Insurance market for digital assets and blockchain set to grow

Increased use of digital assets and better regulation are set to boost growth in the cryptocurrency insurance market, according to Marsh. Demand for insurance to cover digital assets and crypto-related liabilities has been growing, according to the broker. In particular, cryptocurrency firms – which include cryptocurrency miners, exchanges, wallet, vault, payment services and blockchain technology providers – are seeking directors and officers insurance and commercial crime cover, which protects against the theft of cryptocurrency from a wallet. They are also looking to buy specie insurance, which covers private encryption keys held in cold storage, as well as cyber, and errors and omissions insurance. However, the cryptocurrency insurance market is very challenging, according to Sarah Downey, co-lead at Marsh’s cryptocurrency insurance division DART. The cost of insurance for cryptocurrency firms is much higher, and coverage more limited, than for traditional financial institutions, especially for those holding digital assets, she said. The process of obtaining insurance is also more complicated and takes longer than it does for traditional financial institutions, she added. The cryptocurrency insurance market was “hesitant and uncertain” in 2019, according to Ms Downey. “There was limited capacity in the insurance market but there were also pockets of growth compared with 2018, and the markets were more participatory in 2018 than in 2017,” she said. At the same time, the commercial insurance market is becoming more “challenging” in general, with increased premiums and narrowing of coverage, said Ms Downey. “The crypto-insurance market has always been more challenging. While we do expect to see some impact on the crypto-insurance market based on what is going on in the traditional market, we are cautiously optimistic that the crypto market will not see as large an increase as the traditional markets are seeing right now,” she said. “However, there is limited capacity and a limited number of insurers participating in this space, and that could create additional challenges. In 2020, it will be interesting to see how the traditional market might impact the crypto market,” she added. The crypto-insurance market has yet to be tested by a large loss, according to Ankur Kacker, cold storage and specie expert at Marsh’s DART unit. There were a number of cyberattacks in 2019 resulting in the loss of billions of crypto assets, but none of these were insured, he said. “What we want to see going forward, however, is an insured loss so that the market and wordings are tested,” said Mr Kacker. There have also been a handful of cryptocurrency D&O claims, according to Ms Downey. “It’s fair to say the insurance market is waiting to see how the litigation and regulatory landscape plays out, but all this claims activity helps shape the cover and is not necessarily a bad thing,” she said. There were some positive developments in 2019 that suggest insurers in the US and the London market are becoming more comfortable with crypto risks. In September 2019, Marsh launched BlueVault, a facility to provide cold storage insurance. Led by Arch, it offers $150m of cover per insured. There have also been a handful of captives established for cryptocurrency, according to Ms Downey. This gives companies access to direct insurers, but also reinsurance capacity, with potential for price optimisation as clients take a greater share of risk, she said. In mid-January, for example, the first cryptocurrency captive offering cold-storage insurance was launched. New York-based cryptocurrency exchange Gemini Trust Co worked with Aon to establish the Bermuda-based captive in a bid to address the shortage of insurance capacity in the sector. The captive, which also saw Marsh broker excess insurance from the commercial markets, will provide Gemini with $200m of insurance coverage for crypto-custody risks. This is the largest limit on offer anywhere for such risks. Ms Downey expects further cryptocurrency captives to be formed in 2020, although numbers will be limited by compliance and setup costs. Mr Kacker expects four to five of the large crypto players to establish captive insurers. Although the commercial market was “hesitant” in 2019, Marsh is more optimistic for 2020 and sees insurers being “interested, but cautious”. “The cryptocurrency insurance market has improved year on year due to education, experience and data,” said Ms Downey. “The digital asset insurance market will only expand and grow as underwriters become more comfortable with this space. There is no doubt it will continue to grow year by year,” she said. Regulation is likely to drive cryptocurrency insurance purchasing and capacity. Regulation of cryptocurrency has been increasing and becoming clearer. Such regulation is increasingly within the remit of traditional supervisors. “With more certainty from regulators comes more comfort for insurers. Insurers will be looking forward to more clarity on the regulation front,” Ms Downey said. There has also been a shift in how companies purchase cryptocurrency insurance. There is more demand from financial institutions, which should drive further uptake. As more traditional players adopt digital assets, their existing insurance partners will need to be flexible and comfortable with these exposures. Higher demand for digital assets insurance will also come from greater demand for consumer protection by regulators and consumers, Marsh said. Digital asset and blockchain risks are not only an issue for cryptocurrency companies, according to the broker. Blockchain technology is being used by a number of industries to authenticate transactions and data. Digital assets are also being used across a number of industries that see them as a faster, more secure and more transparent way of processing and transferring payments. “Blockchain technology and digital assets in some form are here to stay. As the technology and asset class matures, it is likely that many companies could end up incorporating them into their business,” said Mr Kacker. “For now, most standard forms of insurance coverage can be changed to incorporate the blockchain and digital asset exposures. But as the technology and asset class continues to become more widely accepted, we do believe that there will be new solutions created specifically to cover digital assets,” he said.

Insurance market for digital assets and blockchain set to grow

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