Many of the thought leaders in the risk management industry are looking to captive insurance companies (CICs) as a solution for the complex, interconnected and rapidly evolving global economy. And, it’s this same complex, interconnected global economy that has given rise to crypto-currencies, powered by revolutionary block chain technology. Both realms (captive insurance and crypto-currency) attract entrepreneurial forward thinkers who value innovation, freedom, and the opportunity to control their own economic choices. These realms are destined to cross and the sooner-the-better. In fact, captive insurance company owners should get the ball rolling by adding Bitcoin (the premier crypto-currency) or other crypto-currencies to their insurance reserves.
There are two solid reasons for owning Bitcoin in a captive insurance company.
The first reason is that Bitcoin can often be used to manage cyber-attacks. Cyber-attacks against small and mid-market businesses continue to proliferate and perpetrators continue to advance the complexity of their attacks. Whether it’s hacking, spyware, malware, ransom-ware or any other form of attack, businesses need to be prepared.
In a cyber-attack, fast action is critical to deal with the breach and get systems back on line to avoid lost revenue and reputation damage. An ever popular approach for thieves is ransom-ware. Ransom-ware attacks occur when a hacker or invader enters a company’s system and encrypts the server and all data. The thief then demands payment to provide an encryption code or key to the business. The hackers often demand payment with Bitcoin. Having Bitcoin readily available in its CIC, enables a business to act quickly. We foresee a day when some insurance policies issued by CIC might be denominated in bitcoin rather than dollars.
The second reason is that Bitcoin and other crypto-currencies offer appreciation potential. My Economics Professor always said, “a dollar today isn’t worth a dollar tomorrow…and, you can’t add them.” His point was simply that over time, the purchasing power of dollars (a fiat currency) is eroded by fiscal and monetary policy. Sure, the dollar may have its ups and downs, but the long term trend is that buying power erodes. Bitcoin’s supply is constrained, meaning that its growth cannot be manipulated by fiscal or monetary policy. Its broad and growing adoption also suggests that it is here to stay, and it has a clear head-start building its network effect. In the event of a cyber-attack in two or three years, a business will likely be far better off paying a cyber ransom in 2020 with Bitcoin it purchased in 2017. Also, once purchased, crypto-currencies can be easily exchanged for other crypto-currencies. It is also worth noting that crypto-currencies can also function as a potential “Black Swan,” whose unexpected growth could significantly bolster insurance reserves.
But remember, crypto-currencies are very, very volatile. Both regulators and common sense would suggest that no more than a small fraction of the CIC’s reserves be dedicated to them. Fortunately, a small fraction may be all it takes to make a big difference.
Captive Insurance Companies provide a means for alternative risk financing. For small and mid-market companies, the business owner (s) can also choose to own their own insurance company that insures risks for their business, in effect creating an additional profit center. The CIC can replace commercial insurance, insure warranties, issue bonds or insure enterprise risks. By insuring enterprise risks, the CIC can serve as a chassis for a business’ overall Enterprise Risk Management (ERM) program. ERM is a disciplined approach to assessing and addressing all risks a business faces. In the 21st century, complex, interconnected global economy, enterprise risks abound, threatening the very existence of small and mid-market companies. Examples of enterprise risks include (but are not limited to): cyber, business interruption, reputation damage, loss of key contracts or customers, loss of key suppliers, loss of key employees, regulatory change, government administrative actions, commercial crime, terrorism, excess general liability and existing commercial insurance deductibles. Small CICs also benefit from significant tax advantages that enable them to accumulate loss reserves. Under Internal Revenue Code (IRC) section 831(b), small insurance companies are taxed at a rate of 0% (zero percent) on underwriting profits. CIC reserves are effectively the owner’s wealth.
Hence, ERM with a CIC enables a business owner (s) to turn risk into wealth, and crypto-currencies can play an important role in addressing risk and boosting the risk to wealth benefits of captives.