The cryptocurrency industry has a reputation for being a bit “Wild West”--a digital marketplace teeming with fraud and investors forced to bear the full brunt of any heists. In such a minimally regulated industry, providing coverage sounds borderline absurd for even the most enterprising insurance companies.
But never say ‘never’.
With cryptocurrencies and digital assets becoming more valuable and gaining broader acceptance, blockchain startups and insurance companies are beginning to fashion a workaround of sorts.
A handful of insurance companies including AIG, Chubb, XL Catlin now provide coverage against loss or theft of cryptocurrencies.
Costly Cover
Understandably, the premiums for such packages are huge: An underwriter can charge a crypto company more than five times what it would cost an average business to get cover for the same.
These startups sometimes have to dole out premiums as high as five percent of their coverage limits every year. That places it beyond the reach of many startups.
Those seeking larger amounts of coverage have to strike deals with as many as a dozen underwriters, each offering $5 million-$15 million of insurance. This minimizes the risk for insurance companies by ensuring that no single insurer is ever on the hook for too much.
The high costs mean that in many cases, even the largest players in the industry are unable to fully cover customers’ accounts.
For instance, one of the largest crypto exchanges, Coinbase, only buys insurance for a fraction of the digital coins in its possession. Hot wallets, which may contain up to two percent of client assets, are fully covered--though the company does not divulge how much coverage it provides for the remaining deposits that are stored offline. Related: European Union Hits Google With A $5 Billion Fine
BitGo, a cryptocurrency services provider that became the first to provide crypto insurance in 2015, was later forced to drop coverage due to high expenses.
The type of cover provided by insurance firms can be quite limited, too: Many companies do not pursue the underwriting of insurance for cryptocurrency exchanges or wallets, while some policies can come with so many exclusions as to render them almost useless.
Further, insurance companies are unwilling to talk openly about their policies because they fear that some crypto companies might deliberately overstate their coverage so as to impress potential customers.
High Demand
Despite these challenges, industry insiders are saying that business is booming.
According to Aon and Marsh & McLennan, two insurance brokers that help companies shop for crypto insurance, business has been brisk this year with high demand for such products leading to more insurance companies tweaking their general policies to include crypto-specific coverage.
Related: Institutional Investors Hold A Lot More Crypto Than You Think
And it’s not just about crypto companies getting coverage for clients assets. For the first time, individuals can shop for their own coverage from companies such as Allianz, which provides individual coverage for digital-coin theft. The company sees insurance for cryptocurrency storage as the next big opportunity.
Insurance Hedging Against Volatility
As the cryptocurrency market evolves, insurance companies are introducing increasingly sophisticated products to meet market needs.
Bitrust is one such company that uses smart contracts to provide hedging services against market volatility. The company sells its BTF tokens with both the buyer and seller of insurance using the tokens to lock their funds.
So, it might still be the Cryptic Wild West, but products are emerging as a viable hedge, and eventually, it will be tamed.
By Alex Kimani for Safehaven.com
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