By Daphne Zhang
Companies this year are scrambling to obtain 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 crypto risk and coverage inquiries from all kinds of companies,” said Jackie Quintal, a director at insurance broker Marsh McLennan. “Crypto is popping up all across financial services, tech, 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 command rates several times those of traditional coverage.
“Especially within the last year, more carriers have either started providing 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 risks, she said.
To be sure, some insurers say the unregulated market is still too volatile to touch—and are even putting blanket crypto exclusions in their policies.
But the trend is toward joining the fray, and the recent crypto market collapse hasn’t changed the broader momentum, observers told Bloomberg Law.
”Investors, board members, and regulators expect you to have insurance” to cover crypto exposures, said Joseph Ziolkowski, CEO of Bermuda-based Relm Insurance Ltd. “There’s been a real increase in the importance of crypto insurance—especially over the last two months” after the “Celsius bankruptcy notifications and other massive defaults of crypto firms.”
In some instances, refusing to offer crypto policies is becoming a “difficult position to maintain for insurers that want to keep their renewal book,” said Quintal, because the “request comes from a client an insurance company has been trading partners with for decades.”
Having crypto insurance is a “market differentiator” and “credibility driver,” said Jared Gdanski, CEO of Evertas, a Chicago-based crypto underwriter authorized by Lloyd’s of London. “We know crypto-focused funds where their [investors] said, ‘We’re not gonna give you any money until we see an insurance policy.’”
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 into their clients, Davis said.
Premiums are usually twice as high as traditional policies for non-crypto risks, he said. Superscript’s cyber errors and omissions policy charges from $20,000 to millions of dollars in premiums depending on the business and its specific risk profile.
Businesses entering the cryptocurrency industry have faced market volatility, high-profile hacks, theft of digital assets, and security concerns. And lack of government regulation is a major wildcard.
“Generally speaking, insurers that are writing crypto-related business are writing it profitably,” said Quintal. They try to balance the lucrative opportunity with unpredictable risks, she said.
Last month, Beazley Group announced a $10 million directors and officers insurance to protect crypto company executives from investigations or litigation. In May, Lloyds’s licensed Superscript unveiled its $5 million policy to cover crypto-related contract breaches and cyberattacks.
Most traditional insurers including Lloyds, Chubb Ltd., Tokio Marine Holdings Inc., Mitsui Sumitomo, and AXA XL, cover financial services and tech companies’ crypto risks under business liability policies, according to insurance brokers.
“A lot of insurance companies are looking for new revenue streams,” said Luke Speight, digital assets director of insurance broker Willis Towers Watson. Insurer giants like Munich Re, Zurich, Arch, and Canopious are now underwriting crypto risks, he said.
Many carriers amend typical commercial policies to tailor for crypto companies, banks, and asset managers, said Downey from Lockton.
Crypto insurance capacity is still small compared with the traditional commercial insurance market, “but it is growing on a daily basis,” said James Knox, a regional technology practice leader at broker Aon PLC. “It’s very rare that we cannot find insurance capacity for a crypto client.”
Lloyds of London offers coverage for valuable assets such as art and diamonds called specie insurance. That policy also covers cryptocurrencies a policyholder holds online and offline. A policyholder can get up to $900 million in coverage for offline cryptocurrencies and $75 million for those kept online, since they are more vulnerable to hacks. Aon-negotiated clients get up to $90 million, Knox said.
Most commercial liability coverage capacities such as directors and officers insurance come from US insurers, and most crime coverage for theft of digital assets is issued by UK carriers, said Quintal of Marsh.
A complicating factor for those shopping for policies: Many insurers who are active in selling crypto coverage don’t yet want to publicize it, said Quintal.
“Some of them are enthusiastic but are not externally visible with their enthusiasm” about crypto risks coverage, Quintal said.
Bloomberg Law contacted more than a dozen major insurance carriers who offer crypto coverage, but most of them declined interviews, including AIG, Chubb, Zurich, Munich Re, Arch, and Starr.
“Everyone’s 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 underwriter works with large carriers whose names “we’d love to shout it from the rooftops. But we’re, unfortunately, constrained.”
“If there start to be significant crypto losses,” he said, “even very crypto-focused insurers are going to just pull out” despite the huge demand.
Despite the momentum, crypto is still in its infancy. And even covering damage from natural disasters—like hurricanes in a time of climate change—can be easier for underwriters to stomach.
The global insured rate of 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 especially hard for insurers to measure and price coverage.
It’s tough to cover crypto companies and their directors, especially when there are “regulatory actions against some of these players,” said Imsirovic of AM Best. “Insurance companies are not certain how legal some of these operations are.”
Many crypto start-ups and insure-techs also sell crypto-insurance, but “AMBest will not develop rating criteria for the newly formed crypto insurance firms given the regulatory uncertainty,” said Imsirovic.
Financial services, tech, and crypto firms prefer mainstream insurers like AIG, Chubb, and Zurich because of their better claim-paying reputation and strong financials, said Lockton’s Downey.
“Most big crypto exchanges or even smaller asset managers in the crypto space have insurance through traditional carriers,” she said.
Insurers providing crypto coverage protect themselves by writing low limits with high rates. Directors and officers insurance premiums can be two to five times higher for technology and crypto firms compared with banks, said Relm’s Ziolkowski. Relm manages exposures by being “judicious” with policy limits, he said.
Relm offers up to $5 million coverage for crypto-related risks. But the limit is small compared with a big corporation’s $50 million or $100 million director and officers insurance policy.
“We won’t ever make underwriting decisions off of financial statements that are six months old or even three months old,” Ziolkowski said. “We need absolute clarity on the current state of the entity, its organizational structure, subsidiaries, and mergers and acquisitions.”
“The 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 very well,” said Superscript’s Davis.
“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 out too thin, they invite tons of business risks.”
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