Global insurance brands and experienced hands are venturing into the cryptoasset business to offer coverage with a mix of established commercial products and technology-backed risk management.
For cryptoasset companies, the hope is that insurance can provide legitimacy and investor reassurance to an asset class and currency often not well-understood and frequently associated with criminal enterprises. Meanwhile, insurance players from New York to London are wading into a sector where underwriting is untested but rich starting premiums are on offer to cover a market of a quarter with a trillion dollars of assets.
Reputation management
Cryptoasset companies are well aware of their "headline" reputation as the preferred exchange medium for ransom artists and other crooks, said Philip Martin, chief information security officer of Coinbase Inc. Professional risk assessment and underwriting could provide the burnish they need for business normalcy in financial services, Martin said.
Cryptocurrencies such as Bitcoin or Ethereum use blockchain technology, which stores assets and transactions on a digital ledger distributed across a global network. The most prominent risk is theft from hacks that result in fraudulent transactions that are irreversible.
Coinbase, a cryptocurrency exchange, purchased cover soon after its inception in 2012. "Being able to get that cover means that we went through a fairly rigorous [underwriting] process and do so on an ongoing basis every time we renew these policies," Martin said.
Just a fraction of the estimated $270 billion of cryptoassets have insurance cover, but without the government backing that the Federal Deposit Insurance Corp. provides for U.S. bank deposits, cryptoassets need insurance to aid recovery in case of theft or other calamity.
"[Institutional investors] definitely appreciate knowing about the insurance policy and ask about it frequently," Martin said. "We also hear about it from your normal, everyday retail customers and the feedback we get from them."
Outreach to insurers
The need for insurance has meant an ongoing public relations campaign. Underwriters who could provide the sector with much-needed capacity are among the target audience on Coinbase's perpetual crypto-education talk circuit, Martin said. The company is a money services business licensed on a per-state basis in the U.S. and operating under regulatory licenses in the EU, he said.
"The perception that a lot of folks have — including insurance underwriters and insurance syndicates — is very different from the facts on the ground," he said, adding that the company found its first policy through Aon PLC in Lloyd's of London.
Aon recently announced coverage for cryptoasset custodians for up to $500 million of their customers' deposits using a Lloyd's syndicate led by Arch Capital Group Ltd. The policy is a partnership with GK8, which provides the cybersecurity expertise intended to buttress the underwriting.
GK8 also offers compliance controls for regulated investors, a service that bank depositors especially appreciate, said Lior Lamesh, the company's co-founder and CEO.
"When you have the right expertise, and you're backed by the right people, players from the crypto space can make banks and other financial institutions comfortable," Lamesh said in an interview.
Insurance policies developed so far cover theft of assets, transaction security and directors and officers, or D&O, and professional liability coverage for executives handling exchanges or serving as custodians of deposits.
Marsh recently assembled a cryptocurrency risk transfer team that partners with Curv Inc. and Munich Re Co. to insure cryptoasset companies for D&O, crime, cyber and other areas of liability. The ease and traceability of currency exchanges are attracting more businesses to the market, said Sarah Downey, the Marsh team's D&O liability product leader.
"Exchanges and custodians are differentiating themselves from competitors by buying insurance," Downey said. Companies are now in a position to use insurance to transfer risk so they can focus on growth, she added.
Potential for profit
New insurance risks tend to be more profitable, said Jared Gdanski, CEO and founder of cryptoasset insurance startup Evertas Insurance Agency LLC. Blockchain currencies are poised for growth because they will eventually play an important role in securities, illiquid assets and real estate, in which values will be tokenized, Gdanski predicted.
"You're also going to see the use of blockchain ledger technology in the core infrastructure of various types of industries," he said. "People don't like the idea that they're giving large sums of money to third parties who could lose it or steal it — and that has happened."
Evertas is looking to be a managing general agent, using capacity from carriers to feed what it sees is fast-growing demand that is already outstripping supply, Gdanski said.
One of the incentives attracting new underwriting to the space is the relatively high premium prices that come with a new product, Downey said.
On the other hand, those entering the market acknowledge that new risks can also be difficult to underwrite due to the lack of loss data to feed actuarial models.
Relm Insurance began offering cryptoasset coverage in partnership with international law firm Appleby. Part of their preparation was to study more than 70 cryptoasset breaches during the past 10 years, said Relm Managing Director Joseph Ziolkowski.
"That's nowhere near enough to draw [actuarial] conclusions," Ziolkowski said in an interview.
When underwriting, Relm relies on relationships with insureds and brokers and a great deal of transparency to learn companies' risk management protocols for custodians, he said. The process can takes weeks, Ziolkowski said.
"We protect ourselves by implementing a more hands-on underwriting process as it relates to all these exposures," he said.
A challenge that is at least as big as underwriting is claims, which can be more complex to handle than others, Gdanski said. A hack or theft could draw on blockchain, cybersecurity, accounting forensics and normal crime sleuthing, he said.
"That's why we've built out this really comprehensive framework and serious questions to analyze and understand that," Gdanski said.