5 Reasons Why It’s Hard to Insure Cryptocurrency Operations and Best Practices to Still Obtain Coverage

By: Matthew Studley | July 21, 2022

Matthew Studley, CFA, is Senior Vice President, Complex Risk, for global insurance brokerage Hub International. He is a recognized expert in financial risk management, executive liability and the mitigation of specialty risks through insurance and insurance-linked securities. He consults on a variety of liability matters and risk transfer options, and advises clients on corporate governance issues, investor lawsuits, regulatory investigations and claims management.

How do you insure something with little historical data, a price that could be up or down by 25%+ next month, a reputation associated with criminality, a base of anonymity, an extreme supply/demand mismatch, and great regulatory uncertainty?

By now, you’ve surely guessed that we’re describing the challenges of insuring cryptocurrency.

Despite these high hurdles, crypto remains wildly popular. It’s also inherently risky. Consequently, it’s an asset that must be insured, and yet, only a tiny fraction of businesses and individuals active in the cryptocurrency markets have insured their risks.

Let’s look more closely at the challenges of obtaining coverage:

1) Lack of Historical Data

Because cryptocurrency is so new, it doesn’t have much of an actuarial track record, making it inherently difficult for insurance underwriters to assess and price risk. Unlike insuring a home or vehicle, insurers have little historical data on which to base the likelihood of loss.

For instance, how can an insurer accurately predict the chances of a hacker breaking into someone’s private wallet and stealing crypto assets without knowing what weak or strong operational controls look like?

2) Price Volatility

Cryptocurrency is among the most volatile of assets, including both the wild price swings of Bitcoin, Ethereum or other crypto products and accounting for foreign exchange ups and downs. It’s extraordinarily difficult to assess insurance pricing with that degree of price volatility in the underlying asset.

3) Anonymity

A major plus for many crypto users is their belief that it is anonymous.

Some of those people or entities might be engaged in illegal activities, such as drug smuggling, conducting ransomware attacks or other questionable or suspicious activities. Others might simply follow a Libertarian philosophy of decentralization of government and corporate power.

In fact, crypto is pseudonymous since the blockchain technology allows for public tracking of every move, but the legal names of those participating are hidden to participants by account numbers or wallets. The well-known crypto brokerages comply with anti-money laundering and know your client procedures that are ubiquitous in the traditional financial services industry.

Regardless of the reason for desired anonymity, it is a core aspect of cryptocurrency’s popularity. But pseudonymity is incompatible with how many insurance policies function. How can you provide proof of loss if you can’t prove who owns an account that the asset was moved to?

4) Lack of Availability and Misperceptions About Price

For all of the reasons listed above, including the great need in obtaining crypto insurance and the inherent difficulty in providing it, there is an extreme imbalance between supply and demand, which adds to the challenges surrounding availability and pricing.

Compounding that, there is a major disconnect between the perception of how much insurance premiums for cryptocurrency firms should cost and the insurers’ views of appropriate pricing for products such as directors and officers insurance.

Insurance pricing is significantly higher than many people are willing or able to pay, which leaves many cryptocurrency companies and investors uninsured and fully exposed to risk.

5) Regulatory Uncertainty

Adding to everything else, the regulatory landscape is new and evolving.

The U.S. Securities and Exchange Commission has proposed a comprehensive plan aimed at regulating Treasury markets platforms, which could include cryptocurrency trading. The Commodity Futures Trading Commission on the other hand wants to regulate digital assets as commodities.

Insurers understandably want to see what the crypto regulations will entail and assess their potential impact.

How to Make It Easier to Get Crypto Insurance

In the face of these challenges, the best way to secure appropriate and affordable coverage is for cryptocurrency participants to tell a compelling story to potential insurers.

Cryptocurrency companies and investors need to clearly explain what they do.

How do they operate and make money?
What is their specific crypto involvement and precise insurance need?
What are they doing operationally to lower risks?
What measures are they taking to prevent cyber crime?

Cryptocurrency is still new and represents a huge opportunity for many people and organizations. The insurance industry and government regulatory bodies are on a learning curve along with everyone else. Given the ongoing and growing need, expect demand for and supply of cryptocurrency insurance to grow in the months ahead as we all grapple with the various challenges. &

Vermont’s Future Is Golden

Challenging market conditions are driving insureds to captives. Vermont offers a reliable domicile.

By: State of Vermont | November 21, 2024

Hard markets in commercial insurance lines have been a problem for years now. Many lines don’t show signs of softening, though some, like cyber, have ebbed over the past few years.

High claims volumes and costs have caused carriers to tighten terms and conditions, introduce new exclusions and increase premiums. A variety of different risks are included in this market tightening, and it’s affecting both public and private companies.

As Sandy Bigglestone, deputy commissioner for the State of Vermont’s captive insurance division, explained, schools, churches and other nonprofits are contending carriers are “excluding sexual abuse and molestation from coverage for a lot of these types of entities. These organizations understand the risk and the public needs to have confidence the organizations are addressing the risks, so they must have the coverage.”

Though many commercial lines are affected, property has perhaps been hit the hardest. Increased claims, inaccurate property valuations and other challenges have caused insurers to tighten their books in recent years. 2024’s spate of hurricanes will likely make matters worse.

“There continues to be challenges in the commercial market,” Bigglestone said. “Some companies are coming to us with risks that they say they’ve been self-insuring on their balance sheet, and why not transfer that to a captive to receive greater benefits?”

Consistency and Stability

Sandy Bigglestone, Deputy Commissioner for the State of Vermont’s Captive Insurance Division

With the commercial insurance market so unstable, companies are turning to captives to house their exposures. Vermont, a long-time domicile, is getting increased attention because of their strong reputation and their leadership as the top domicile worldwide.

“All stakeholders enjoy the stable political and regulatory environment Vermont has to offer to operate in,” Bigglestone said.

Of course, a lot of consideration goes into deciding whether or not a captive is the right choice for a particular company. Businesses need to assess their exposures and their books to make sure they can adequately operate a captive.

There are significant advantages, however. “For low frequency, high severity risks, captives can access the reinsurance markets directly, so it’s very attractive for businesses to put a captive in place,” Bigglestone said.

And carriers are more accepting of captives as part of a broader insurance program.

“Captives are changing the relationship businesses have with commercial carriers,” Bigglestone said. “Commercial carriers are wanting to see companies with skin in the game; therefore, the relationships have evolved to be less transactional and more strategic.”

Balancing Bureaucracy

With 76 global domiciles, companies have a lot of options when it comes to selecting a captive partner. “Captive insurance domiciles compete globally for the business,” Bigglestone said. “If you were to put all 7,000-plus captive insurance companies around the world, all in New York, it wouldn’t have the same economic impact as 700 captives in Vermont does. The captive insurance industry is very important to our state and we will continue to support it in any way we can.”

Businesses should look for domiciles that balance a need for quality regulations with a process that isn’t overly bureaucratic and is seamless for business owners to navigate.

“Companies are attracted to an environment with quality regulatory standards and a stable regulatory environment,” Bigglestone said. “Vermont sets the regulatory standard in terms of financial analysis and examinations.”

In addition to quality regulations, firms will want to seek out a domicile that is agile enough to license captive insurance companies that fit their unique needs. It is important that a domicile have firm but fair regulation and the experience to consider new ideas and implement them. Companies must consider a variety of factors when choosing a domicile and not everyone will be the right fit for every company.

“You have to consider the captive owner and the industry sector that that owner operates in, as well as the insurance risks that are going into the captive program,” Bigglestone said. “Captive laws and regulations have to have a reasonable degree of flexibility to accommodate all the varying needs of owners and then impose rules based on the merits of each captive program.”

She added that creativity is a critical part of the process: “The ability to vet concepts and ideas with trusted individuals is key to having quality standards,” Bigglestone said. “And it can make captives appealing to insureds who are tired of commercial carriers not meeting the needs of the business, and who desire more control over their insurance programs.”

“When you think about the commercial marketplace, commercial insurers are supposed to operate in each jurisdiction in a competitive manner. Commercial carriers often look the same. They sell auto coverage to anyone with a driver’s license. The rules and regulations imposed upon commercial insurance companies are designed to be more formulaic for that reason,” Bigglestone said.

“Uniform regulatory standards apply to commercial carriers for the protection of the policyholders. These are standards all insurance regulators focus on, and standards captive insurance regulators need to understand, but with a specialized focus.”

A Quality Domicile Built for the Future

A combination of experience, regulatory standards and talent make Vermont a top domicile for companies looking to form a captive. The longevity of licensing captive insurance companies for over forty years is a testament to the quality work they’ve provided in the past and will continue to provide for many years to come.

Vermont’s reputation has helped the state attract and retain top captive talent, ensuring the businesses it serves are in good hands. The state has 32 employees dedicated to captives, and their average employee retention is 15 years. The Vermont Captive Insurance Association, the largest captive insurance trade organization, also helps companies connect with professional services needed to make their captive successful.

“There’s a whole host of service providers with proven expertise right here in Vermont,” Bigglestone said.

Taken together, Vermont’s resources, expertise and talent make it a prime domicile. They’ve been on a growth trajectory over the last few years and that’s unlikely to change anytime soon. Companies can trust their captive will be in good hands when they choose Vermont.

“Vermont has always competed on quality,” Bigglestone said. “We do have a mission and that hasn’t changed in over 40 years. It’s to maintain a system, or domicile that attracts quality business to Vermont, to promote our reputation in the industry, and to uphold a regulatory framework to protect the solvency of the companies that choose to place their business here.”

To learn more, visit: www.vermontcaptive.com

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

The State of Vermont, known as the “Gold Standard” of captive domiciles, is the leading onshore captive insurance domicile, with over 1,200 licensed captive insurance companies, including 48 of the Fortune 100 and 18 of the companies that make up the Dow 30.