Silence is the sound of money talking. The same applies to staid and buttoned-up world of insurance companies. You will find crypto insurance ads almost nowhere, but, according to insiders, this type of insurance is a new growing business that more and more companies are trying to join.
At first glance, insurance of crypto currency risks seems absurd, because crypto space is like the Old West. There is no regulation, and consumer deception, fraud, and theft of funds are rather a rule than an exception — it is enough to recall the Mt. Gox exchange scandal and the recent hacking of Bitfinex and Coincheck.
Nevertheless, as cryptocurrencies and blockchain technology are slowly turning from exotic to mainstream and insurers are learning to work with the industry risks. The premiums from insuring such risk can be substantial. According to insiders, underwriters can charge a crypto-related company upwards of 5 times or more than your average business for coverage against theft or loss.
“Insurance for cryptocurrency storage will be a big opportunity,” said Christian Weishuber, a spokesman for Allianz, which began offering individual coverage for digital-coin theft in the past year and is one of the few insurers that agreed to talk about the issue. “Digital assets are becoming more relevant, important and prevalent on the real economy and we are exploring product and coverage options in this area.”
Although many young companies can not afford such services. Marsh & McLennan and Aon, the two leading insurance brokers that help companies shop for crypto policies, expect a significant business revival this year — Marsh formed a team of 10 for servicing blockchain startups.
Aon, which covers 50% of the crypto insurance market, recently simplified the application form to expedite a contract conclusion. In addition, some Aon’s insurers include protection from crypto currency risks in general insurance policies.
Marsh and Aon declined to give the names their partners, but insiders said that today more than 12 underwriters, including Chubb and XL, provide coverage to crypto-related businesses.
XL said it is “being careful when looking at those risks and analyzing them on a case by case basis,” without getting into specifics. Chubb said that they insure “crypto exchanges and wallets,” but declined to tell whether they offer cover for other types of crypto risks. Marsh and Aon said that, despite all hacks and thefts of recent months, they aren’t aware of any case of crypto insurance payout.
It should also be noted that some startups can lie about the crypto insurance they have.
“Quite honestly, it’s something insurers are aware of and cautious about too,” said Jackie Quintal, Aon’s practice leader for financial institutions. “They don’t want an advertisement to say, ‘We are insured with ABC insurance company’ and for it to be inaccurate or misleading. It’s definitely a concern.”
However, potential customers have noticed a progress.
In May, BitGo, a cryptocurrency services provider, met with approximately 75 insurers. According to Chief Executive Officer Mike Belshe, as early as 2015, the company became one of the first to receive crypto insurance, only to drop coverage a year later because its high cost.
“They aren’t just kicking the tires. They are asking very specific questions so they can assess the risks,” he said.
Today there are a lot of crypto startups which consider insurance as a must-have. According to industry experts, crypto currency companies typically seek out to cybercrime coverage; annual fees can reach 5% of the amount of insurance coverage.
If the company is interested in larger amounts of coverage it has to conclude agreements with a dozen underwriters, with each offering from $5 million to $15 million of insurance — thanks to this practice, no insurance company will be affected too much if any problems arise.
The Industry Legitimization
There is some irony in the fact that the crypto industry, emerged from a desire to liberate users from the traditional financial system, now is in dire need of insurance.
“Coverage can reduce investor concerns and make it easier to work with banks. It definitely helps legitimize the industry,” said Lucas Nuzzi, director of technology research at Digital Asset Research.
For example, Trustology, a London-based startup which specializes in crypto custody services, is negotiating the insurance for its customer accounts up to 85,000 pounds for attracting more customers. It’s also looking at self-insuring client funds.
However, it should be noted that the situation is far from ideal — many young startups still can not afford the costly insurance; the police approval can take several months, and exclusions from insurance can add up fast. For example, losses from an interruption of service can be considered a covered loss, and the theft that caused it might not.
‘Close to Useless’
The exclusions “can make the whole policy close to useless,” said Hillik Nissani, chief operating officer of Cryptalgo, a startup that helps institutional traders execute orders. Nevertheless, he said his company is looking to buy insurance or potentially self-insuring.
In addition, the amount of coverage often does not equal the size of the potential losses.
Coinbase, one of the world’s leading exchanges, buys insurance for some of the digital coins it holds. In particular, the insurance covers funds stored in so-called hot wallets, which may contain up to 2% of client assets and are used in active trading.
It should also be borne in mind that, since the value of cryptocurrencies is highly variable, insurance, which once corresponded to the value of assets, may become insufficient at some point. That’s what happened to crypto-finance firm Circle Internet Financial, which holds billions of dollars of assets for its customers, according to CEO Jeremy Allaire.