No Risk, No Reward: Even Insurers Have the Appetite for Crypto

By August 1, 2018Uncategorized

Every industry has been put on watch: Blockchain is here to oust you. Not a day goes by that we don’t see a crypto-solution for a problem that arguably doesn’t exist, let alone needs the technology. However, such an appetite for growth can awaken even the sleepiest of giants.

Better known for risk-aversion rather than being first to the table, insurance is not an industry you’d associate with cryptocurrency. Yet, the largest companies in the insurance world have been quietly making strides into the arena. While each has kept its precise activities somewhat under wraps, Bloomberg recently reported that dozens of underwriters are now offering crypto-coverage. On the one hand, the emerging insurance products could be a sign of an industry maturing; of traditional markets taking cryptocurrency seriously enough to protect it. On the other, the premiums on offer could demonstrate an opportunistic move from established giants who have spotted a herd of cash cows on the horizon.

Time will tell exactly how this one plays (and pays) out – but for now, we can only assume this is a positive signal.

 

A Nose for Opportunity

As regulation ramps up, nascent crypto-businesses are acknowledging the need to protect themselves: from crime, from legal action against their executives, from a hack on the exchange where their funds are stored. And insurers have recognized that, while the sector holds extreme risk, the reward could be too significant to pass up. Allianz, XL Group, AIG, and Chubb – among others – have been gradually amassing high-value contracts, charging as much as five-times what a traditional business would expect to pay for the same level of theft and loss coverage. While crypto companies are routinely paying premiums at 5% of annual coverage limits, spreading the risk across ten or more underwriters. This shows just how much money is on the table as each underwriter takes on coverage of between $5 and $15 million. Though the dangers are in plain sight – the likely reason for the insurers’ quietly-quietly approach – even they can’t look a gift horse in the mouth, despite the fact it could bolt at any minute.

 

Specialist Units Lead the Way

Most insurers won’t state their level of exposure, but those who comment have confirmed that crypto-business has been particularly strong in recent months. So strong, in fact, that Marsh and McLennan have established a dedicated 10-person team focusing on blockchain start-ups exclusively.

Aon has followed an alternative route, streamlining standard policies to cater to burgeoning demand, expediting their capture of new business – they’ve since claimed as much as fifty-percent market share.

AIG has added cryptocurrency coverage to its standard policies; Allianz has stepped in with individual coverage for digital asset theft as senior executives recognize how traditional economies are moving increasingly online.

Yet, as insurers happily pursue the risk, institutions remain cautious: Lloyd’s of London recently released its own guidance calling on agents to exercise due caution when meddling in cryptocurrency as…

 

…Still, It Remains Wild

This is the world of crypto, and if it’s one thing, it’s –dynamic. As the price of Bitcoin continues to fluctuate, insurers are struggling to manage their potential losses meaning they’re having to offer coverage based on value – so, ignoring the price movements of the underlying asset. Plus, where there’s so much cash on the table, there will inevitably be scams; but insurers are yet to define if a loss due to phishing fraud constitutes theft. As if a customer fails to validate an SSL certificate, then sends currency to the wrong address – who should be liable? Then, there are the start-ups claiming to have levels of insurance coverage above what they actually have – if they have any at all! – creating a dangerous playing field for all.

Does Short-term Allegiance Pay?

In short, it seems not: especially if you’re on the crypto-side of the bargain. No insurer has yet paid out on any policy – be it for theft, loss, or otherwise – despite the ongoing hacks. Plus, the majority of plans have many exclusions and limitations, calling the value they offer into question. Coinbase, for example, covers funds in hot wallets; but it’s believed to amount to a mere 2% of the cryptocurrency they store, which is a drop in the ocean were something to go wrong. But such insurance does, at least, provide a sense of security to clients. So, perhaps it’s just a matter of appropriate due diligence on all sides – not just that of the insurer – when entering into a contract to ensure you receive sufficient coverage to provide the level of client assurances you seek.

Long-term Allegiance Will.

What’s undoubtedly great business for the insurers could represent a sense of smoke-and-mirrors for crypto-players – at least, in the short-term. However, with blockchain technology still searching for broader legitimacy; coupling up with one of the oldest, most traditional industries out there can only be a good thing over the long-term. As no matter the prospect of a payout, in the purists’ eyes: the more people who interact with the technology, the better.

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