Global insurers to offer protection against cryptocurrency theft
New York (Reuters): Major global insurers are starting to offer protection against cryptocurrency theft, willing to tackle daunting challenges it brings rather than miss out on this volatile and loosely regulated, but rapidly growing business.
So far only a few insurers sell such insurance, including XL Catlin, Chubb, and Mitsui Sumitomo Insurance . Yet several others told Reuters they are looking into theft coverage for companies that handle digital currencies like bitcoin and ether, which trade between anonymous parties.
Such efforts so far have garnered little attention, but the emergence of an insurance market marks an important step for the nascent industry’s mainstream recognition.
The risks are clear: digital currency investors have already lost billions from dozens of cryptocurrency hacks, technical errors and fraud. Many hacked exchanges later shuttered.
On Friday, Tokyo-based exchange Coincheck became the latest casualty, reporting a loss of around $534 million worth of coins to hackers.
For insurers the challenge is how to cover those risks for customers they know little about, who use technology few understand and represent a young industry that lacks troves of data insurers usually rely on in designing and pricing coverage.
Christopher Liu, who heads American International Group Inc’s North American cyber insurance practice for financial institutions, said the answer is to find an established business with a similar risk profile and try to adapt what works there.
“It’s sort of akin to a digital armored car service,“ he said about cryptocurrency firms. ”If there is a problem like an accident or a robbery – that’s going to be the accumulation of all these exposures.” Liu says AIG began researching cryptocurrency theft coverage in 2014 and has written a few such policies, but remains in an “exploratory phase.”
Greg Bangs, head of XL Catlin’s North America crime coverage underwriting recounts how the firm had to become its own expert on the new technology by talking to key players and potential clients before developing bitcoin theft insurance.
XL Catlin now offers annual crime coverage of up to $25 million per incident, Bangs said, “The first challenge for us was to figure out if there was a product here.”
Knowing the customer also takes on special importance.
Jackie Quintal, who advises financial institutions for insurance broker Aon Plc, said part of her job is to tell legitimate digital currency companies from shady ones, something that often gets cleared up even before an insurer gets involved.
she said, “If someone is hesitant to provide information and they don’t have answers to compliance questions, they tend to disappear on their own.”
Matt Prevost, who heads Chubb’s North American Cyber Product Line, “Some bitcoin exchanges and wallets weren’t anticipating the level of underwriting and due diligence that they undergo when they approach the market.”
Digital coin sales raised more than $5 billion across nearly 800 deals in 2017, according to venture capital data provider CB Insights. There are no estimates yet how much of that has been insured or of total premiums collected.
Others will avoid coverage for coins kept online, or in “hot storage,” because of high risk of hacking and will only cover offline “cold storage,” which is also generally preferred by cryptocurrency companies.
Coinbase, a leading cryptocurrency exchange available in 32 countries, says on its website it holds less than 2 percent of customer funds online and that those funds are insured.
Lloyd’s of London, the world’s largest insurance marketplace, was providing insurance to the exchange, according to a person familiar with the matter. Reuters could not determine the terms or the scope of the coverage and a Lloyd’s spokesman declined to discuss Coinbase.
Some insurers are not yet convinced the cryptocurrency business is large enough for premiums to cover possible losses.
Currency volatility is another concern. While coverage limits shield insurers from wild swings, the impact for clients can be dramatic. For example, a $10 million policy signed in January 2017 would cover 10,957 bitcoins at the time, but only 923 if a hack happened a year later.
Cameron Winklevoss, co-founder of Gemini, a cryptocurrency exchange and custodian, argues insurance should not be an investor’s primary concern.