Mr. Dambacher, Mr. Langenbach*: Why is there a need for specific insurance for digital assets?
Mark Dambacher: For me, this is not a question of digital assets. As a bank, you generally have to insure yourself. We can't exclude any segment, whether traditional or digital. If we did that, we would jeopardize the insurance coverage for everything. That’s why you have to take a comprehensive look at digital assets together with all the risks. For us as InCore Bank, offering our clients maximum insurance protection is not least a matter of reputation.
Rolf Langenbach: It’s in the interest of service providers like InCore Bank to bring the greatest possible continuity to their customer relationships. This also applies to new products and services added to the established range. In this respect, insurance companies play an important role: continuity and security are needed to establish new products on the market and lead them to sustainable success.
Mark Dambacher: Nevertheless, the topic of insuring banks in general and digital assets in particular receives too little attention.
So, where did the idea for Digital Assets Insurance come from?
Rolf Langenbach: Insurance for digital assets meets a need. Whether in the B2B or B2C area, the banking client relies on his financial services provider to have an insurance solution with appropriate coverage. Currently, new products such as digital assets or new services are being offered, and we as Swiss Quality Broker have the task of entering the new insurance territory, looking for the additional security in the market and developing the appropriate products. This expansion into new products is taken for granted, but on closer inspection of the market it is not.
Mark Dambacher: I see it as an advantage that we also offer the corresponding protection with digital assets. Especially in contrast to providers who are active in the crypto sector but don't offer this security and trust. It is part of our business idea to integrate these two central factors into digital assets in order to increase their acceptance.
Rolf Langenbach: One thing is important: In order to keep performance promises to customers, we don't protect the individual coin, but the entire InCore Bank ecosystem. Each element must be looked at closely to prevent the system from falling apart if a single link is damaged. Ensuring this protection is much easier in the traditional space because each participant has appropriate insurance.
Insurance as a matter of course
What led to the cooperation between Swiss Quality Broker and InCore Bank?
Mark Dambacher: It' a close partnership that began long before the advent of digital assets. The topic of insurance is so complex that it would be fatal to believe that a bank is capable of handling it itself. You need experts who can provide you with customized solutions. At the end of the day, it's about trust – just as our customers trust us when they work with InCore Bank in the area of digital assets.
What makes insuring digital assets so challenging?
Rolf Langenbach: Banking and ICT have been amalgamating visibly for years. However, the insurance merger is still a major challenge, because insurers have separate departments and products for each area that are not aligned with each other. Uniting these two worlds into customized solutions has become even more challenging with the emergence of new technologies and new products. We like it because we are traditionally involved in banking and ICT, are well versed in the field and feel comfortable.
Do you make insurance coverage for digital assets an issue with customers?
Mark Dambacher: We don't use insurance coverage as a marketing tool with either our insourcing or B2B customers – we are rarely asked about it either. For InCore Bank, it's a given. But there is a difference between depositing digital assets with a bank that offers insurance coverage and depositing them with a provider that does not.
Risk management more important than ever
Does every InCore Bank client benefit from this digital assets insurance?
Mark Dambacher: Yes. Clients don't have to do anything for it. The insurance is also not passed on to the customers as a fee. This is despite the fact that more and more providers are entering this market, especially in Switzerland, and the price war is intensifying. For me, this is an add-on: if the client stores his digital assets with InCore Bank, he automatically gets this security included.
There is more competition. Are providers also obliged to take out appropriate insurance policies?
Rolf Langenbach: That’s not the case. Even banks with a FINMA license are not yet obliged to take out insurance for digital assets. In my opinion, this also has to do with the fact that the market is still fairly easy to overview, which I’m sure Mr. Dambacher perceives differently. It will be exciting to see how this develops and whether the insurance industry will be able to meet the very rapidly growing demand.
Even better for InCore Bank, which thus has a unique selling proposition...
Mark Dambacher: I would take it one step further. We afford security for the benefit of our customers and at the expense of our margins. There are certainly market players who handle this differently.
Where are we today in terms of the level of limits for digital assets?
Rolf Langenbach: It is an interplay of insurance coverage and several factors such as technology and security, compliance and governance. Neither in Switzerland nor anywhere else in the world is it possible for a custodian to obtain coverage for, say, five hundred million US dollars. Therefore, they have to avoid or reduce the risks through targeted measures and finally purchase adequate coverage. In this context, the work of the risk manager is of central importance.
Mark Dambacher: Risk management has never been as important as when it comes to digital assets. Without preparation, without addressing and minimizing the risks, a financial intermediary will not receive coverage - we have invested more time in this area with Swiss Quality Broker than in negotiations with the providers. In the end, it is a close interaction between bank, broker as well as insurer under the motto: risk management first.
Insurance as the crucial factor
Is this a matter of purely technical risk management?
Mark Dambacher: One looks at all aspects. It concerns the whole control framework of the bank. InCore Bank has defined well over four hundred checks, and furthermore, everything is reviewed by internal and external auditors. In addition, the risks are considered in terms of their probability of occurrence and the possible extent of damage. Thanks to these comprehensive audits, the risks are mitigated – in this respect, insurance is only one option, and the final one. It is essential for providers to understand the control system; otherwise, they will not be able to issue a policy.
This sounds like an intensive cooperation...
Rolf Langenbach: Insurers and brokers go to the customer together to arrange for coverage. The three partners bring their specific know-how, experience and experts from different areas to the table to develop a joint solution. Such large round tables are not typical for the insurance sector.
InCore Bank works with partners. What is the situation here in terms of risk management?
Mark Dambacher: In addition to our outsourcer’s technology, we also look at their risk management. And last but not least, we ask how well they are insured. This is where Swiss Quality Broker comes into play again: We are not only concerned with finding the right insurance policies, but also correctly insured partners.
Rolf Langenbach: Insurance coverage can certainly tip the scales when it comes to deciding in favor of one partner or another. As I said, if one link in this value chain breaks... And InCore Bank in particular, as a transaction bank, is not only responsible for its own reputation.
A question of philosophy
Is digital assets insurance different from traditional insurance?
Rolf Langenbach: No. A token, a cryptocoin are simply a different type of security. Whether you steal a dollar or a token of the same value, the damage done is the same. And theft is a criminal act in both cases. But there is a difference in the potential for risk; in this regard, policyholders and insurer companies are entering uncharted territory, and there is a lot in development. This dynamic makes it more challenging, other than that it is the same.
Why is the range of digital assets insurances so small?
Rolf Langenbach: The market for digital assets is still comparatively small. Only a few financial institutions or technology companies generate empirical values. But it is precisely these that are very important for insurers. The result is a still manageable provider market with corresponding prices: The insurance of digital assets costs several times more than that of fiat currencies.
Despite these high premiums, InCore Bank offers this insurance for free?
Mark Dambacher: That is a question of philosophy. Whether it's traditional investments or digital assets: I believe we should look at everything the same way. If we start to differentiate, then this new area will never establish itself, it will remain something exotic. That's why we don't make a distinction in insurance either.
Speaking of which: Why is a distinction made, even though everything has long since been traded and stored digitally?
Mark Dambacher: That's an interesting question. Maybe it's the lack of understanding of the products. Many people are still trying to understand digital assets from a technological view. When I use the computer, I don't know how it works either. For me, digital assets are financial assets like others.
Rolf Langenbach: Technologies like blockchain are still relatively new, and we don't yet have the experience we have with classic products which are traded, stored and stolen in the same way. It's not just insurance companies that can't deal with this uncertainty and lack of experience. I think in a few years, this topic will be a done deal for all participants.
Mark Dambacher: I can only agree with that. From my and investors' point of view, the biggest risk is not the technology, but the volatility and the sometimes extreme reactions of the market.
Fraud risk first
Apart from volatility, where do you see the greatest risk in digital assets?
Mark Dambacher: Fraud comes first, regardless of whether it comes from external or internal sources.
Rolf Langenbach: In addition to all the technological and procedural issues, insurance companies are intensively dealing with fraud aspects. For example, how great is the probability of fraud if several people join forces? We try to make that impossible by taking specific precautions.
Will the attacks negatively impact the development around digital assets or even stop it altogether?
Mark Dambacher: No, I don't think so. It's more likely that large countries will try to stop the development because they fear losing control over the currencies and thus losing power and influence. But they have long since lost this battle. The development is unstoppable because it is decentralized.
Are there aspects in connection with digital assets insurance that are not given enough attention?
Rolf Langenbach: Directors & Officers Liability (D&O) is a hot topic, yet one that is neglected. The board of directors of a financial institution or technology partner entering digital assets is entering an unfamiliar field. It has to deal with technologies and services that it has mostly never been confronted with before. The risks are much greater, which in turn has an impact on insurance: Directors' and officers' liability is provided to only a few organizations. Especially in the technology and start-up sector, the topic is currently quite hot. In the context of storage, on the other hand, the market has developed positively because a lot has been invested in technology and the security frameworks are seen as mature. This example illustrates the connection between minimizing risks and offering insurance solutions.
What about policy updates?
Rolf Langenbach: It’s not the case that the policy is taken out and then you are insured for the next five years. Because of updated set-ups, these insurance policies have to be completely scrutinized and renegotiated with the insurers on a regular basis. The annual review including risk management is mandatory. The effort for this is high, there is a lot of educational and communication work. In this case, policyholders and brokers have a duty of care, without which there will be no insurance coverage.
Taking out insurance is one thing, claims management is another.
Rolf Langenbach: Our insurance provider has a claims department with experts from a wide range of fields, be they lawyers, computer scientists, forensic experts, etc. The cooperation with such organizations is easier than with an offshore insurer who simply writes a limit. As a broker and as an insured company, it is valuable to know that you have a provider backing you who, in the worst case, not only helps financially, but can also provide on-site support. No matter how well we organize and protect ourselves, a loss event is and remains a catastrophe, and we need more than someone who just gives us money.
Focus on communication and lobbying
Where does your offering currently stand?
Rolf Langenbach: We have provided InCore Bank with comprehensive insurance services for digital assets from day one and have continued to develop them. Today, we cover higher sums, we accompany the entire life cycle, and we insure additional services.
Mark Dambacher: Being able to provide a solution right from the start was a huge asset for us. As soon as we entered the new market, we were insured for all eventualities – we didn't just buy any insurance, but developed the product based on our specific needs.
Was taking out digital assets insurance a criterion for entering this new market?
Mark Dambacher: I'll be honest: no. The entry into digital assets is one of the pillars of our strategy. After the decision was made, we considered what was needed for a successful implementation. Insurance was one aspect that had to be taken into account.
What if InCore Bank hadn't found a provider?
Rolf Langenbach: As a broker, it is our task to offer a hand for such solutions to enable the implementation of business strategies and ideas.
What's next for digital assets insurance?
Mark Dambacher: Education is key. The point is to explain what is insurable and what is actually insured in the first place. As it's not always clear to end customers which insurance benefits are included. Headlines like '500 million insurance' don't really help.
Rolf Langenbach: Maybe we'll reach those amounts sometime. In any case, the services are constantly being adapted to changing needs and requirements, and that also applies to the limits. At the moment, however, the focus is on finding new providers and on educational and lobbying work. We have to show that good service providers at the highest level exist in this young segment.
Mark Dambacher: And that applies to both the insurers and the insured, i.e. the banks.
* Mark Dambacher is CEO of InCore Bank.
Rolf Langenbach is CEO of Swiss Quality Broker AG.