Fidelity insurers adapt to crypto risks

Digital ledger technology and cryptocurrencies pose emerging risks that are only now beginning to be understood and addressed as insurers learn more about these new and evolving tools and technologies.

But even as the technology proliferates, risk managers are struggling to keep up.

“Any innovation has inherent risks,” said Paul Meeusen, head of distributed ledger technology at Swiss Re Ltd. in Zurich.

“Cryptocurrency is a very novel technology, and it may have a very bright future, yet there’s certainly a good amount of risk associated with it,” said Patrick Schmid, vice president of The Institutes RiskBlock Alliance, the digital ledger technology consortium started by The Institutes, the insurance industry education and research organization in Malvern, Pennsylvania.

There are some 1,500 cryptocurrencies in existence with a cumulative market value of half a trillion dollars, Mr. Schmid said.

But the rapidly expanding crypto sector has caught many in the risk profession and community off guard.

“I don’t find, when speaking to professional risk managers and insurance brokers, that people necessarily fully understand the risk at this point. It’s really new technology,” said Stephen D. Palley, of counsel with Anderson Kill P.C. in Washington.

“Cyber is really new and completely intangible, and no one’s really good at understanding what that means yet,” said Joe Calandro, managing director with PwC in New York.

Using digital ledger technology in regular activities may not create new or substantial risk management challenges.

“If you are simply using the technology and the technology is part of the professional services provided, generally speaking that should be something that is covered or coverable within a traditional insurance program,” said Jackie Quintal, financial institutions practice leader for Aon Risk Solutions in New York.

The technology could even become a risk mitigation tool.

“Blockchain, the technology behind cryptocurrencies, may help reduce risk through its decentralized nature,” Mr. Schmid said.

Digital ledger technology “could be seen as a tool to improve process efficiency, as well as a risk mitigation tool, meaning it’s a much more secure environment than what exists today,” Mr. Calandro said.

But risks associated with cryptocurrency may require closer attention when it comes to insurance.

“Once you venture past the technology into the cryptocurrency space, the conversation changes,” Ms. Quintal said. “What exactly are you doing, how is it secured, what does the technology look like? Some of those things are not immediately picked up by traditional language from a fidelity (policy) perspective and would warrant a more specific and focused conversation.” Small changes to policy language may be needed, she said.

“It’s mostly a mechanical change because most insurance policies — if you think of the traditional terms and conditions of a fidelity policy — are based around legacy systems and processes within banks,” Ms. Quintal said. “So you are looking at something which covers theft of money and securities defined in a narrow enough way that cryptocurrency is neither. It requires a change to policy language such that you are picking up coverage for cryptocurrencies in addition to traditional fiat currency.”

Such changes in language, however, meet with varying responses from the insurance marketplace, Ms. Quintal said. “Some insurers are more comfortable than others with making such changes. In general, the more an insurer knows, the more comfortable they tend to be.”

Insurers seem to have differing levels of understanding of and appetite for the exposures, she said.

“There are some insurers which have taken the time and learned to ask better questions and are willing to make changes,” Ms. Quintal said. “Others have said, ‘We don’t quite understand it, and we’re not sure we’re going to understand it fast enough, so we’re just not going to do it.’”

“We recognized back in 2014 if we did have a fidelity claim with cryptocurrency there were holes in the policy and it could be interpreted in a variety of ways,” said Frank Scheckton, president of the fidelity and crime division for Great American Insurance Co. in Windsor, Connecticut. “We really felt the need to define just what we thought it was so that our customers were covered.”

Great American began offering crime coverage for bitcoin in June 2014 and has most recently begun exploring the insuring of cold storage of bitcoin, which moves accounts off an exchange and stores them offline on a hardware wallet, on a case-bycase basis. “We have people approaching us to look at cold storage and we are saying yes or no,” Mr. Scheckton said. The cold storage coverage covers theft by any individual, employee or third party, he said.