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Bitcoin's digital obstacles may relegate insurance coverage to specialty market


The insurance industry has dipped its toe into providing coverage connected to the digital currency Bitcoin, but significant obstacles remain.

They include the industry's conservatism, Bitcoin's widely fluctuating monetary value, the absence of any government backing, its use by some unsavory criminal elements and uncertainty as to whether its popularity is a short-lived fad.

On the other hand, experts point to the industry's eagerness to find new premium volume and increasing buyer interest as factors that could encourage underwriting Bitcoin insurance.

Bitcoin is a digital or cryptocurrency created through a digital “mining process.” It reportedly was introduced by the pseudonymous Satoshi Nakamoto in 2009. Miners use special software to solve math problems and are issued a certain number of bitcoins in exchange.

Any initial Bitcoin coverage is likely to be written in the excess and surplus lines market, and experts say the best approach may be a hybrid policy combining various types of coverage.

Limited insurance coverage has already been provided, including a Lloyd's of London policy that covers Bitcoin storage for London-based Elliptic Vault Ltd. Other insurers report receiving queries about such coverage.

Bitcoins already are accepted as payment by some businesses, including the Sacramento Kings professional basketball team, online discount shopping website Overstock.com Inc. and online travel CheapAir.com.


Insurance would be very welcome by the Bitcoin industry, which is “looking for legitimacy and financial protection and hedges that would build confidence in it,” but “it's going to be a difficult nut to crack,” said Tim Zeilman, Hartford, Conn.-based vice president at Hartford Steam Boiler Inspection & Insurance Co., a Munich Reinsurance Co. unit, which currently does not plan to offer such coverage.

One concern is that Bitcoin is not backed by any government.

“It's intangible and covert. I think that's going to be a problem,” said Peter Taffae, managing director at wholesale brokerage Executive Perils Inc. in Los Angeles.

Another issue is the reported connection between the use of bitcoins and criminal activities, said Ty Saglaow, president of consulting firm Innovation Insurance Group L.L.C. in New York. The insurance industry has to look at “some of the criminal activities that are so often associated with that enterprise,” he said.

On Feb. 6, for instance, Florida undercover agents arrested two men who were accused of offering to sell bitcoins in exchange for cash in a money laundering scheme, according to prosecutors.

Also earlier this month, the reincarnated online black market Silk Road reportedly said that hackers took advantage of an ongoing bitcoin glitch to steal $2.7 million from its customers.

An April 2012 FBI report said bitcoins are likely to continue to attract cyber criminals, “who view it as a means to move or steal funds as well as a means of making donations to illicit groups.”


Another concern is whether Bitcoin will even be around in the long term, with some comparing it with Holland's 17th century tulip mania, which is synonymous with speculative bubbles that eventually pop.

Furthermore, someone could devise an alternative that is “easier, faster, cleaner and a more desirable piece of transaction, a currency that could cause bitcoins to go away,” said Robert Parisi, network security and privacy practice leader at Marsh L.L.C. in New York.

Bitcoin may be the Myspace of its day, said Richard Magrann-Wells, vice president and financial services practice leader at Willis North America Inc. in New York, referring to the social media network that Facebook later overtook. It “may have broken new ground,” but it also “may not be the one that sticks around for the long run,” he said.

Bitcoin is a difficult risk for underwriters to “get their hands around,” Mr. Parisi said. “It's cutting edge. It's pushing the envelope as to what transactions could be undertaken, and that carries with it a certain amount of risk. You're asking people to do things in a new and distinct way.”

“The truth is, no one wants their name to be associated with the first big deal having something go awry, or having the company that insured it prosecuted for criminal charges,” Mr. Magrann-Wells said.

“Everyone would like to be the first, but there's some serious risk going on,” he said. “Quite honestly, insurers and underwriters are willing to take large risks if they see large premiums,” but Bitcoin now would result in little potential premium.

However, some experts view the situation differently.

“There's a fair amount of innovation in the insurance industry, and there are insurance companies who love to be seen as offering the next new thing, especially when it comes to anything that smacks of the Internet,” said Richard Betterley, president of Sterling, Mass.-based Betterley Risk Consultants Inc.


“I would not be at all surprised to see products coming to the market very soon surrounding bitcoins,” said Howard Mills, New York-based director and chief adviser of the insurance industry group at Deloitte L.L.P.

“The industry is really working to be very innovative and being cutting-edge and being on top of this,” Mr. Mills said. “With growth being such a challenge in this market, the insurance industry is really looking for all sorts of new avenues and areas of growth, so I think this will be a very vibrant space in the industry.”

At XL Group P.L.C., “we have actually started to see some submissions” from firms involved in Bitcoin, said Steven Anderson, Dallas-based vice president and senior underwriter.

“The entrepreneurs are going right into tapping this new monetary market,” Mr. Anderson said. “With that said, we're very leery of just how (Bitcoin currency) works and the reputation it has up to this point, so we have been reluctant to write any of those risks. But that is not to say that won't change, because it's obviously gaining a little bit more steam.”

Oliver Brew, New York-based vice president of technology and privacy at Liberty International Underwriters, part of Liberty Mutual Holding Co. Inc., has received coverage inquiries from companies that accept bitcoins.

“We look at this type of risk on a case-by-case basis, and where it may make sense,” he said.

However, Liberty Mutual has not developed a dedicated product for that risk, and bitcoin coverage would be incorporated into the insurer's data privacy policy, Mr. Brew said.