Insurance for bitcoins – a nascent industry

Weighed down by cyber heists, insurers are gingerly tip toeing around the bitcoin business.

Despite daunting challenges and the volcanic volatility of cryptocurrencies, global insurers, including Mitsui Sumitomo Insurance, XL Catlin and Chubb, are increasingly being drawn against swinging prices of cryptocurrencies and are starting to offer protection against thefts.

Although, so far, their efforts have generated little attention, nevertheless, the emergence of this segment of the insurance market is a nascent step in the industry’s recognition.

For the insurers, the risks in the business are clear: there have been dozens of cryptocurrency hacks, frauds and technical errors which have resulted in many exchanges shuttering down their services.

Last week, on Friday, Tokyo-based Coincheck, a cryptocurrency exchange, became the latest victim to a cyber heist and lost $534 million worth of coins to hackers.

For insurers, who typically know very little of the underlying technology, who want to cover the risks for customers despite the lack of data, normally rely on a scheme of pricing coverage.

As per Christopher Liu who heads American International Group’s (AIG) North American cyber insurance practice for financial institutions, the answer revolves around finding an established business with a similar risk profile and try to adapt what works there.

“It’s sort of akin to a digital armored car service,“ said Liu. ”If there is a problem – like an accident or a robbery – that’s going to be the accumulation of all these exposures.” Liu says AIG began researching cryptocurrency theft coverage in 2014 and has written a few such policies, but remains in an “exploratory phase.”

Backing this approach was Greg Bangs, head of XL Catlin’s North America crime coverage underwriting recounts how the firm had to become its own expert on the new technology by talking to key players and potential clients before developing bitcoin theft insurance.

“The first challenge for us was to figure out if there was a product here,” said Bangs. He went on to add, XL Catlin offers annual crime coverage of up to $25 million per incident.

KYC is King

As you might imagine, knowing who your customer is, is critical to the business.

As per Jackie Quintal, an adviser to Aon Plc, an insurance broker firm, part of the job is to distinguish legitimate digital currency companies from shady ones.

“If someone is hesitant to provide information and they don’t have answers to compliance questions, they tend to disappear on their own,” she said.

No wonder insurers spend a lot of time, depending on the scale of the operations, scrutinizing records and making sure everything from security to storage procedures are in place.

“Some bitcoin exchanges and wallets weren’t anticipating the level of underwriting and due diligence that they undergo when they approach the market,” said Matt Prevost, head of Chubb’s North American Cyber Product Line.

Insurers like Chubb are betting that cryptocurrencies will gain a wider recognition in the coming future.

As per data from CB Insights, a venture capital data provider, Initial Coin Sales in 2017 raised more than $5 billion across nearly 800 deals. As yet, there is no data as to how much of that amount has been insured or of the total premiums collected.

A few insurers are yet to be convinced that the cryptocurrency business is large enough for premiums to cover possible losses.

“We’re looking at it, but does it make sense to offer a market for that?” said Frank Scheckton, President of Great American’s Fidelity Crime Division.

Currently, costs acts as a deterrent for startups and small firms, said Ty Sagalow, CEO of Innovation Insurance Group LLC

“It’s an expensive product that many companies can’t afford,” said Sagalow.

According to insurance experts, an annual premium for $10 million in theft coverage would typically run at around $200,000, or 2% of the limit. In comparison, for traditional financial clients, the typical premium hovers around 1%.

Another real concern if currency volatility. Although the coverage limit shields insurers, the impact from wild swings are felt in clear cold terms by the client.

Case in point, a $10 million policy signed in January 2017 would cover 10,957 bitcoins at the time, but it would be only 923 if a hack happened a year later.

“The key is to look for regulatory oversight that ensures that an exchange is doing what it should be doing so that it doesn’t get to the point where you have to fall back on an insurance policy,” argues Cameron Winklevoss, co-founder of Gemini, a cryptocurrency exchange and custodian.

Insurance should not be an investor’s primary concern.

As per Henry Sanderson, who oversees cyber and technology coverage for Safeonline LLP, a Lloyd’s broker, “cryptocurrency insurance can help the young industry mature while creating new business for insurers”.

He went on to add, “This whole space is maturing and growing. If we don’t embrace it now, it’s a missed opportunity for insurers.”


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