How do Non-Fungible Tokens (NFTs) impact the insurance market?

NFTs have grown in popularity but many still don't completely understand what they are or how they impact insurance.

So what is an NFT?

At a basic level, an NFT is a digital asset that links ownership to unique physical or digital items, such as works of art, real estate, music, or videos. These exist on a blockchain and cannot be replicated.

Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system

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March 2021 saw NFT’s make headlines when Christie’s sold an NFT by digital artist Beeple (Mike Winkelmann) for a record $69 million. This made this piece the most expensive digital artwork NFT sold, until December 2021 when ‘The Merge' a digital artwork NFT sold for $91.8 million and the NFT market continues to grow.

Whilst NFT’s are more commonly associated with digital collectibles they can be used to represent real-world items like artwork and real estate. This is done by “Tokenizing” the real-world tangible asset to allow them to be bought, sold and traded within the blockchain, which aims to make the process more efficient and reduce the probability of fraud.

This has created opportunities for owners of physical art to benefit from the growing NFT market by working with companies to facilitate the entry of physical artwork through the blockchain and creating a unique and irreplaceable Token. This Token can then act as a certificate of authenticity and ownership when physical artwork is bought and sold.

As noted the shift towards the use of NFT’s for physical assets was also seen in the real estate market with the first real estate being sold via an NFT in June 2021. This demonstrates the potential for NFT’s and this technology to revolutionise the sale of not only digital but also physical assets.

So what does this mean for the insurance market?

There are a number of challenges within the insurance market when considering the provision of cover for NFT’s. The NFT market still remains in its infancy and as such brings with it a lot of volatility. The very nature of being a non-fungible asset that is unique and irreplaceable creates challenges around valuing these items.

NFT IllustrationIn addition, there is currently a lack of data around NFT’s for the insurance market to be able to confidently underwrite and price NFT’s for the risks that they present.

With the NFT market continuing to develop it waits to be seen whether this will revolutionise or fundamentally change the way that collectible items are bought and sold. As an Insurer we continue to monitor this change and to consider how our products need to adapt to keep pace with the changing needs of our mutual customers.

At the moment NFTs aren't automatically covered in our policies however we are currently exploring different options to help protect your customers. If this is something you're interested in and have any thoughts on the specific covers customers would need, please do share your thoughts with our HNW team. We'll keep you updated on how this exciting project proceeds!