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. &

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

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.