The cryptocurrency insurance market in 2019 was “hesitant and uncertain,” according to experts in Marsh’s Digital Asset Risk Transfer (DART) team. While the market is growing slowly, by and large, insurers remain cautious about pumping capacity into the emerging cryptocurrency arena.
Progress has been made around coverage solutions for digital asset firms in both the US and UK insurance markets. As things stand, US insurers have really taken the lead in terms of providing directors’ and officers’ (D&O) insurance for cryptocurrency clients. Both the US and UK markets are actively providing commercial crime insurance, professional liability, and cyber insurance solutions. The UK markets are the primary suppliers of specie insurance for cold storage of crypto assets.
“2019 was definitely a very challenging market,” said Sarah Downey (pictured), co-leader of DART. Insurance premiums for companies dealing with digital assets tend to be much higher than premiums allocated to more traditional businesses. So far, carriers have also offered more limited insurance coverage than they would for more traditional types of companies, and the process for cryptocurrency firms to actually buy insurance is much more complicated and time-consuming than the norm.
“The [premium] really varies depending on what that digital asset company does,” Downey added. “For example, if you have a digital asset company who actually holds the assets, coverage for them would likely be much more expensive than a technology incubator who’s really more focused on developing the technology associated with blockchain and digital assets.”
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Despite its many challenges, the 2020 cryptocurrency insurance market is shaping up for some interesting developments, according to Downey. The first revolves around the potential for increased regulation or more regulatory clarity. The US has already started on this journey. In 2019, the US Securities and Exchange Commission (SEC) issued some guidance around the issue of digital assets, with a primary focus on investor protection. The SEC also issued a handful of no-action letters for companies offering cryptocurrency.
“It’s very helpful to see no-action letters, but at the same time, they’re only directed to a specific company, so the cryptocurrency industry doesn’t really walk away with a full set of guidance towards what it should or should not do,” Downey commented. “There’s still more room for additional [regulatory] clarity … and we continue to expect the SEC to take an active role in [providing that]. With more certainty from the regulators comes much more comfort from the insurance underwriters. I think the insurance community is looking forward to some more clarity on the regulation front.”
Another trend to watch is the potential impact of firming in the wider property / casualty insurance markets. Commercial insurance markets are quite challenged at present due to increased litigation, intensified regulatory activity, and the upward trend in frequency and severity of losses. As a result, carriers are increasing rates and reducing the amount of capacity and/or coverage they’re willing to provide.
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“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’s going on in the traditional market, we’re cautiously optimistic that the crypto market won’t see as much of an increase in pricing as the traditional markets are seeing right now,” said Downey. “However, the fact is that there’s still limited capacity and a limited number of insurers who are participating in this space, so that could continue to create some additional challenges. In 2020, it will be interesting to see how the traditional market might impact the crypto insurance market.”
As the digital asset industry matures and more cryptocurrency companies purchase insurance, insurers will gain access to more data, which will help them become more comfortable underwriting the risks. This all takes time, Downey pointed out.
She added: “The crypto markets are gaining in maturity, which makes the insurers more comfortable. Some crypto companies have started hiring very experienced board members – that also helps. And what we’re seeing from a lot of the crypto companies is a real drive to become more regulatory compliant. Many are focused also on retaining third-party vendors to help support their business. By third party vendors, we mean auditors, accountants, lawyers, insurance brokers, data analytics firms, which again, as the crypto market matures will really help insurance underwriters become much more comfortable in this space.”
If 2019 was categorized as being hesitant and uncertain, Downey provided a more optimistic outlook for 2020, categorizing the insurance markets as being “interested and cautious.”
“The cryptocurrency insurance market improves every year due to education, experience and data,” she said. “We spend a lot of time educating the insurance markets, our clients spend a lot of time educating the market, and the markets, quite frankly, are educating themselves as well and really devoting a lot of time to it. We remain very optimistic that the above the trends we talked about will lead to an increase in the comfort level of the commercial insurance market and their willingness to actively participate in this space.”