EU regulator proposes to oblige insurance firms to hold 100% reserves for clients’ crypto assets

What’s new? The European Insurance and Occupational Pensions Authority (EIOPA), in a new report to the European Commission, has proposed that insurance companies be required to maintain capital equal to the value of their crypto assets as a risk mitigation measure for clients. Officials noted that they consider 100% collateral to be reasonable, given the inherent risks and high volatility of cryptocurrency.

EIOPA report

What else is known? EIOPA noted that there are currently no specific provisions on crypto assets in the EU regulatory framework for insurers. The introduction of the new rule would therefore fill the regulatory gap between the Capital Requirements Regulation and the Markets in Crypto-Assets (MiCA) regulation.

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As part of the proposal, the directorate has put four options before the European Commission: make no changes, set an 80% “stress level” for crypto assets; set a 100% stress level; or examine the risks of tokenized assets more broadly to develop different rules. It is the third option that officials see as the most appropriate.

It implies that crypto asset prices could fall by 100% and diversification — spreading risk across different crypto assets — will not mitigate this impact. EIOPA reminded us that bitcoin and Ethereum have fallen 82% and 91% respectively in the past.

This approach is much more stringent compared to equities, where provisioning levels range from 39% to 49%, and real estate (25%), according to the capital and solvency requirements set out in Commission Delegated Regulation 2015/35.

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Officials said that 100% requirements would not be too onerous, but would fully cover the risks of crypto assets. However, they acknowledged that the market for crypto insurance firms is currently valued at only 655 million EUR and called such a volume insignificant.

The adoption of such a rule would most severely affect insurers in Luxembourg and Sweden. According to EIOPA, they accounted for 69% and 21% of all crypto asset risks among insurers as of Q4 2023. For Ireland, Denmark, and Liechtenstein, the figures are 3,4%, 1,4% and 1,2%.

Most of these businesses are structured within funds such as exchange-traded funds (ETFs) managed on behalf of clients.

Given this data, EIOPA also recognized that wider adoption of crypto assets in the future may require a more “differentiated approach.”