How insurance companies cover such a highly unregulated industry as crypto
The crypto industry has infiltrated global markets and gained much acceptance in society. But because money does not pass through the banking system, the industry remains outside government control. Financial watchdogs do not currently regulate it, making the task of protecting crypto companies challenging for commercial insurers. This post reviews some of the most common exposures facing the crypto industry and how insurance companies provide coverage in an unregulated industry.
Understand the challenge of crypto insurance
While cryptocurrency isn’t shiny new, it’s young enough that it doesn’t have much of a track record. As you might expect, commercial insurance companies use historical data to assess and price an industry risk. But without this valuable information, insurance companies face many challenges in predicting various vulnerabilities.
For example, underwriters cannot predict the likelihood of a cybercriminal stealing crypto-assets or how much damage it will cause for the theft of someone’s private wallet.
Another “wild west” component of crypto involves pricing. Cryptocurrencies are some of the most volatile assets on the market. Consider the huge price swings of Bitcoin or Ethereum that regularly make headlines. As a result of these ups and downs, it is challenging to put a specific price tag on cryptocurrencies. Insurance companies face a tall order when it comes to finding accurate insurance rates.
Finally, neither SPIC nor the FDIC insure cryptoassets, creating an environment protected very little by the federal government. And still, insurance companies are expected to play the overall safety net for the crypto industry. With US regulators considering crypto rules and standards frequently, it’s hard to get everyone on the same page.
Common risks crypto companies face
While most industries continue to plow through their post-pandemic mess, crypto companies face similar challenges – but with additional niche exposures. Some of these vulnerabilities include the following:
- Regulatory variation: Until now, the US government’s approach to cryptocurrency has ranged from aggressive to indifferent. Only recently have American regulators put the spotlight on increased awareness regarding responsible crypto innovations.
- Market volatility: The open market has uncomfortable lows and rewarding highs that all investors and companies must navigate. Cryptocurrency markets can be more vulnerable to the influence of headlines and world news than others, making the swings more challenging.
- Cyber security: Due to the digital nature of cryptocurrency exchanges, cybercriminals often target them. In addition, malware and technical issues create more unique dynamics in crypto, creating a digital environment ripe for costly cyber threats.
- Talent acquisition: Business leaders face unique hiring challenges, mainly because crypto-competent workers are hard to find. Like other industries, cryptocurrency companies must offer potential candidates a competitive advantage in order to attract and retain top talent.
How insurance companies provide crypto coverage
Admittedly, considering all parts of the crypto pie is overwhelming. A better approach is to break it down into more manageable parts. For example, let’s start with five steps of proper risk managementwhich includes:
- Identification
- Analysis
- Evaluation
- Tracking
- Treatment
Understand risk management
Working with a commercial insurance broker who specializes in crypto can make these steps effortless. Deciding how to manage risk – avoid, transfer, reduce or accept – will be much easier. Insurance companies can do a better job of protecting crypto just by getting to know the risks up close, which brings us to the next point.
Provide information
Insurance companies can provide comprehensive crypto coverage better when they know all the details of the operation and have the right information. For example, what is the company’s specific crypto commitment? How do they work and generate revenue? By using this information, insurance companies can better identify insurance needs.
Fills the gaps
More specifically, we know that SPIC or the FDIC are not in the crypto corner (for now); However, insurers need to consider what crypto companies are doing operationally to mitigate risk. Another way to look at it is to examine the vulnerabilities the lack of SPIC or FDIC support causes. What holes does this fallout create? Can the crypto company fill a void? Commercial insurance brokers specializing in crypto can quickly identify ways to make up for the lack of support.
Avoid cyber liability
US data breaches cost businesses an average of more than $4 million per incident, prompting insurers to ask crypto companies what controls they have in place to avoid cyberlawsuits. Furthermore, we begin to see more, still limited but increasing; cyber claims are bleeding into D&O through shareholder lawsuits as there is an increased fiduciary duty on the C-suite to maintain proper cyber controls through regulation and industry requirements.
Customize coverage
The foundation of any risk management plan is undoubtedly preparedness, such as completing the five-step process mentioned earlier and working with a specialist. However, it requires a tailored approach to combat the unknown risks of crypto companies.
For example, a hacker can use private details to access a wallet and digitally transfer cryptocurrency to their anonymous account. Only an insurance product designed specifically for crypto companies can protect against such hacks.
With the growing number of cryptocurrency companies and exchanges, insurers have to think differently – and even go so far as to develop new products for the industry. Fortunately, many insurtech and legacy players are jumping on board.
There is no doubt that insurance companies face challenges covering such a highly unregulated industry. However, we are encouraged to see new risk management ideas emerge in support of safer and more secure crypto, regardless of regulatory standards.
