Authored by Samiul Chowdhury, Principal Actuarial Consultant, RNA Analytics

Innovation in the digital world is accelerating. Whilst the web has been in constant transformation since the very first network for computers was developed in the 60s, a major conceptual step change has begun to occur that marks a significant shift in the way the web is used.

The first such shift took place around the early 2000s, when what is retrospectively referred to as the Web1 era (which describes that of largely read-only, static pages) made way for a new iteration. Web2 built on the foundations of Web1 to allow users to participate in content – albeit in an environment controlled by Big Tech firms.

Now a second shift, to Web3, is underway that aims to create a decentralised web – one where control and ownership of data is no longer monopolised by a small number of large firms, but instead is owned by multiple independent parties in a globally distributed infrastructure of protocols and ledgers, including blockchains. In the Web3 era, information will be increasingly connected and organised by semantic metadata. Crypto is the currency in this new token-based economy where users maintain control and build value.

The web’s new, democratised iteration requires – and begets – innovation both in the tech itself, and in the products and services that either rely on the internet for their application or distribution (whether solely or partially), or are affected by the changed use of internet-based technologies (both at work and at home). This shift will fundamentally alter some business models.

One element of Web3 that is getting a good deal of column inches at the moment is that of the metaverse. At home, the metaverse, or ‘cyber space’, already exists in a basic form in the gaming world, with Roblox or Fortnite being two of the better known metaverses amongst Generation Z. Beyond gaming, a vision for an ‘industrial metaverse’ is emerging – where a wide range of new technologies create highly immersive ways for people, things and organisations to interact, through hyper-connectivity and advanced data analytics.

In Web3 as in the metaverse, new markets, new threat dynamics and liabilities – and even entirely new industries may emerge. Both developments are expected alter long-established business risks and liabilities, and create altogether new ones.  Just as the opportunities and risks will change, many of the traditional approaches to insurance may need to be completely rethought so that they are fit to respond to new models and exposures.

Forward looking carriers are already beginning to think about how their customers’ needs may change in this new paradigm. Cyber risks and intellectual property infringement are two areas where new the insurance policies of old will no longer be fit for purpose. Calculating the opportunities and risks will require powerful modelling tools for insurers to make the most of the new dynamics.

In this web of tomorrow, insurers’ own operations, the way that carrier interact with insureds could change radically, as will the composition of revenue pools, and distribution models; and actuaries will be called upon to create new models to support insurers through this transition.

Tomorrow’s world

Whilst there is a huge degree of excitement around Web3 (and the metaverse), neither will happen overnight and both could well change direction at any point. At the World Economic Forum’s Davos meeting in January 2023, participants spoke of the metaverse not as the “endgame” but as part of “ongoing digital transformation” and it is indeed much more useful to think of the evolving concepts of both Web3 and the metaverse in this way – as a journey rather than a destination. Along this journey, a raft of new legal frameworks will be needed to respond to the challenges of insuring a changing world.

A number of associations, foundations and alliances have sprung up in recent years to help support and realise advances in Web3 and metaverse technologies and tools, each with a different agenda – from collaborating for an open and interoperable infrastructure, to ensuring the ethical operation of the new ecosystem through the development of standards.

Among these, a WEF panel convened at the organisation’s annual meeting featured some of the work that have been carried out by the Forum’s own initiative to held define and build the metaverse. Its first two papers focus on interoperability, governance and the consumer’s role in the metaverse of the future. The regulation of digital identity remains another of the WEF’s key concerns, and one that has a plethora of implications for insurance and insurers.

The issue of systemic financial risk in Web3 more widely was mentioned in the Bank of England’s recent biannual Systemic Risk Survey, in which the risks surrounding cryptocurrencies were raised by 4% of respondents, with the main concerns focused on cryptocurrencies as an asset, and a shift to cryptocurrencies (even stablecoins) being used for payments.

The shift to Web3 will be a non-linear process of uncertain length, but for insurance, as the backbone to innovation (from the oldest maritime insurance contracts to innovative space coverages) the work to consider the risks and opportunities begins now.