As cryptocurrencies are used in more financial transactions, insurers are being asked to insure those deals.
With each passing day, more transactions are done through virtual currencies or cryptocurrencies such as bitcoin. According to Bitcoin.com, the global supply of bitcoins already amounts to nearly 16.7 million.
Statistics from Blockchain, a software platform for digital assets, reported 205,201 confirmed bitcoin transactions on February 20 alone. Late last year, Forbes noted that the monetary value of transactions done during a single day (November 16) via a bitcoin network reached an all-time high of more than $2.8 billion.
As bitcoins fuel more transactions, this virtual currency has caught the attention of insurers who are being asked by companies for insurance against bitcoin theft. As with any emerging risk, however, insurers confront challenges in underwriting this new exposure.
First Forays in Cryptocurrency Insurance
According to Reuters, only a handful of insurers currently offer cryptocurrency insurance. Among those that do are XL Catlin, Chubb, and Mitsui Sumitomo Insurance. Greg Bangs, Head of XL Catlin’s North America Crime Coverage Underwriting, told the news service that his company provides coverage of up to $25 million per incident.
Other insurers have yet to venture into the marketplace, but they admit that demand for the product may grow. “This is sweeping through for the insurance industry,” Christopher O’Brien, Partner at Venable LLP, said during a panel discussion at the recent 2018 Professional Liability Underwriting Society (PLUS) Directors & Officers Symposium. “Your clients are going to touch these risks even if they’re not blockchain companies.”
If companies do decide to insure bitcoin transactions, Reuters reports that they’ll pay an annual premium of $200,000 for $10 million in theft protection. Such a policy would cover the cost of bitcoins lost to hackers, which can be significant. In February, hackers stole some $534 million in bitcoins from Tokyo-based cryptocurrency exchange Coincheck.
Bitcoins are also increasingly associated with ransomware attacks as hackers demand payment in this virtual currency. Michael Tanenbaum, a Chubb Executive Vice President, told Bloomberg that he sees a direct correlation between the rising price of bitcoin and the frequency of ransomware crimes. He added that the highest payouts for corporate ransomware incidents hit more than $1 million in the middle of last year, well below the previous peak of $17,000.
Since cryptocurrencies remain a relatively new phenomenon in the world of finance, insurers have yet to collect enough data to accurately price the risk or determine how to cover it. During the PLUS conference, panelists discussed potential gaps in coverage if bitcoin theft isn’t specified in, say, a company’s directors and officers (D&O) policy.
Insurers also must be mindful of regulations that touch on cryptocurrencies. For example, the Securities and Exchange Commission (SEC) recently said that initial coin offerings (ICOs), or public offerings that raise capital through digital tokens, are securities, and therefore have the same protections as equity market offerings.
“It becomes a coverage issue,” O’Brien said during the PLUS conference. “If you’re writing a D&O (directors and officers) policy for a company, and you didn’t think about ICOs, you didn’t think about risks associated with cryptocurrency and you just rolled over your same policy language, arguably you are in for it, because you don’t have the line that says you’re not.”
Some insurers are being selective in insuring bitcoins. In 2014, Great American Insurance Group added a rider that covers employee theft at companies that accept bitcoin payment, but it does not insure hacking. Similarly, Independent Agent reports that a typical homeowner’s or business insurance policy excludes bitcoin theft unless a special endorsement is added.
O’Brien advised insurance companies to choose whom they insure in this sector carefully, picking only those insureds who understand and have a long history in the business. “With all new technology and any type of emerging risk, you want to look at who is backing it and what is the thought process behind it,” O’Brien said. “The first one into the space is going to be able to pick their insureds, so that’s a good thing. It’s a less competitive marketplace.”