The reasons it's so hard to insure cryptocurrency operations

The concentration of risk and volatility are just a few of the challenges insurers face in the sector.

Companies and investors need a clear explanation of what they do in the cryptocurrency market, how they operate, and how they make money. They need to explain their specific crypto involvement and insurance needs. And they need to detail their operational procedures to lower risk, and the measures they’re taking to prevent cybercrime. (Credit: Credit: Igor Faun/Shutterstock.com)

While businesses and investors jump headfirst into cryptocurrency, insuring the risks involved is no simple task. Unfortunately, players in the market — whether they are banks, investors or other entities in the crypto business — are discovering that finding insurance isn’t easy.

Why is it so difficult to obtain coverage/? There are several reasons:

  1. Lack of data and familiarity

Cryptocurrency is new and doesn’t have a performance or actuarial track record, making it inherently difficult to assess and price risk. When insuring an asset like a home or automobile, insurers have an immense amount of historical data that predicts the likelihood of loss. But because crypto is so new, it’s nearly impossible for an insurer to predict the likelihood of a hacker breaking into someone’s private wallet and stealing crypto coins, for instance.

  1. Regulatory uncertainty

The regulatory landscape is anything but settled. The U.S. Securities and Exchange Commission has proposed a comprehensive, 654-page plan aimed at regulating Treasury markets platforms that will likely include cryptocurrency trading. Insurers understandably see what the crypto regulations will entail and assess their potential impact.

  1. Price volatility

Cryptocurrency has been among the most volatile of assets, whether it’s the price swings of popular forms such as Bitcoin or accounting for foreign exchange ups and downs. It’s extraordinarily difficult to assess insurance pricing when there’s major swings in the price of the underlying asset.

  1. Concentration risk

There are few, well-recognized crypto-custodial operations, heightening concentration risk, with hackers seeing easy targets with large potential payoffs. Carriers are reticent to insure markets in which a single entity is such an enticing target.

  1. Misperceptions regarding costs

Adding to all this is a major disconnect between the perception of how much crypto insurance premiums should cost and the insurers’ views of appropriate pricing for products such as directors and officers coverage. Insurance pricing is significantly higher than many people are willing or can pay, leaving many cryptocurrency companies and investors uninsured and fully exposed to risk.

How to make it easier to get crypto insurance

In order to secure appropriate and affordable coverage, cryptocurrency players need to have a compelling story to tell potential insurers.

Matthew Studley of HUB International. (Credit: Jon Reis)

Companies and investors need a clear explanation of what they do in the cryptocurrency market, how they operate and how they make money. They need to explain their specific crypto involvement and insurance needs. And they need to detail their operational procedures to lower risk and the measures they’re taking to prevent cybercrime.

Matthew Studley, CFA, is senior vice president, complex risk, for global insurance brokerage Hub International. He is a recognized expert in financial risk management, executive liability and the mitigation of specialty risks through insurance and insurance-linked securities. He consults on a variety of liability matters and risk transfer options, and advises clients on corporate governance issues, investor lawsuits, regulatory investigations and claims management.

Opinions expressed here are the author’s own.

This article originally appeared on the HUB International website. It is reprinted here with permission.

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