regulations on encryption assets, resulting in high compliance risks.

Fraud and cybersecurity incidents are frequent: issues such as hacking attacks or the loss of private keys make it difficult for insurance companies to underwrite.

Market demand is still small, making it difficult to scale: Currently, the market size for insurance related to encryption assets is too small to be cost-effective.

In the reality of "high risk, low profit, and ambiguous rules", the development of encryption asset insurance products still faces many obstacles.

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Future regulations need to be more detailed to avoid a one-size-fits-all approach.

Even though EIOPA recommends adopting the strictest measures, the agency also acknowledges that if encryption assets gradually become more prevalent in the financial system in the future, a "more differentiated regulatory approach" may need to be taken to balance innovation and risk management.

This article from the EU insurance regulatory authority: Insurance companies holding encryption assets must have 100% capital coverage, with high fluctuation risks, first appeared in Chain News ABMedia.