4 Hurdles Facing the Cryptocurrency Insurance Market

Even as cryptocurrency becomes more widely accepted, lack of insurance capacity could stall its upward trajectory.

By: John Hintze | February 24, 2021

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. &

John Hintze is a freelance writer who can be reached at [email protected].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.