Highlights
- Most believe there’s insufficient supply of digital asset insurance
- There’s more supply than last year as insurers don’t want to miss out
- Cold wallet insurance costs 0.8% to 1.2% of assets covered
- Hot wallet costs 3% to 5%
- Startups use 3rd party insurance for marketing as a vote of confidence
- Insurers are getting educated. It’s unclear whether they all understand the risks
Until now, cryptocurrency insurance has been newsworthy because of the challenge in finding cover. At last month’s Blockchain for Insurance event, Hugo Wegbrans Aon’s Global Chief Broking Officer declared that’s a thing of the past. There’s “more supply than demand”, he said and “it’s almost getting mature.” But the sentiment is not shared by others.
However, Aon should know, because it has a decent track record in the space. It brokered hot wallet insurance for Coinbase to the tune of $255 million and a similar kind of cover for the Gemini Trust (Winklevoss twins). Plus it has secured coverage for multiple specialist custody solutions with big name backers including Trustology (Two Sigma, ConsenSys), Anchorage (Visa, Andreessen Horowitz) and METACO (Swisscom).
Agree to disagree
Asked about supply exceeding demand, one broker stated “I think there is a shortage of supply and it’s not only for that new risk. It’s for lots of new risks. It’s the case for cyber.”
Visa backed crypto custodian Anchorage also sees the supply as scarce. In a blog post CEO Nathan McCauley wrote: “The market capacity for digital asset custody insurance is limited, with likely less than $1 billion available, so all crypto custodians are in a sense competing for a finite amount of available coverage.”
The same figure was quoted by Trustology’s Dominic Longman who noted that Coinbase is taking up a large slice of that. BitGo has also secured $100 million. Longman is also seeing more interest from insurers compared to a year ago. So in terms of supply exceeding demand, he said: “I think the sentiment is correct, but I’m not sure if the statement is true.”
Sarah Downey, who co-leads the digital asset risk transfer team at broker Marsh, echoed a similar opinion. While disagreeing with the statement, she observed that insurers now realize that blockchain technology and digital assets are here to stay. “Carriers a year ago who were not in the space are now starting to offer coverage because they really don’t want to miss out,” said Downey.
Another factor in the increased capacity is that many of the companies seeking cover are more mature and sophisticated in their processes and hence are easier to insure.
Hot, warm, cold and pricing
The risk coverage is already evolving. In the past, it was hot versus cold wallets. Hot wallets have the cryptocurrency online, which makes it more vulnerable to hacking attempts. As a result, coverage is usually for crime.
With cold storage, the currency is stored offline, potentially in hardware that could be in a physical vault.
One person commented: “Cold storage is a lot easier to price because people are used to pricing up the insurance for assets in a vault.” And the cost figures we heard in the market were surprisingly consistent at 0.8% of assets covered. But it can go as high as 1.2%.
That compared with figures of between three and five percent for hot wallets.
But there’s also something in between hot and cold.
Increasingly the cryptocurrency needs to be online. The market is volatile, so a quick response time is required for trading. And newer blockchains that use Proof of Stake (PoS) rather than the energy wasteful Proof of Work need the currency to be available for staking. That way, coin holders can earn rewards, not dissimilar to bank interest.
Hence new companies like Trustology and Anchorage are starting to provide Hardware Security Modules which provide secure online storage. Multiple authorizations are usually needed to access the coins or tokens. This is sometimes referred to as “warm” storage.
The insurance costs will also vary on factors like the amount of coverage, and the company looking for cover. It’s not just about the company’s technology but also their processes in terms of vetting staff, onboarding, and procedures for dealing with emergencies.
If a company is willing to live with a higher retention or excess, then naturally the price will be lower. And in some cases, there may even be coinsurance where the insurers might only be exposed to 50% of the loss.
Insurance for marketing purposes
Stories in the press only cover a fraction of the marketplace coverage. Sarah Downey from Marsh commented that press releases often are “about companies who are buying crime insurance that they use as a marketing tool”.
Trustology had even considered creating an insurance captive (internal insurance), but external insurance helps with reputation. “Creating a captive would not have necessarily assisted with that reputation. Having highly credit worthy and recognised insurers is critical for that,” said Trustology’s Longman.
So it’s the startups that are publicizing their cover. Marsh’s Downey stated that they have “really amazing clients” in the space, but the companies don’t want to publicize the details. That’s because with certain types of insurance, advertising it can attract litigation.
In terms of more traditional asset managers and other companies getting into the digital asset sector, insurance is far easier. The insurance can just be tacked on to existing coverage, and digital asset holdings are likely to be relatively small compared to other assets.
Do insurers fully appreciate the risks?
Aon’s Wegbrans said that there is hardly any “innocent capacity. Everyone who writes this [risk] knows what he’s doing.” Another industry participant commented: “Most of the market really doesn’t understand the risks associated with many of these things.”
Others felt it’s a mix, with some insurers with more crypto experience now becoming quite knowledgable.
In an article last year, Magdalena Ramada from broker Willis Towers Watson compared blockchain insurance to cyber. “Back in 1997, the first cyber insurance policies written were essentially third-party liability policies that covered external hacking events. They ignored or did not fully address the fact that most risks were originated inside a company by poor processes or disengaged employees.”
“They also had a simplistic approach to defining price and coverage: revenue-based rather than exposure-based. Well, for blockchain risk insurance, it is probably still 1996.”
It remains to be seen what is being overlooked today for digital asset risks.
Both the brokers and the companies getting cover are involved in educating insurers. Trustology’s Longman says he’s spent a lot of time talking to numerous insurers and “insurers now understand the risk profile better.” Some brokers recommend that underwriters attend meetings, even just to learn. And this week Marsh is running a conference in Bermuda to educate underwriters about covering cryptocurrency and blockchain risks.
The conclusion is that the supply is increasing. The big question is whether the speed of insurance coverage growth will be fast enough. Soon there could be demand to cover huge insurance risks, like mass adoption of digital assets by institutions or cover for Facebook’s Calibra wallet.
