Insurance policies

Crypto insurance policies are ‘sprung up’ to meet frenzied demand

This year, companies are scrambling to secure cryptocurrency insurance as a hedge against catastrophic losses, paying dearly for relatively limited protection as they venture into the world of high-risk, high-reward digital assets.

“We’re seeing inquiries about crypto risk and coverage from all kinds of businesses,” said Jackie Quintal, director of insurance brokerage Marsh McLennan. “Cryptography is popping up across all financial services, technology, fintech, and other sectors of the economy.”

Demand now far outstrips supply — less than 2% of crypto risk is currently insured, said Edin Imsirovic, associate director at insurance credit rating agency AM Best — so those who wish to sell policies may charge prices several times higher than those for traditional coverage.

“Especially in the last year, more and more operators have started providing assurances to crypto companies or have formed internal committees to understand the space,” said Sarah Downey of broker Lockton Companies Inc. Insurers “have definitely increased their appetite” for crypto risk, she said. .

Certainly, some insurers claim that the unregulated market is still too volatile to be affected and are even building general crypto exclusions into their policies.

But the trend is to join the fray, and the recent crypto market meltdown hasn’t changed the broader momentum, observers told Bloomberg Law.

“Investors, board members and regulators expect you to have insurance” to cover crypto exposures, said Joseph Ziolkowski, CEO of Bermuda-based Relm Insurance Ltd. “There has been a real increase in the importance of crypto insurance, especially in the last two months” after the “Bankruptcy of Celsius notices and more crypto flaws businesses. »

In some cases, refusing to offer crypto policies becomes a “difficult position to maintain for insurers who want to keep their renewal book,” Quintal said, because the “request comes from a client with whom an insurance company has been a business partner for decades.”

“Very great year”

Having crypto insurance is a “market differentiator” and a “credibility driver,” said Jared Gdanski, CEO of Evertas, a Chicago-based crypto underwriter licensed by Lloyd’s of London. “We know that crypto-focused funds where their [investors] said, “We’re not going to give you any money until we see an insurance policy.”

Demand started to rise last October and “2022 has been a really big year” for crypto insurance, said Ben Davis of Lloyds-endorsed Superscript. The broker has received hundreds of insurance inquiries from banks, tech firms and crypto firms this year, and has converted up to 15% of them into customers, Davis said.

Premiums are typically twice as high as traditional policies for non-crypto risk, he said. Superscript’s cyber errors and omissions insurance policy charges premiums ranging from $20,000 to millions of dollars depending on the company and its specific risk profile.

Companies entering the cryptocurrency industry have faced market volatility, high-profile hacks, theft of digital assets, and security issues. And lack of government regulation is a major wildcard.

“Generally speaking, insurers who write crypto-related business do so profitably,” Quintal said. They try to balance lucrative opportunity with unpredictable risk, she said.

“Growing Every Day”

Last month, Beazley Group announced $10 million in directors and officers insurance to protect executives of crypto companies from investigation or litigation. In May, Lloyds-licensed Superscript unveiled its $5 million policy to cover breaches of contract and crypto-related cyberattacks.

Most mainstream insurers, including Lloyds, Chubb Ltd., Tokio Marine Holdings Inc., Mitsui Sumitomo and AXA XL, cover the financial services and crypto risks of tech companies under professional liability policies, according to brokers. insurance.

“Many insurance companies are looking for new revenue streams,” said Luke Speight, director of digital assets at insurance brokerage Willis Towers Watson. Insurance giants like Munich Re, Zurich, Arch and Canopious are now underwriting crypto risk, he said.

Many carriers are modifying typical business policies to suit crypto companies, banks and asset managers, Lockton’s Downey said.

Crypto insurance capacity is still small compared to the traditional commercial insurance market, “but it is growing day by day,” said James Knox, regional head of technology practice at brokerage Aon PLC. “It’s very rare that we don’t find insurance capacity for a crypto client.”

Lloyds of London provides cover for valuables such as art and diamonds, called cash insurance. This policy also covers cryptocurrencies that an insured holds online and offline. An insured can get up to $900 million in coverage for offline cryptocurrencies and $75 million for those held online, as they are more vulnerable to hacks. Customers brokered by Aon get up to $90 million, Knox said.

“Everyone is very sensitive”

Most commercial liability cover capabilities such as directors and officers insurance come from US insurers, and most criminal cover for theft of digital assets is issued by UK carriers, Quintal of Marsh said. .

A complicating factor for policy seekers: Many insurers that sell crypto coverage don’t want to advertise it yet, Quintal said.

“Some of them are enthusiastic but not visible to the outside with their enthusiasm” about crypto risk hedging, Quintal said.

Bloomberg Law contacted more than a dozen major insurance companies that offer crypto coverage, but most declined interviews, including AIG, Chubb, Zurich, Munich Re, Arch, and Starr.

“Everyone is very sensitive about the use of their name,” said Gdanski of Evertas, which offers a $5 million policy to cover crypto-related tech breaches. The crypto underwriter works with big carriers whose names “we’d love to shout it from the rooftops. But unfortunately we’re limited.

“If there starts to be significant crypto losses,” he said, “even very crypto-focused insurers are just going to pull out” despite the huge demand.

Hurricanes Against Crypto

Despite the momentum, crypto is still in its infancy. And even covering damage from natural disasters, like hurricanes in times of climate change, may be easier for policyholders to bear.

The global natural catastrophe insured rate is around 50%, according to broker Aon, while the crypto market’s insurance rate is less than 2%.

And without sufficient historical data for risk modeling, the unregulated nature of digital assets makes it particularly difficult for insurers to measure and price coverage.

It’s hard to cover crypto companies and their directors, especially when there’s “regulatory measures against some of those players,” AM Best’s Imsirovic said. “Insurance companies are unsure of the legality of some of these transactions.”

Many crypto start-up and insurers also sell crypto insurance, but “AMBest will not develop rating criteria for newly formed crypto insurance companies given the regulatory uncertaintysaid Imsirovic.

Financial services, technology and crypto companies prefer traditional insurers like AIG, Chubb and Zurich because of their better claims-paying reputations and strong financials, Lockton’s Downey said.

“Most of the big crypto exchanges or even smaller asset managers in the crypto space are insured through traditional carriers,” she said.

Absolute clarity needed

Insurers providing crypto coverage protect themselves by writing low limits with high rates. Directors’ and officers’ insurance premiums can be two to five times higher for tech and crypto firms than for banks, Relm’s Ziolkowski said. Relm manages exposures by being “judicious” with the limits of the policy, he said.

Relm offers coverage of up to $5 million for crypto-related risks. But the limit is small compared to the $50 million or $100 million directors and officers insurance policy of a large corporation.

“We will never make underwriting decisions based on six-month or even three-month-old financial statements,” Ziolkowski said. “We need absolute clarity on the current state of the entity, its organizational structure, its subsidiaries and its mergers and acquisitions.”

“Markets are volatile,” he continued. “Whether you’ve been in crypto for a year or seven, the reality is that your financial situation six months ago has almost no bearing on your financial situation today.”

A company is more likely to get crypto insurance if it “does one or two things really well,” said Superscript’s Davis.

“If they want to start an exchange, create an NFT platform, and then mine, they’ll never do it,” Davis said. “By spreading themselves too thin, they invite tons of business risk.”