Insurance Providers Rethink Their Approach to Crypto

After years on the sidelines, the insurance industry is increasingly embracing the digital assets sector.

Many crypto exchanges and custodians have for years been unable to get insurance or shied away from getting it because of high premiums stemming from a dearth of insurers willing to underwrite the industry’s risk. Some big exchanges have chosen to insure themselves instead.

But that is slowly changing, as the traditionally risk-averse insurance industry—from big brokers to new startups—dips its toes into the water by setting up new teams focusing on cryptocurrency, hoping to profit from the industry’s rapid growth.

“Previously, there wasn’t the demand that we’re seeing now, and over the last six months of last year, there’s been a real growth in demand from our clients to better understand this space and to be able to manage the risk in the space,” said

Luke Speight,

who last month became the director of a newly created digital assets team at insurance broker and consulting firm

WTW,

formerly known as Willis Towers Watson.

U.K. startup and Lloyd’s of London licensed broker Superscript earlier this month launched a crypto insurance product called Daylight that will cover technology liability and cyber insurance, the company said. It plans to expand coverage this year to include directors and officers, custodianship and crypto mining.

The shift comes as the crypto market saw another wave of turmoil in recent weeks, a reminder of the highly volatile nature of an industry that still lacks significant oversight and investor protections. As traders take flight from risky investments amid rising interest rates and high inflation, more than $1 trillion in digital money has vanished since November.

The demand for digital assets insurance also reflects a step in the evolution of the crypto industry, whose early supporters often expressed skepticism of the Wall Street establishment and government regulations. The industry has been grappling with rising regulatory scrutiny while looking for ways to gain credibility with the public and investors and to attract more mainstream adoption.

Crypto firms typically look to insure against a loss of funds held by the exchanges on behalf of clients in case of incidents such as external thefts and employee thefts. They also often take out directors and officers insurance that protects executives and the companies from costs related to investigations or litigation, as well as cybersecurity insurance against hacks and professional liability insurance to protect against claims of negligence.

James Knox, a regional technology practice leader at Aon PLC.



Photo:

Bernadette Knox

Having insurance coverage also lends crypto firms and exchanges wider credibility. Unlike most industries, some of the most popular crypto exchanges such as

Coinbase Global Inc.,

Gemini Trust Co., Bittrex Inc. and Crypto.com, have publicly announced that they have hundreds of millions of dollars in digital asset insurance.

Regulatory uncertainty around the cryptocurrency industry and a number of high-profile, significant crypto thefts have made insurers reluctant to wade into the crypto world, according to

James Knox,

a regional technology practice leader at professional services firm

Aon

PLC. He said that for potential insurers, news of recent crypto losses has had “a chilling effect.” Although some insurers, mostly those based in London or Bermuda, are taking on the risk, a number of insurance companies still aren’t comfortable with the risk involved in insuring crypto firms, he said.

Gemini said it offers $300 million in insurance for assets it holds on behalf of clients, covering theft, security breaches and fraudulent transfers, a spokeswoman said. The exchange, which worked with insurance broker

Marsh & McLennan

Cos., said it has demonstrated to insurers that it offers “a safe and secure exchange and custodian.” It expects the supply of digital asset insurance to meet the growing demand in the coming years, the spokeswoman said.

Neta Rozy, co-founder and chief technology officer of Parametrix Insurance.



Photo:

Parametrix Insurance

“Crypto evolved out of not wanting regulations and compliance, but they realized to gain the credibility of users, who were burned a bit in the past, some balance of compliance and regulations are necessary, as this industry grows,” said Neta Rozy, co-founder and chief technology officer of Parametrix Insurance, which covers businesses against technology downtime.

New York-based Parametrix began tailoring its products to the crypto industry earlier this year, providing insurance to help crypto firms mitigate the financial risks during cloud outages. Demand for cloud insurance has grown among crypto exchanges after traders and investors filed several lawsuits seeking millions of dollars in damages related to outages. The price of a Parametrix policy varies, depending on the size of the firm and its cloud infrastructure, but the annual premium can range from $10,000 to $500,000 or more.

One reason premiums remain high is that crypto is still a nascent industry lacking a substantial record of claims to accurately quantify the risks, while insurers have a limited understanding of how the blockchain technology behind cryptocurrency works, industry participants said.

Jorge Pesok, chief legal officer at HBAR Foundation.



Photo:

Jorge Pesok

Jorge Pesok,

chief legal officer at crypto-based nonprofit HBAR Foundation, said there were only a handful of options when he was looking recently for insurance for the organization. The same was true when looking for a former employer, Tacen Inc., he said.

Many crypto firms, such as token issuers, are considered high risk by insurers, said Mr. Pesok, because they face frequent inquiries from regulators that are voluntary but could quickly turn into formal investigations. “They either don’t want to cover it, and they build up exclusions for token issuers knowing this, or they will cover it and will charge an extraordinary amount for it,” he said.

Still, it is beneficial for a crypto firm to have a D&O insurance policy, as it is useful for attracting new directors and officers to the company, he said.

One insurer working in the cryptocurrency sector is Hamilton, Bermuda-based Relm Insurance Ltd. The firm, founded three years ago, has underwritten for crypto mining operations, large exchanges, asset managers and remittance firms around the world, according to

Joseph Ziolkowski,

co-founder and chief executive. Without the wealth of loss data that insurers have on traditional industries, Relm has been digging into the details of each account before underwriting each crypto firm.

Joseph Ziolkowski, co-founder and CEO of Relm Insurance.



Photo:

Viveca Ljung

“If we can’t say that, for example, all exchanges are good risks, then we need to find the exchanges that do actually represent a good risk and the only way that that can be done is a diligent underwriting and due-diligence process in order to arrive at a decision to provide coverage or not,” he said. Mr. Ziolkowski added that his firm asks the crypto businesses to provide current audited financial statements, valuations, entity organization charts and the latest investor decks, among other items, in its underwriting process.

Other factors insurers look for in their decision to provide coverage include whether the crypto firm has strong anti-money-laundering and know-your-customer onboarding procedures and internal controls, according to Mr. Knox of Aon.

“The insurance brokers have to be innovative, more so than ever to deal with the crypto industry, and the crypto industry is developing rapidly and strongly,” he said. “Insurance brokers and companies have to be very nimble and innovative to look out for their clients’ best interests.”

While the SEC hasn’t announced major actions against big crypto exchanges, the commission has threatened to sue companies offering crypto lending. WSJ’s Dion Rabouin explains why this one part of the crypto market has drawn such a strong reaction. Photo: Mark Lennihan/Associated Press

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