Crypto insurance policies ’emerge’ to meet frenetic demand

Businesses this year are scrambling to acquire cryptocurrency insurance as a hedge against catastrophic losses, paying dearly for relatively limited protection as they venture into the world of high-risk, high-reward digital assets.

“We’re seeing requests for crypto risk and coverage from all kinds of companies,” said Jackie Quintal, director at insurance broker Marsh McLennan. “Crypto is emerging across financial services, technology, fintech and other parts of the economy.”

Demand now far outstrips supply — less than 2% of crypto-related risks are currently insured, said Edin Imsirovic, associate director at insurance credit rating agency AM Best — so those willing to sell policies can get rates several times higher than traditional coverage.

“Especially over the past year, more operators have either started offering insurance to crypto companies or formed internal committees to understand the space,” said Sarah Downey of broker Lockton Companies Inc. Insurers “have definitely increased their appetite” for crypto risk, she said.

To be sure, some insurers say the unregulated market is still too volatile to touch — and are even building blanket crypto exclusions into their policies.

But the trend is toward joining the fray, and the recent collapse in the crypto market hasn’t changed the broader momentum, observers told Bloomberg Law.

“Investors, directors and regulators expect you to have insurance” to cover crypto exposures, said Joseph Ziolkowski, CEO of Bermuda-based Relm Insurance Ltd. “There has been a real increase in the importance of crypto insurance – especially in the last two months” following the “Celsius bankruptcy filings and other massive crypto firm defaults.”

In some cases, refusing to offer crypto policies is becoming a “difficult position to maintain for insurers who want to keep the renewal book,” Quintal said, because “the request comes from a client an insurer has been trading partners with for decades.” “

“Very Big Year”

Having crypto insurance is a “market differentiator” and “credibility driver,” said Jared Gdanski, CEO of Evertas, a Chicago-based crypto insurance company authorized by Lloyd’s of London. “We know crypto-focused funds where they [investors] said, ‘We’re not going to give you any money until we see insurance.'”

Demand started picking up last October and “2022 has been a very big year” for crypto insurance, said Ben Davis of Lloyds-approved Superscript. The broker received hundreds of insurance applications this year from banks, tech firms and crypto companies, and converted up to 15% of them to its clients, Davis said.

Premiums are typically double that of traditional non-crypto risk policies, he said. Superscript’s cyber errors and omissions policy costs from $20,000 to millions of dollars in premiums depending on the business and its specific risk profile.

Companies entering the cryptocurrency industry have faced market volatility, high-profile hacks, theft of digital assets, and security issues. And lack of government regulation is a big wildcard.

“In general, insurance companies that write crypto-related business write it profitably,” Quintal said. They are trying to balance the lucrative opportunity with unpredictable risks, she said.

“Growing on a daily basis”

Last month, the Beazley Group announced a $10 million insurance policy for directors and officers to protect executives of crypto companies from investigation or lawsuits. In May, Lloyds’ licensee Superscript unveiled its $5 million policy to cover crypto-related breach of contract and cyber attacks.

Most traditional insurers, including Lloyds, Chubb Ltd., Tokio Marine Holdings Inc., Mitsui Sumitomo and AXA XL, cover financial services and technology companies’ crypto risks under business liability, according to insurance brokers.

“Many insurers are looking for new revenue streams,” said Luke Speight, director of digital assets for insurance broker Willis Towers Watson. Insurance giants such as Munich Re, Zurich, Arch and Canopious now underwrite crypto risks, he said.

Many operators are changing typical commercial policies to tailor to crypto companies, banks and asset managers, Lockton’s Downey said.

Crypto insurance capacity remains small compared to the traditional commercial insurance market, “but it’s growing on a daily basis,” said James Knox, a regional head of the technology practice at broker Aon PLC. “It is very rare that we cannot find insurance capacity for a crypto client.”

Lloyds of London offers cover for valuable assets such as art and diamonds called specie insurance. This policy also covers cryptocurrencies that a policyholder holds online and offline. A policyholder can get up to $900 million in coverage for offline cryptocurrencies and $75 million for those held online, as they are more vulnerable to hacks. Aon negotiated clients get up to $90 million, Knox said.

“Everyone is very sensitive”

Most commercial liability cover capacity such as directors and officers insurance comes from US insurers, and most crime cover for theft of digital assets is issued by UK carriers, Marsh’s Quintal said.

A complicating factor for those buying policies: Many insurers active in selling crypto coverage don’t yet want to publicize it, Quintal said.

“Some of them are enthusiastic but are not outwardly visible with their enthusiasm” about crypto risk coverage, Quintal said.

Bloomberg Law contacted more than a dozen major insurance companies that offer crypto coverage, but most declined interviews, including AIG, Chubb, Zurich, Munich Re, Arch and Starr.

“Everyone is very sensitive about their names being used,” said Gdanski of Evertas, which offers a $5 million policy to cover crypto-related technology breaches. The crypto-insurer works with major carriers whose names “we’d love to shout it from the rooftops. But unfortunately, we’re limited.”

“If there start to be significant crypto losses,” he said, “even very crypto-focused insurance companies will just pull out” despite the huge demand.

Hurricanes vs. Crypto

Despite the momentum, crypto is still in its infancy. And even covering damage from natural disasters—like hurricanes in an era of climate change—may be easier for insurers to handle.

The global insurance rate for natural disasters is around 50%, according to broker Aon, while the crypto market insurance rate is below 2%.

And without sufficient data history for risk modeling, the unregulated nature of digital assets makes it particularly difficult for insurers to measure and price cover.

Covering crypto companies and their directors is difficult, especially when there are “regulatory actions against some of these players,” said AM Best’s Imsirovic. “The insurance companies are not sure how legal some of these operations are.”

Many crypto startups and insurance technologies also sell crypto insurance, but “AMBest will not develop assessment criteria for the newly created crypto insurance companies given the regulatory uncertainty,” Imsirovic said.

Financial services, technology and crypto firms prefer mainstream insurers such as AIG, Chubb and Zurich because of their better claims-paying reputations and strong financials, Lockton’s Downey said.

“Most major crypto exchanges or even smaller asset managers in the crypto space have insurance through traditional carriers,” she said.

Absolute clarity is required

Insurance companies that offer crypto coverage protect themselves by writing low limits with high rates. Insurance premiums for directors and officers can be two to five times higher for tech and crypto firms compared to banks, Relms Ziolkowski said. Relm manages exposures by being “sensible” with policy boundaries, he said.

Relm offers up to $5 million coverage for crypto-related risks. But the limit is small compared to a large company’s $50 million or $100 million insurance policy for directors and officers.

“We will never make insurance decisions based on financial statements that are six months old or even three months old,” Ziolkowski said. “We absolutely need clarity on the current state of the entity, its organizational structure, subsidiaries and mergers and acquisitions.”

“Markets are volatile,” he continued. “Whether you’ve been in crypto for a year or seven years, the reality is your financial situation six months ago has almost no bearing on your financial situation today.”

A company is more likely to get crypto insurance if “they do one or two things really well,” Superscripts’ Davis said.

“If they want to launch an exchange, do an NFT platform and then do mining, they’ll never do it,” Davis said. “By spreading themselves too thin, they invite tons of business risk.”