Insurance Upgrades and DeFi Coverage: Could AM Best Ratings Matter in Decentralized Insurance?

Hook: Why this matters to investors, custodians and DeFi traders right now

You hold assets on a custodial exchange, you buy a DeFi cover policy, or you lean on a protocol treasury for yield — but how confident are you that the insurer or protocol will pay when disaster hits? In 2026 the stakes are higher: institutions demand insurance-grade certainty, regulators press for clearer solvency disclosures, and retail traders want clarity amid rising rug-pull and oracle risks. That gap — between traditional insurance assurance and decentralized risk models — is the pain point this article tackles.

Thesis: AM Best-style ratings contain useful signals, but they must be radically adapted for DeFi

Traditional rating agencies such as AM Best evaluate insurers using time-tested metrics: balance-sheet strength, underwriting performance, enterprise risk management and liquidity. Those metrics matter. But DeFi protocols and custodial crypto insurers are structurally different: capital is tokenized and on-chain, risks include smart contract bugs and oracle failure, and legal remedies may be limited or cross-jurisdictional. The answer is not to transplant AM Best scores unchanged, but to translate and extend their framework into an on-chain, real-time model that explains solvency, underwriting quality and claims reliability for decentralized contexts.

Why AM Best still matters — and a timely example

AM Best remains the benchmark for insurance creditworthiness. Its recent actions highlight the signals investors and counterparties watch closely: on Jan. 16, 2026, AM Best upgraded Michigan Millers Mutual to A+ (Superior), citing strongest balance-sheet strength and strong operating performance — a classic example of how capital adequacy and reinsurance affiliation influence ratings.

"AM Best upgraded Michigan Millers’ Financial Strength Rating to A+ and revised outlook to stable, reflecting balance sheet strength and participation in Western National’s pooling agreement." — Insurance Journal, Jan 16, 2026

That upgrade is instructive. In traditional markets, a rating upgrade tells buyers and partners the company has stronger capital, better reinsurance, and improved enterprise risk management. For DeFi, investors want the same reassurance — but measured differently.

Where DeFi insurance and custodial insurance diverge from traditional metrics

Before mapping AM Best’s playbook to DeFi, understand the key structural differences:

• Transparency vs. Legal Recourse — On-chain assets are transparent, but legal enforcement across jurisdictions is often weak or non-existent.
• Code Risk — Smart contract bugs and oracle failure are material, ongoing threats with no direct analogue in P&C insurance.
• Tokenomics & Governance — Protocol treasuries are influenced by token incentives, governance votes and potential insider actions.
• Real-time Liquidity — Capital adequacy must be assessed in real time; off-chain audits are necessary but not sufficient.
• Reinsurance & Counterparty Risk — Reinsurance can be both on-chain (capital pools, syndicated coverage) and off-chain (traditional reinsurers), creating hybrid exposures.

Adapting AM Best: A component-by-component translation

AM Best evaluates insurers across four high-level dimensions: balance-sheet strength, operating performance (underwriting), enterprise risk management (ERM), and liquidity/claims-paying ability. Below is a practical mapping to on-chain equivalents — the first step toward a defensible, DeFi-native rating methodology.

1) Balance-sheet strength → On-chain reserve adequacy

Traditional metric: surplus, capital-to-risk ratios and reinsurance arrangements. DeFi equivalent:

• On-chain Treasury Composition: asset mix (stablecoins vs. volatile tokens), liquidity of reserves, and concentration risk.
• Real-time Solvency Coverage Ratio (SCR): a live metric = (liquid reserves marked to market) / (modeled maximum probable claim over 30–90 days).
• Reinsurance & Backstops: proof of reinsurance treaties, capital commitments from institutional partners, or on-chain reinsurance pools.

2) Underwriting & Pricing → Parametric/actuarial rigor of coverage

Traditional metric: loss ratio, combined ratio, premium adequacy. DeFi equivalent:

• Underwriting Models: are policies priced with robust on-chain actuarial models and historical event data? Do they account for cascading DeFi failures?
• Coverage Scope & Exclusions: clear, machine-readable policy language that specifies oracle failures, economic exploits, governance attacks, and custody exclusions.
• Premium Adequacy Index: modelled vs. actual claims over rolling windows adjusted for systemic events.

3) Enterprise Risk Management (ERM) → Governance, code control and operational risk

Traditional metric: ERM frameworks and board oversight. DeFi equivalent:

• Governance Risk Score: centralization of admin keys, timelocks, multi-sig arrangements, and on-chain governance dynamics.
• Smart Contract Assurance: number and depth of audits, bug-bounty history, formal verification status and time since last upgrade.
• Operational Controls: treasury access controls, multisig signers’ identity verification, treasury segregation and custody safeguards.

4) Claims-paying ability → Liquidity & claims process transparency

Traditional metric: cash flow ability to pay claims, historical claim pay-outs. DeFi equivalent:

• Claims Transparency Index: documented, on-chain claims adjudication processes, time to pay, dispute resolution mechanisms and historical pay-out records.
• Liquid Coverage Ratio: % of reserves immediately available to pay claims without disrupting market liquidity.
• Legal Recourse Score: whether policyholders have enforceable contracts in a relevant jurisdiction and the practical odds of recovery.

Practical framework: The DeFi Assurance Score (DAS)

To operationalize the mapping above, protocols and custodians should publish a composite score — the DeFi Assurance Score (DAS) — that adapts the logic of AM Best to on-chain realities. Suggested components and weights (example):

• Solvency Coverage Ratio (SCR) — 30%: liquid reserves vs. modeled worst-case claims.
• Smart Contract & Audit Score — 20%: depth of audits, formal verification, bug-bounty history.
• Governance & Admin Control Score — 15%: multisig, timelocks, decentralization of decision power.
• Claims Transparency Index — 15%: documentable claims history and process automation.
• Reinsurance & Backstop Index — 10%: presence of reinsurance treaties, capital partners.
• Legal Enforceability Score — 10%: on/off-chain legal protections and jurisdictional clarity.

Each component should be algorithmically computed where possible and backed by third-party attestations. The DAS should be refreshed in real time and published on-chain and off-chain dashboards.

Actionable checklist for investors evaluating custodial insurance and DeFi coverage

Before trusting a policy or custodian, use this practical checklist to assess solvency, underwriting quality and claims reliability:

1. Request on-chain reserve attestations: Proof of custody (Merkle proofs or attestations by top auditors) and the asset mix of the treasury.
2. Check SCR and LCR metrics: Does the provider publish Solvency Coverage Ratio and Liquid Coverage Ratio? Are these audited?
3. Read the policy wording: Look for exclusions (smart contract risk, governance exploits, stablecoin de-pegs) and check if the language is machine-readable/standardized.
4. Examine claims history: Time to settlement, percentage of claims paid, and whether governance votes were required to approve payouts.
5. Audit & security pedigree: Number and reputation of auditors, formal verification, bug-bounty program size and payout history.
6. Reinsurance & capital partners: Are there regulated reinsurers or institutional capital lines backing the protocol?
7. Governance profile: Number of active multisig signers, timelock durations, and whether signers are identifiable/subject to legal agreements.
8. Legal framework: Does the custodian/policy issuer have a legal entity and jurisdiction? Are there enforceable agreements?
9. Stress-test reports: Has the protocol published stress tests for market crashes, liquidity squeezes and correlated failures?
10. Third-party ratings or attestations: Independent reports from auditors, DeFi-focused rating firms, or partnerships with traditional insurers.

How custodial insurers and DeFi protocols can pursue an AM Best-style rating (step-by-step)

Insurers and protocols that want to be taken seriously by institutions or to achieve higher trust scores should follow these steps:

1. Formalize financial statements: Publish audited financials (GAAP or IFRS) for off-chain assets and on-chain attestations for treasury holdings.
2. Build reinsurance or institutional backstops: Secure capital commitments or reinsurance treaties to cover tail events; document contracts and make key terms public.
3. Strengthen ERM: Implement board-level oversight, risk committees and documented ERM frameworks adapted for protocol risk (oracle, governance, concentration).
4. Increase transparency with dashboards: Real-time on-chain dashboards displaying liquidity, pending claims, and SCR; make raw data and assumptions downloadable.
5. Engage with rating & audit firms: Partner with DeFi-specialized auditors and seek collaborative work with established agencies (e.g., co-developed on-chain assessment frameworks).
6. Standardize policy language: Use machine-readable, standardized policy templates (similar to ISO standards) to reduce ambiguity during claims.
7. Legal readiness: Create jurisdictions and contractual frameworks that make claiming and enforcement practical for retail and institutional clients.
8. Continuous security program: Maintain ongoing audits, sizable bug-bounty programs and public remediation timelines.

Limitations and real risks of applying traditional ratings to DeFi

Even with an adapted framework, be transparent about limits:

• Legal enforceability: Ratings imply enforceable backup. For many DeFi entities, enforcement is uncertain.
• Dynamic risk: Smart contract and oracle risk evolve rapidly — a high score today can be invalidated by an upgrade or governance capture tomorrow.
• Data quality: On-chain signals are noisy — wrapped tokens, bridged assets and staking derivatives complicate true liquidity measurement.
• Conflict of interest: Token-based governance can bias risk controls; rating firms must guard against fee-for-rating conflicts and on-chain manipulation of metrics.

2026 trends shaping the future of DeFi coverage and ratings

Several developments in late 2025 and early 2026 make this adaptation timely:

• Institutional demand for auditable coverage: Asset managers and custodians now contract only with providers that publish real-time solvency metrics and third-party attestations.
• Hybrid insurance models: Traditional reinsurers are selectively underwriting tokenized risks, creating hybrid solutions that combine legal treaties with on-chain capital pools.
• Regulatory attention: Global regulators are requiring clearer disclosures from custodial providers (proof of reserves, SOC attestations) and scrutinizing insurance claims processes tied to retail customers.
• Standards & tooling: New DeFi standards — machine-readable policy schemas, on-chain attestation protocols, and standardized stress-testing tools — have emerged to enable algorithmic scoring.
• Ratings collaboration: Some legacy rating agencies and DeFi analytics firms have begun pilot projects to co-develop on-chain rating methodologies, acknowledging that neither side can do it alone.

Final takeaways — what investors and service providers should do now (actionable)

• Investors: Demand real-time solvency and liquidity metrics before relying on any custodial insurance or DeFi policy. Use the checklist above before deploying capital.
• Custodians & Protocols: Publish audited treasuries, strengthen ERM, and seek hybrid reinsurance relationships. Invest in clear, machine-readable policy documentation and claims automation.
• Rating Agencies & Auditors: Build new, transparent methodologies that combine on-chain telemetry with off-chain legal and actuarial review. Pilot co-branded assessments with DeFi-native firms.
• Regulators: Encourage standardized disclosures and support a permissive but accountable environment for on-chain attestations to protect retail participants.

Conclusion & call-to-action

AM Best-style ratings bring valuable discipline: they make solvency, underwriting and enterprise risk visible to buyers and counterparties. But decentralized insurance and custodial coverage require a reimagined approach — one that preserves the analytical rigor of traditional ratings while embedding real-time on-chain data, smart-contract risk measures and governance assessments. The path forward is hybrid: standardized, auditable metrics (like the DeFi Assurance Score) combined with traditional legal and reinsurance backstops. That combination will give institutions and retail users the confidence they need to scale crypto custody and DeFi coverage responsibly in 2026 and beyond.

Take action: Download our free Due Diligence checklist for DeFi insurance and custodial coverage (includes SCR template and audit-attestation requests), or contact our team for a custom risk assessment of a protocol or custodian. Protect your assets with measurable metrics, not promises.

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