Insurance

Insurance

Due to market value fluctuation, insuring these items can be tricky. What are they insuring, and for what value? This is a difficult question to answer with a significant value change that could exist throughout the investigation.

Getting an insurance policy to ensure the assets for cryptocurrency is a difficult challenge, to say the least. Insurance companies can make it very difficult because of value fluctuation. They want to know what they are insuring for and for what value. It is impossible to answer with all of the significant value changes that could exist throughout the length of the investigation.

Many insurance companies are starting to insure for cryptocurrency as they see it as the wave of the future and do not want to miss out on this volatile and loosely regulated but rapidly growing business.

So far, only a few sell this insurance to include XL Caitlin, Chubb, and Mitsui Sumitomo Insurance. Yet several others are looking into companies that handle digital currency like bitcoin and ether, which trade between anonymous parties. Such efforts so far have garnered little attention. Still, the emergence of insurance markets leads most to believe the field is evolving and is an important step for the industry’s mainstream recognition.

The risks are clear as digital currency investors have already lost billions from dozens of cryptocurrency hacks, many of which were later shuttered. For the insurers, the challenge is how to cover those risks for the customers they know little about and whose technology few understand and are represented by a young industry that lacks data insurers are used to relying upon.
According to Christopher Liu, who heads American National Group Inc.‘s North American cybersecurity practice for financial institutions, one suggestion is to find an established business with a similar risk profile and try to adapt to what works there. Liu stated, “it’s sort of akin to a digital armored car service” if there is a problem- like an accident or a robbery-that is going to be the accumulation of all of those exposures’‘. Liu has been studying cryptocurrency theft coverage since 2014 but remains in an “exploratory phase’‘.

“Some bitcoin exchanges and wallets weren’t anticipating the level of underwriting and due diligence that they undergo when they approach the market,” said Matt Prevost, who heads Chubb’s North American Cyber Product Line. Insurers like Chubb are betting that cryptocurrencies will gain wider recognition even if the new business now represents only a tiny sliver of the global $720 billion per year commercial insurance business. Digital coin sales raised more than $5 billion across nearly 800 deals in 2017, according to venture capital data provider CB Insights. There are no estimates yet how much of that has been insured or of total premiums collected.

Many insurers remain wary of the new business. Like Great American Insurance Group, an American Financial Group Inc. unit offers protection from employee theft to companies that accept bitcoin payments but avoid outside risks, such as hacking. The company added the coverage to its standard employee theft policy in 2014.

Others will avoid coverage for coins kept online or in “hot storage” because of the high risk of hacking and will only cover offline “cold storage,” which is generally preferred by cryptocurrency companies. (Reuters graphic: http://tmsnrt.rs/2DNRkFu) Coinbase, a leading cryptocurrency exchange available in 32 countries, says on its website it holds less than 2 percent of customer funds online and that those funds are insured.

According to a person familiar with the matter, Lloyd’s of London, the world’s largest insurance marketplace, provides insurance to the exchange. Reuters could not determine the terms or the scope of the coverage, and Lloyd’s spokesman declined to discuss Coinbase. He said that member companies had written a small number of policies for cryptocurrencies in recent years, and Lloyd’s was requiring members to proceed with caution and use additional scrutiny of cryptocurrency companies. Some insurers are not yet convinced the cryptocurrency business is large enough for premiums to cover possible losses.

“We’re looking at it, but does it make sense to offer a market for that?” said Frank Scheckton, president of Great American’s Fidelity Crime Division.
Right now, costs act as a deterrent for small firms and startups, said Ty Sagalow, chief executive of Innovation Insurance Group LLC, which has been developing coverage for cryptocurrency companies since 2013.“It’s an expensive product that many companies can’t afford,” he said.
Insurance experts say annual premiums for $10 million in theft coverage would typically run at about $200,000, or 2 percent of the limit. That compares with about 1 percent or less for traditional financial clients, depending on the company, loss history, and other factors.

Currency volatility is another concern. While coverage limits shield insurers from wild swings, the impact for clients can be dramatic. For example, a $10 million policy signed in January 2017 would cover 10,957 bitcoins at the time, but only 923 if a hack happened a year later.

Cameron Winklevoss, the co-founder of Gemini, a cryptocurrency exchange and custodian, argues insurance should not be an investor’s primary concern.
As a registered New York trust company, Gemini carries state-mandated insurance against employee theft, computer fraud, and fund transfer fraud but has no coverage for hacking; Winklevoss founded the firm with his twin brother Tyler said.

“The key is to look for regulatory oversight that ensures that an exchange is doing what it should be doing so that it doesn’t get to the point where you have to fall back on an insurance policy,” he told Reuters.

However, Henry Sanderson, who oversees cyber and technology coverage for Safe online LLP, Lloyd’s broker, argues cryptocurrency insurance can help the young industry mature while creating new business for insurers. This whole space is maturing and growing,” he said. “If we don’t embrace it now, it’s a missed opportunity for insurers.”