Like the crypto market damageSome insurance companies are trying their best not to provide coverage for crypto-related risks under insurance policies.
But because crypto is still so new, insurers are struggling to explain and price the risk. The lack of clear rules also makes it difficult to explicitly remove crypto risks from commercial insurance policies, which can lead to losses for insureds, according to insurance lawyers, brokers, and directors.
At the other end of the spectrum, insurers are swimming in regulations.
“When it comes to crypto and cryptocurrencies, insurance companies are very careful and very regulated,” said Mirjam Bamberger, CEO of AXA Europe.
Nicholas Pappas, a lawyer at Reed Smith who represents policyholders, said he has seen the removal of crypto-related businesses’ cyber, crime, property, and many credit policies this year.
“Insurers are investing a lot in cryptocurrency or digital assets, and it’s a lot,” Pappas said.
Carriers want to avoid the big losses and confusing documents they had with cyber insurance when they jumped too quickly to sell policies without a full understanding of the new risks. Cyber insurers have experienced a 300% increase in losses since 2018, according to Fitch Ratings.
Therefore, cyber insurers are not interested in crypto coverage. This year’s cyber policy overhaul “will have a complete elimination of crypto,” said Luke Speight, director of digital assets at insurance broker Willis Towers Watson.
Some insurers, despite realizing the great value of crypto market insurance, are leaving the opportunity to sell the service.
“We’ve seen insurance companies put crypto exclusions on non-crypto companies,” said James Knox, regional technology director at the broker.
Some insurers, too, find crypto exclusions in their contracts with reinsurers, who provide insurance to carriers, so there is little they can do about it, said Jackie Quintal, managing director of insurance broker Marsh McLennan.
Unmanaged Risks, Unclear Policies
Crypto is illegal in the US, and many insurance policies do not clearly explain or exclude crypto-related risks.
But Louisa Weix, a partner at TittmannWeix who advises insurance, said she saw crime insurance to add “almost money and digital assets” to avoid hiding hacks and cryptocurrency theft.
Meanwhile, there is uncertainty about how cryptocurrency should be regulated, a topic that has been the subject of high-profile rulings from courts and government agencies.
“There is no understanding of what crypto is. Is it a digital asset, a security, an asset, a currency, an asset, or is it a scam?” said Edin Imsirovic, assistant director at AM Best, a credit management agency for insurance companies.
In 2014, the IRS announced that “real money” would be taxed as “property,” not income. In 2018, an Ohio court ruled that $16,000 worth of bitcoin lost was property covered by homeowner’s insurance. And in 2020, courts in Singapore, the UK, and New Zealand, among others, ruled that cryptocurrency is “property.”
The Securities and Exchange Commission, for its part, paid Ripple Labs and its management in 2020 who are said to have raised more than $1.3 billion through unregistered offerings for digital asset protection. The lawsuit, pending in New York, looks at whether Ripple’s token—XRP—is protected under federal law.
Either way digital economy and security it’s important for companies to determine whether they can get D&O coverage, which protects them from lawsuits and investigations that affect security, said Geoff Fehling, a partner at Hunton Andrews Kurth who represents policyholders.
Uncertain D&O policies covering crypto could create more exposure for insurers, Weix said, because ambiguity in insurance policies tends to favor insurers.
If cryptocurrency is found to be a covered security under D&O, many carriers may begin adding cryptocurrency privacy exclusions to clarify that they only provide traditional security claims, Fehling said. Insurers can also rely on cyber waivers to deny coverage, depending on what’s said and what the claims are, he said.
However, companies should not be discouraged from seeking crypto-related information in other business channels, Fehling said.
“There is nothing unique in crypto that precludes disclosure under traditional procedures” such as D&O disclosures by the SEC, the Financial Industry Regulatory Authority, or the Department of Justice investigating crypto officials, he said. Filing with a crypto company or executive may trigger a D&O disclosure before receiving a subpoena, complaint, or notice of an SEC investigation.
Crypto news stories started appearing in the last five years. But many have settled before going to trial, in part because insurers want to avoid wrongful claims, said Orrie Levy, a Cohen Ziffer partner who works with policyholders.
Hurts For The Crypto Market
Sarah Downey, head of blockchain consulting at broker Lockton Companies, said few insurers write crypto coverage across the board. Instead, many traditional carriers that cover crypto-related risk manage exposure by underwriting premium policies with lower and lower premiums, he said.
D&O policies that provide crypto coverage typically do not exclude claims for manipulation, theft of digital assets, and initial cash contributions, Downey said.
Joseph Ziolkowski, CEO of Bermuda-based Relm Insurance Ltd., said the repeal of the rules would “destroy the value of the D&O policy almost completely.” Relm’s D&O policies specify which crypto business risks are covered rather than excluding all regulatory claims, he said.
At the end of the day, demand for crypto insurance is strong but “supply is very limited,” said Jared Gdanski of Evertas, a Chicago-based crypto underwriter accredited by Lloyd’s of London.
“Lack of insurance is hurting crypto markets,” Gdanski said. “We know a lot that didn’t happen because people couldn’t get insurance.”
Bamberger, head of AXA Europe, said insurance companies are also considering whether local laws allow crypto services.
However, he said, “if the bank has a financial sector in cyrpto, we have nothing to offer.”