Stephen S. Wu-- SL: Legal Writer,, (408) 573-5737, 50 W. San Fernando St., Ste. 750, San Jose, CA 95113

Insurance for Virtual Worlds Businesses

I received an email the other day that contained a very interesting question. The person asked my opinion as to whether it would be a good idea for virtual worlds businesses to obtain insurance. The person had in mind companies like The Electric Sheep Company. I wrote back to say that obtaining insurance is a good idea, and there may be some general insurance products out there that virtual worlds businesses can consider. Unfortunately, however, I don’t believe the market for insuring virtual worlds risks is mature enough yet to have virtual world-specific coverages. A number of factors are barriers to carriers rolling out virtual world-specific coverages today.
First, for there to be a viable market, the carriers need to identify an insurable interest in assets worth enough to make it worthwhile for users/businesses to pay money to protect it. While some people, like Anshe Chung, may have enough assets in the virtual world to insure, the vast majority of users are only invested in very small amounts of money in virtual environments. They wouldn’t miss the money they invested, even if it were completely lost. Therefore, they can self-insure at that level. For most businesses in virtual worlds, there just isn't enough money flowing through the system to make it worth spending money on insurance premiums, and without willing customers to pay premiums, there is no point in creating insurance products to sell to those customers.

Next, there needs to be some identifiable set of risks with at least some actuarial experience. Right now, the risks are uncertain, and there is no actuarial experience to speak of. As a result, I speculate that carriers are not ready to jump in.

Finally, I think virtual worlds are too new for the insurance industry to tackle. My sense is that the industry lags developments in business and technology. Consequently, we'll have to wait for the market to develop.

Virtual worlds business may want to consider more general coverages that may protect their activities on virtual worlds. For instance, some carriers offer network risk policies to transfer Internet and information security risks. Other virtual worlds businesses may want to consider insurance coverage for intellectual property infringement. But I have not yet heard of virtual worlds-specific insurance policies.

Having said that, I believe that virtual worlds products will eventually be sold. As we transition from a 2D Internet to a 3D Internet, more and more assets and attention will be on virtual worlds, we will pay more attention to risks, we will develop more loss experience, and customers will want to have some forms of protection. The bottom line is that talk of virtual worlds insurance policies is about 5-10 years ahead of its time.