4 Hurdles Facing the Cryptocurrency Insurance Market

Insurance covering cryptocurrency risks is likely to remain expensive and in short supply until today’s hard insurance market starts to soften, despite increasingly broad acceptance of digital currencies by traditional companies and national regulators.

Major financial institutions such as Fidelity Investments and the Intercontinental Exchange, parent of the New York Stock Exchange, have made significant investments in the cryptocurrency space. And regulators have taken notice, with a cryptocurrency company receiving the first federal charter in early January.

Public companies, too, are recognizing the digital currencies.

Last summer, Nasdaq-listed MicroStrategy acquired 21,454 bitcoins, arguing the digital currency is safer than holding cash, and it boosted its cryptocurrency holdings again in December. In a press release last August, CFO Phong Le said the digital currency will enable the company “to earn better returns and preserve the value of our capital over time compared to holding cash.”

Closer to home for insurers, 170-year-old MassMutual said in December that it had purchased $100 million in bitcoin, or about 0.04% of its general investment account.

Despite that acceptance, however, capacity for crypto-related insurance policies remains limited compared to other risks. The very strongest players, such as digital-currency exchange Coinbase, may find significant capacity, brokers said. But even they face several hurdles along the way.

Hurdle #1: Tough Limits

Timothy Fletcher, managing director of the West Region at Aon, said his team has seen limits up to $600 million for any one insured, but “we’ve had clients come to us wanting $1 billion, and such amounts have not been available to date.”

Eileen Yuen, managing director for financial institutions, Gallagher

And that’s mainly insuring companies providing “cold wallet,” off-line storage of crypto keys in the event of physical damage or theft. For providers of more common “hot wallets” that allow users to send and receive cryptocurrency tokens via the Internet, and consequently are at greater risk of being hacked, capacity is typically a much lower $25 million, brokers said.

Crypto-related insurance is also expensive.

For cold-storage crime coverage, said Eileen Yuen, managing director for financial institutions at Gallagher, a $5 million policy could cost as much as $250,000 annually and hot-wallet coverage several times that.

“Or it might be unavailable at any cost, since there may be no insurer that will take that specific risk,” she said.

In addition, only a small number of highly reputable companies can obtain capacity above $100 million, with most policies in the single digit and low double-digit millions of dollars. Brokers estimate total crypto insurance capacity at $3 billion, give or take $1 billion — a drop in today’s crypto-asset bucket, the value of which now hovers around $1 trillion.

Yuen noted that available capacity is highly dependent on the specific risk and line of coverage sought.

Hurdle #2: Limited Covers

And while companies may want to insure their crypto exposures with the full range policies — for the same reasons as non-crypto companies — so far insurers have mainly provided only crime and D&O policies, with the former making up the vast bulk of capacity volume.

Yuen said professional and cyber liability policies are all but unavailable in the crypto market today, although companies may run that coverage through their existing captives.

She added cryptocurrencies’ volatility — bitcoin, making up more than 80% of the cryptocurrency market, has more than tripled in value since the summer — has played a part in more traditional insurers’ hesitancy to insure crypto risks.

Hurdle #3: A Hard Market to Boot

However, the bigger hurdle has been the hard market across insurance lines that has been exacerbated by the pandemic.

Insurers’ businesses are now more profitable as premiums on traditional, better-understood policies have soared. “At some point the insurance market may pivot to offer broader coverage [for crypto assets], but in a hard market carriers are not actively looking to embrace a new risk,” Yuen said.

Brokers estimate that there are two dozen or so carriers that consider providing cold-wallet crypto coverage, but insurer capacity is constantly changing and many are still unwilling. That partly stems from a lack of understanding about cryptocurrencies and how they work.

Sarah Downey, co-leader of Marsh’s two-year-old Digital Asset Risk Transfer (DART) team, said that every year more traditional insurers acknowledge the market, and there is a pool of underwriters seeking to develop relationships with crypto clients.

Nevertheless, “We spend a lot of time helping to educate the traditional insurance market about how distributed ledger technology (DLT) works, what digital assets are, their exposures, etc., so they become more comfortable underwriting it,” Downey said. She noted that Marsh helped clients insure more than $1 billion in their crypto assets in 2020. DLT is the technology that supports bitcoin and other cryptocurrencies.

Hurdle #4: Insurers Are Selective 

Most crypto capacity today comes from Lloyd’s of London, which historically has covered new and more esoteric risks, but insurers remain very selective.

Fletcher added that Aon is seeing growing “pockets of capacity” from P&C insurers in the. U.S. as well as a few globally diversified insurers and niche players.

“We’re in the market now trying to get more players, including reinsurers to participate … some dabblings there,” Fletcher said, noting that reinsurers can deploy significant capital, enabling insurers to lay off some risk and unlock the sector’s capacity constraints.

Fletcher also said that the uncertain and fluid regulatory environment for digital has slowed some insurers and inhibited others from participating in the market.

Looking Ahead for Crypto

The Securities and Exchange Commission announced in December that its Strategic Hub for Innovation and Financial Technology, or FinHub, will become a standalone office, prompting market participants to anticipate more resources devoted to cryptocurrency regulation.

The CFTC’s strategic plan through 2024, released last July, supports developing a framework for the cryptocurrency derivative markets.

Anton Lavrenko, North American head of financial institutions at Allianz Global Corporate & Specialty, said regulatory developments are one of the main factors enabling carriers to become comfortable with new risks presented by this new asset class.

“It’s important to have something formal, an agreement among all the regulators about who oversees cryptocurrency and how that is managed,” Lavrenko said.

Perhaps furthest ahead has been the Office of the Comptroller of the Currency (OCC), which has provided interpretive guidance to clarify issues such as how banks can custody cryptocurrencies and using DLT technology for bank functions such as payments. On Jan. 14, the OCC approved a federal “trust” charter for Anchorage that enables traditional banks to white label the cryptocurrency start-up’s services, which include custody, trading and lending.

J. Gdanski, CEO and a founder of Evertas, acknowledged macroeconomic reasons such as the hard market resulting in traditional insurers’ hesitancy to cover crypto assets, but he added, “It’s at their own peril.” As traditional businesses increasingly adopt cryptocurrencies, insurers risk losing that rapidly growing market.

“The insurance industry is unprepared for what’s coming, and it’s easy to ignore these types of things until it’s too late,” Gdanski said. &