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Doubling Down on the Crypto-Heist Game

Back in February, Business Insider released information on ‘Crypto-heist insurance.’ Only a few insurers had the stomach to take on the risk.

Fast forward six months, and we see the appetite increasing. So, what is crypto-heist insurance, and who cares, and why?

Are Crypto Currencies really needed?

For the vast majority of commercial users, Bitcoin is more interesting for the rapid growth in the currency’s values versus transactional payment processing.  However, there is a lot of activity for the use of commercial and retail transactions.

Stephen Pair, CEO at BitPay, told Financial Times  that his company is expanding to Asian markets:

“Bitcoin is increasingly popular in Asia-Pacific and we see huge potential for cross-border payments,” Pair said. He added “Using the Bitcoin network, we can enable businesses to have invoices paid in one day for a fee that is less than traditional banks.”

But what’s the risk?

In February, Reuters’ Suzanne Barlyn, writing in Business Insider, penned an article on insurance for crypto currency theft.    While Bitcoin and other crypto currencies can be tracked on exchanges, bad things still can, and do, happen.  Barlyn writes:

“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.”

She notes a concrete example:  “Tokyo-based exchange Coincheck became the latest casualty, reporting a loss of around $534 million worth of coins to hackers.

No minor loss.

Next step:  A new reason to love KYC …

Earlier this year, a few insurers had recognized the risk opportunity and stepped forward.  These included: XL Catlin, Chubb, and Mitsui Sumitomo.    Each had to determine the risk profiles and create coverages that made sense to the consumer and the carrier.

Barlyn notes that knowing your customer (KYC) takes on special importance in the crypto currency world. She references work in progress by Jackie Quintal from Aon.  Quintal notes that her role is to tell legitimate digital currency companies from shady ones.

“If someone is hesitant to provide information and they don’t have answers to compliance questions, they tend to disappear on their own,” Quintal said.

Fast forward six months

Other insurers – including AIG and Allianz – are in the game now.  Writing in PropertyCasualty360, Christian Weishuber, from Allianz, said:

“Insurance for cryptocurrency storage will be a big opportunity.  Digital assets are becoming more relevant, important and prevalent on the real economy and we are exploring product and coverage options in this area.”

That said, insurers are being conservative.  XL is quoted as saying that it is , “being careful when looking at those risks and analyzing them on a case by case basis.”

A conservative start …

Significantly, Marsh and Aon said that they weren’t aware of any insurer that has had to pay out a crypto policy claim.  There are some possible reasons.

First, selection combined with policy exclusions is challenging for smaller organizations and start ups.  Hillik Nissani, COO of Cryptalgo, a start up that helps institutional traders execute orders, said that exclusions “can make the whole policy close to useless.”

In addition, coverage amounts fall short of their risk sums on the policies. At the same time, the fluctuations of crypto currencies can shift wildly.

… with a hopeful ending

These might be challenges, but there are also true believers. For example Greg Spore, Marsh’s U.S. financial products placement leader, notes that the new technology is evolving quickly, and there are potential security issues.

That said, Spore himself is a self-confessed ‘crypto believer’ and a  ‘blockchain technology enthusiast’.

What do you think?

There are lots of reasons to be afraid, but there are significant opportunities as well.  Do you see crypto-heist becoming a manageable risk?  Will this stabilize Bitcoin as a currency?

We’re staying tuned.

 

Editor’s Comment:  We see that one impact of digital insurance products is a significant shift in risk. 

There will be several sessions discussing risk trends at the 2018 Insurance-Canada Executive Forum (#ICXF2018) on 28 August 2018.

Details and registration available here

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