Insurance Providers Rethink Their Approach to Crypto


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

Many cryptocurrency exchanges and custodians have been unable to get insurance or have avoided getting it because of the high premiums due to the shortage of insurers willing to take out industry risk. Some large bags have chosen to insure themselves.

But that is slowly changing, as the insurance industry has traditionally been risk-averse – from big brokers to start-ups – dipping their toes into water by creating new cryptocurrency-focused equipment, hoping to benefit from the industry’s rapid growth. .

“Before, there was no demand that we are seeing now, and in the last six months of last year, there has been a real growth in demand from our customers to better understand this space and be able to manage risk in space,” said Luke Speight. who last month became the director of a newly created digital asset team at consulting firm and insurance broker WTW.,

formerly known as Willis Towers Watson.

British startup and London-based broker Lloyd’s Superscript launched a cryptographic insurance product called Daylight earlier this month that will cover liability and cyber insurance, the company said. It plans to expand coverage this year to include directors and officers, custody and cryptographic mining.

The change comes as the cryptocurrency market has seen another wave of turbulence in recent weeks, a reminder of the highly volatile nature of an industry that still lacks meaningful oversight and investor protection. As traders flee risky investments amid rising interest rates and high inflation, more than $ 1 trillion in digital money has been missing since November.

The demand for digital asset insurance also reflects a step in the evolution of the cryptographic industry, whose early supporters have often expressed skepticism about the establishment of Wall Street and government regulations. The industry has been dealing with increased regulatory scrutiny as it seeks ways to gain credibility with the public and investors and attract greater adoption.

Cryptography companies typically seek to insure against the loss of funds held by exchanges on behalf of customers in the event of incidents such as external thefts and employee thefts. They also often take out insurance for directors and officers to protect executives and companies from costs related to investigations or litigation, as well as cybersecurity insurance against hacking and professional liability insurance to protect against claims for negligence.

James Knox, regional technology practice leader at Aon PLC.


Photo:

Bernadette Knox

Having insurance coverage also gives cryptographic companies and exchanges greater credibility. Unlike most industries, some of the most popular cryptocurrencies are 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.

According to James Knox, regional technology practice leader at professional services firm Aon PLC, regulatory uncertainty surrounding the cryptocurrency industry and a series of major, high-profile thefts have made insurers reluctant to enter the world of cryptocurrency. He said that for potential insurers, news of recent cryptocurrency losses has had a “chilling effect”. While some insurers, most of them based in London or Bermuda, are taking the risk, several insurance companies are still not comfortable with the risk involved in securing crypto companies, he said.

Gemini said it offers $ 300 million in insurance for assets it owns on behalf of customers, which cover theft, security breaches and fraudulent transfers, a spokeswoman said. The exchange, which has worked with insurance broker Marsh & McLennan Cos., Said it has shown insurers it offers “insurance exchange and custody.” He hopes the supply of digital asset insurance will meet growing demand in the coming years, the spokeswoman said.

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


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Parametrix Insurance

“Crypto has evolved by not wanting regulations and compliance, but they have understood that to gain the credibility of users, who have burned a little in the past, a balance between compliance and regulations is needed, 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 adapting its products to the crypto industry earlier this year, providing insurance to help crypto companies mitigate financial risks during cloud outages. Demand for cloud insurance has grown amid cryptocurrency exchanges after traders and investors filed several lawsuits seeking millions of dollars in disruption-related damages. The price of a Parametrix policy varies, depending on the size of the business and its cloud infrastructure, but the annual premium can range from $ 10,000 to $ 500,000 or more.

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

Jorge Pesok, legal director of the HBAR Foundation.


Photo:

Jorge Pesok

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

Many cryptocurrency companies, such as token issuers, are considered high risk by insurers, Pesok said, because they face frequent consultations from regulators that are voluntary but could quickly become formal investigations. “Either they don’t want to cover it and create exclusions for token issuers who know this, or they will cover it and charge an extraordinary amount for it,” he said.

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

An insurer working in the cryptocurrency industry is Relm Insurance Ltd, based in Bermuda, Hamilton. The company, founded three years ago, has secured cryptographic mining operations, stock exchanges, asset managers and remittance companies around the world, according to Joseph Ziolkowski, co. -founder and executive director. Without the wealth of loss data that insurers have on traditional industries, Relm has been researching the details of each account before subscribing to every cryptocurrency company.

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 really pose a good risk and the only way to do that is a diligent process of guarantee and due diligence. To make a decision to give coverage Mr. Ziolkowski added that his company is asking crypto companies to provide current audited financial statements, valuations, organization charts and the latest investment platforms, among other things, in their underwriting process.

Other factors that insurers are looking for in their decision to provide coverage include whether the cryptocurrency company has strong incorporation procedures and internal controls against money laundering and know their client, according to Knon de Aon.

“Insurance brokers need to be innovative, more than ever, to deal with the crypto industry, and the crypto industry is developing rapidly and strongly,” he said. “Insurance brokers and companies need to be very agile and innovative to look after the best interests of their clients.”

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Write to Mengqi Sun and mengqi.sun@wsj.com

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