While businesses and investors jump headfirst into cryptocurrency, insuring the risks involved is no simple task. Unfortunately, players in the market — whether they are banks, investors or other entities in the crypto business — are discovering that finding insurance isn’t easy.
Why is it so difficult to obtain coverage? There are several reasons:
Lack of data and familiarity
Cryptocurrency is new and doesn’t have a performance or actuarial track record, making it inherently difficult to assess and price risk. When insuring an asset like a home or automobile, insurers have an immense amount of historical data that predicts the likelihood of loss. But because crypto is so new, it’s nearly impossible for an insurer to predict the likelihood of a hacker breaking into someone’s private wallet and stealing crypto coins, for instance.
The regulatory landscape is anything but settled. The U.S. Securities and Exchange Commission has proposed a comprehensive, 654-page plan aimed at regulating Treasury markets platforms, that will likely include cryptocurrency trading.1 Insurers understandably see what the crypto regulations will entail and assess their potential impact.
Cryptocurrency has been among the most volatile of assets, whether it’s the price swings of popular forms such as Bitcoin or accounting for foreign exchange ups and downs. It’s extraordinarily difficult to assess insurance pricing when there’s major swings in the price of the underlying asset.
There are few, well-recognized crypto-custodial operations, heightening concentration risk, with hackers seeing easy targets with large potential payoffs. Carriers are reticent to insure markets in which a single entity is such an enticing target.
Misperceptions regarding costs
Adding to all this is a major disconnect between the perception of how much crypto insurance premiums should cost and the insurers’ views of appropriate pricing for products such as directors and officers (D&O) coverage. Insurance pricing is significantly higher than many people are willing or can pay, leaving many cryptocurrency companies and investors uninsured and fully exposed to risk.
How to make it easier to get crypto insurance
In order to secure appropriate and affordable coverage, cryptocurrency players need to have a compelling story to tell potential insurers.
Companies and investors need a clear explanation of what they do in the cryptocurrency market, how they operate, and how they make money. They need to explain their specific crypto involvement and insurance needs. And they need to detail their operational procedures to lower risk, and the measures they’re taking to prevent cybercrime.
HUB International’s experts can help companies navigate the difficult journey of insuring cryptocurrency risks.
1 Forbes, “The SEC Introduces A ‘Trojan Horse’ Crypto Regulation As The Price Of Bitcoin, Ethereum, BNB, Solana, Cardano, XRP Rebounds,” February 2, 2022.