Insurers start to cover cryptocurrency theft
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 said they were 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.
Last Friday, Tokyo-based exchange Coincheck became the latest casualty, reporting a loss of about $534-million (R6.3-billion) 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 that 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 was to find an established business with a similar risk profile and try to adapt what worked there.
“It’s sort of akin to a digital armoured car service,” he said of cryptocurrency firms.
Liu says AIG began researching cryptocurrency theft coverage in 2014 and has written a few such policies, but remains in an “exploratory phase”.
XL Catlin’s North America crime coverage underwriting head Greg Bangs 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 $25million (R296-million) per incident, Bangs said.
Knowing the customer also takes on special importance.
Jackie Quintal, who advises financial institutions for insurance broker Aon plc, said part of her job was 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,” she said.
Still, insurers spend more time than usual scrutinising everything from security and storage procedures, the scale of their operations, to the peo- ple involved – a process that can take several months.
“Some bitcoin exchanges and wallets weren’t anticipating the level of underwriting and due diligence that they undergo when they approach the market,” Matt Prevost, who heads Chubb’s North American Cyber Product Line, said.
Insurers like Chubb are betting that cryptocurrencies will gain wider recognition even if the new business now represents only a tiny sliver of the global $720-billion (R8.5-trillion) a year commercial insurance business.
Digital coin sales raised more than $5-billion (R59-billion) across nearly 800 deals last year, 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.
Many insurers remain wary of the new business. Some, like Great American Insurance Group, an American Financial Group Inc unit, offer protection from employee theft to companies that accept bitcoin payments, but avoid outside risks, such as hacking.
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”.
Some insurers are not yet convinced the cryptocurrency business is large enough for premiums to cover possible losses, while currency volatility is another concern. – Reuters
[Cryptocurrency firms] are akin to a digital armoured car service