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Cryptocurrency, based on blockchain technology, comprises digital assets commonly created through a process known as mining that involves using computers to solve complex puzzles.
They are purchased through online exchange platforms and stored in digital wallets, which are apps that allow cryptocurrency users to store and retrieve their digital assets.
“Hot” wallets are connected to the internet, which could make them more vulnerable to online attacks, while “cold” wallets are not.
Unlike traditional currencies, they are not backed by a government or centralized authority and have significant pricing volatility.
They continue to increase in popularity. Last year, their price growth exceeded the Standard & Poor’s 500 stock index.
Popular cryptocurrencies include bitcoin, ethereum and tether, but there are thousands of others.
While cryptocurrency is used for criminal purposes, such as ransomware demands, it is also used for legitimate purchases, such as buying digital artwork through NFTs, and there is an extensive investment market in the assets.
Insurer interest in cryptocurrency is growing as the digital assets boom, but an underlying wariness of the risks involved remains.
Many believe cryptocurrency insurance is in its nascent stage and will expand, although hurdles include its price volatility, the absence of historical underwriting data, a lack of regulation and a poor reputation because of its association with ransomware payments and other criminal activity.
Only an estimated 2% of cryptocurrency assets are insured, experts estimate.
Some insurers are also beginning to accept premium payment in cryptocurrency and others may include it in their investment portfolios (see story).
Cryptocurrencies, which are digital assets based on blockchain technology, are booming. While bitcoin is the most high-profile cryptocurrency, there are many others.
According to a study by Dublin-based research firm Research and Markets.com, the global cryptocurrency market reached $1.78 billion in volume in 2021 and is projected to multiply to $32.42 billion by 2027.
In March, President Joe Biden signed an executive order requiring the government to assess the risk and benefits of creating a central bank digital dollar, as well as other cryptocurrency issues, which analysts view as an acknowledgment of the sector’s growing importance.
Cryptocurrency-related insurance is offered by Lloyd’s of London syndicates, other London market insurers and by insurers in Bermuda and elsewhere, observers say. Buyers of the coverage include cryptocurrency exchanges; asset managers; custodians, which are the third parties hired to look after the assets; crypto miners; and payment remittance platforms.
Most of the coverage written has been for crime exposures, with other lines including cyber liability, directors and officers liability, technical errors and omissions and property coverage, observers say.
Cryptocurrency insurance coverage is limited, said Christopher Grimes, a director at Fitch Ratings Inc. in Chicago. It has been “typically split among a small group of niche insurers and not broadly covered by more mainstream insurers. Lloyd’s is the one big headline that drives the industry, really, on this,” he said.
“There’s a lot of customer clients out there that want this coverage, and there’s a mismatch between demand and supply,” said Timothy Fletcher, Los Angeles-based national financial services group leader for Aon PLC.
Few markets write the coverage and premiums are often high, said J. Gdanski, New York-based CEO and founder of Evertas, a managing general agency that writes on behalf of Arch Capital Group Ltd.’s Lloyd’s syndicate, which was granted coverholder status by Lloyd’s in February.
While many are interested in underwriting the business, there is hesitancy “because people don’t fully understand the risk,” Mr. Gdanski said.
Cryptocurrency is a new technology, and underwriters need “to get to a level of comfort” to commit to underwriting the exposure, said Joseph Ziolkowski, co-founder and CEO of Bermuda-based cryptocurrency insurer Relm Insurance Ltd.
Its price can rise or fall by thousands of dollars day to day. Mr. Ziolkowski said its value changes with geopolitical events, which is a factor hindering its further adoption by insurers.
There is also concern about cryptocurrency-related crime. A report by New York-based blockchain analytics company Chainanalysis Inc. states that the total cryptocurrency value received by illicit web addresses reached $14 billion in 2021, compared with $7.8 billion in 2020.
Some experts say cryptocurrency’s poor reputation, caused in part by its use in ransomware payments, also dampens demand.
Cryptocurrency has become a “taboo” industry because of its associations with arms dealers, ransomware and drugs, Mr. Fletcher said.
“Insurers need to ignore the noise and be able to underwrite the various risks,” he said, adding that cash can also be difficult to trace, yet insurers cover banks.
Furthermore, historical loss data for cryptocurrency is limited. Past loss experience gives insurers “a level of comfort” in underwriting, Mr. Ziolkowski said.
“There’s still a lot of education that needs to be done with most insurance companies” around what the asset is and how to protect it, said Jacob Decker, San Francisco-based director of financial institutions for Woodruff Sawyer & Co. But for those willing to do the work, “the components are there,” he said.
The market now is where cyber insurance was several years ago, said a spokesman for Coinbase Global Inc., a cryptocurrency exchange platform, which has insurance through Lloyd’s.
In providing coverage, security controls are an issue.
“We don’t quote, let alone write, cryptocurrency risk” without addressing an extensive list of concerns that include perimeter security, encryption, contract terms, customer data and how it is stored, said Michael Carr, Chicago-based head of risk engineering for insurtech Coalition Inc., which writes cyber and technical E&O coverages as a managing general agency.
“It certainly creates a lengthier underwriting process and requires us to do a little bit more work” in getting insurers comfortable with insuring cryptocurrency, said Jacqueline Quintal, New York-based managing director and digital asset leader within Marsh’s U.S. financial institutions practice.
Insurers’ greater participation in the market in the U.S. is inevitable, but “regulatory clarity” is needed, said Edin Imsirovic, Oldwick, New Jersey-based associate director with A.M. Best Co. Inc. This could come from the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, which has taken an interest in the area, or various states, among others, he said.
“There’s a lot of case law to be written, and there’s new regulations coming up that define the space better,” Mr. Carr said.
“We hear all the time that insurers are skittish about the industry because of the uncertain regulatory environment,” said Mr. Fletcher, who added President Biden’s executive order portends a move to more regulatory clarity around cryptocurrency, which will make insurers more comfortable with the business.
However, Mr. Decker said there is “enough regulatory clarity” already. Banks, for instance, are not prohibited from assuming custody of digital assets, although they must have controls in place, he said.
Insurers need to know who the customer is and the source of the funds and confirm that blacklisted countries such as North Korea are not involved, he said.
Among the cryptocurrency coverages offered “crime is actually the most important line,” Mr. Gdanski said.
“You’ve got a big demand for crime insurance from custodians and asset managers,” which “is going to be a hard thing for us as an industry to get done,” Mr. Fletcher said.
In 2020, Lloyd’s syndicate Atrium, with Cardiff, Wales-based cryptocurrency service provider Coincover, created a liability policy against losses arising from the theft of cryptocurrency held in “hot” wallets, which are internet-connected apps that allow cryptocurrency users to store and retrieve their digital assets.
The policy was backed by a panel of other Lloyd’s insurers, including Tokio Marine Kiln and Markel Corp. syndicates, which are members of Lloyd’s product innovation facility.
Jeff Hanson, senior vice president at London-based Paragon International Insurance Brokers Ltd., said he has seen the number of cryptocurrency crime insurance buyers ramp up significantly over the past three years. There are about 25 crime insurance programs that protect cryptocurrency custodians and exchanges where limits of $10 million or more have been purchased, he said.
A related coverage is specie insurance for cryptocurrency risks, which covers losses or damages to private keys in cold wallets, which are unconnected to the internet.
Mr. Fletcher said “more insurers are dipping their toes into” the D&O market where a lot of attention is focused as cryptocurrency companies seek to bolster their boards, sometimes to comply with regulatory requirements.
Many companies that need to raise capital are seeking independent directors, who will not agree to join boards without obtaining D&O coverage, Mr. Ziolkowski said.
Some observers predict cryptocurrency insurance will eventually be more widely offered.