Understanding the Insurable Vulnerabilities of Crypto-Currency, Block Chain and other Smart-Contracts Markets
Background and Purpose
With the recent collapse of the crypto-currency exchange FTX, digital investors and other stakeholders that may come to rely on the stability of such exchanges are reminded of the risks involved with crypto-currencies as well as other types of smart-contracts largely due to lack of insurance products providing coverage to such investors and/or financial institutions as well as lack of regulatory oversight. Having insurance coverage against such things as theft of digital wallet, default on digital loans (specifically for institutions lending digital currencies), breach of blockchain security protocols, etc., or scams, hacks and exploits of smart contracts, can help strengthen the acceptance, growth and community safety of the Decentralized Finance (“DeFi”) ecosystem. The recent accelerating proliferation and consumerization of various DeFi technologies present great opportunities for insurance companies to expand their market and product-suites into this non-traditional and emerging financial market. To better understand the risks involved, investors need to understand not only the underpinnings of the risks, but also the technology underlying these innovations as well as the vulnerabilities of the smart contracts themselves.
While not designed or intended as a hedge against investment risk of such contracts or exchanges, insurance can play a role in protection against product liability, system performance, and theft in its various digital forms.
Research Objective
The Society of Actuaries Research Institute (SOA) General Insurance Research Committee (GIRC) is seeking researchers to study the vulnerabilities to users and investors of the cryptocurrency and smart contracts markets and identify ways in which insurance coverages could benefit consumers. Along with identifying the risks, it would be valuable to research whether or not these risks may be insurable. For example:
- Does the buyer have an insurable interest?
- Is the recovery in the event of an occurrence indemnification of loss (and if so, how is that measured) vs. a parametric contract?
- Would the aggregation of exposure allow for spreading of risk or is it too concentrated?
- Would this need to be separately or specially regulated, and would insurers want to cover an unregulated industry?
The following are examples of proposed topics that may be addressed:
- An understanding of crypto exchanges, the role they play, and the role of insurance against exchange collapse
- Cryptocurrency / smart-contracts / guarantees - technology and risks
- Types of insurance coverages to be issued by insurance companies, along with an outline of product design features
- Management of risks
- Technological infrastructure for insurers and reinsurers
- Possible datasets for actuaries to model the cybersecurity risks involved in smart-contracts
- A thorough literature review, and how the actuarial techniques published in the SOA/CAS/CIA cyber-related papers can be transformed to study the risks involved in smart contracts
Note that the list above is not meant to be exhaustive but merely examples of proposed topics that may be researched.
Proposal Requirements
To facilitate the evaluation of proposals, the following information should be submitted:
- Resumes of the researcher(s), including any graduate student(s) expected to participate, indicating how their background, education and experience bear on their qualifications to undertake the research. If more than one researcher is involved, a single individual should be designated as the lead researcher and primary contact. The person submitting the proposal must be authorized to speak on behalf of all the researchers as well as for the firm or institution on whose behalf the proposal is submitted.
- An outline of the approach to be used (e.g., literature search, model, etc.), emphasizing issues that require special consideration. Details should be given regarding the techniques to be used, collateral material to be consulted, and possible limitations of the analysis.
- A description of the expected deliverables and any supporting data, tools or other resources.
- Cost estimates for the research, including computer time, salaries, report preparation, material costs, etc. Such estimates can be in the form of hourly rates, but in such cases, time estimates should also be included. Any guarantees as to total cost should be given and will be considered in the evaluation of the proposal. While cost will be a factor in the evaluation of the proposal, it will not necessarily be the decisive factor.
As a guide for developing the project budget, please review the Historical Project Cost Guide (see Appendix) - A schedule for completion of the research, identifying key dates or time frames for research completion and report submissions. The General Insurance Research Committee is interested in completing this project in a timely manner. Suggestions in the proposal for ensuring timely delivery, such as fee adjustments, are encouraged.
- Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.
Selection Process
The General Insurance Research Committee will appoint a Project Oversight Group (POG) to oversee the project. The General Insurance Research Committee is responsible for recommending the proposal to be funded. Input from other knowledgeable individuals also may be sought, but the General Insurance Research Committee will make the final recommendation, subject to Society of Actuaries Research Institute (SOA) leadership approval. An SOA staff research actuary will provide staff actuarial support.
Questions
Any questions regarding this RFP should be directed to Rob Montgomery, SOA Research Project Manager at rmontgomery@soa.org or 1-740-258-2977.
Notification of Intent to Submit Proposal
If you intend to submit a proposal, please email written notification to Erika Schulty at eschulty@soa.org
Submission of Proposal
Please email your proposal to Erika Schulty at eschulty@soa.org; proposals must be received no later than April 22, 2023. It is anticipated that all proposers will be informed of the status of their proposal by mid-June 2023.
Conditions
The selection of a proposal is conditioned upon and not considered final until a Letter of Agreement is executed by both the Society of Actuaries Research Institute and the researcher.
The Society of Actuaries Research Institute reserves the right to not award a contract for this research. Reasons for not awarding a contract could include, but are not limited to, a lack of acceptable proposals or a finding that insufficient funds are available. The Society of Actuaries Research Institute also reserves the right to redirect the project as is deemed advisable.
The Society of Actuaries Research Institute plans to hold the copyright to the research and to publish the results with appropriate credit given to the researcher(s).
The Society of Actuaries Research Institute may choose to seek public exposure or media attention for the research. By submitting a proposal, you agree to cooperate with the [Society of Actuaries/sponsoring entity] in publicizing or promoting the research and responding to media requests.
The Society of Actuaries Research Institute may also choose to market and promote the research to members, candidates and other interested parties. You agree to perform promotional communication requested by the Society of Actuaries Research Institute, which may include, but is not limited to, leading a webcast on the research, presenting the research at an SOA meeting, and/or writing an article on the research for an SOA newsletter.
Conflict of Interest
You agree to disclose any of your material business, financial and organizational interests and affiliations which are or may be construed to be reasonably related to the interest, activities and programs of the Society of Actuaries Research Institute.
Appendix
The cost ranges below are intended as a guide for budgeting project costs for proposals in response to SOA Research Institute Request for Proposals (RFP). Please note these figures span the 33rd to 66th percentiles for all projects as well as projects that involve a specific approach (lit review, survey, etc.). They are based on historical costs over several recent years. Expected costs for some RFPs may fall outside these ranges depending on the nature of the work and resources required for completion.
All Contracted Projects
This category includes all contracted projects that the Institute has undertaken within the last several years.
The 33rd-66th percentile project costs range is $25,000 - $50,000.
Literature Reviews
This category includes projects that involved only a literature review or the cost for the portion of a larger project that included a literature review.
The 33rd-66th percentile project costs range is $15,000 - $20,000.
Surveys
This category includes all projects that had a survey as their primary component.
The 33rd-66th percentile project costs range is $28,000 - $55,000.