The cryptocurrency industry has been on a roll, peaking at a market capitalization of $2.2 trillion this April. Motivated by its growing popularity, major corporate investors evinced an interest. Tesla acquired $1.5 billion of bitcoin (BTC) in January 2021 while MicroStrategy stockpiled $2.2 billion of BTC. Insurers slow to enter the crypto world, are warily assessing risks ranging from cyber-attacks on exchanges and users to price volatility. Despite being a growing, multi-trillion dollar industry, crypto assets remain 96% uninsured. But as crypto moves away from a HNW user base, insurers are making moves.
The surging valuation of bitcoin and other cryptocurrencies spewed massive thefts of online wallets and exchanges, with multi-million losses, such as Coincheck in January 2018. The cumulative result of such hacks is a weakening ecosystem. Cryptocurrencies present unique challenges for insurers as historical data that drive insurance pricing, is practically non-existent. Volatility in valuations in the event of large price swings affect premiums by reducing the total number of coins being insured. Regulatory ambiguity and scant oversight at cryptocurrency exchanges further complicate matters for insurers interested in providing services. However, insurance for cryptocurrencies has been gaining demand, given the instability of the cryptocurrency ecosystem.
For certain, bitcoin has been on the watch list of insurance companies. In 2015, Lloyd’s in a report listing risk factors mentioned, “The establishment of recognized security standards for cold (offline) and hot (online) bitcoin storage would greatly assist risk management and the provision of insurance”. It mentioned server-side security, cold storage, and multi-signature wallets as possible methods to mitigate risk attacks. Such challenges within the cryptocurrency ecosystem are a potential source of revenue for the industry. Most insurance products currently available are bespoke products tailored to fit client needs. Companies operating in cryptocurrency typically opt for theft coverage, which includes cyber-crime and excludes hacks, paying as much as 5% of coverage limits.
There are largely three ways that (re)insurers are playing in the cryptocurrency space.
- Underwriting crypto
Insurers provide cover for crypto assets in the form of crime and custody policies, for example against theft, hacks or cold-storage key loss. Nexus Mutual, a 2017 founded decentralized insurance fund operating on Ethereum blockchain, offers such covers. Another path is insurers providing coverage for crypto businesses, something only a handful of providers offer e.g. Evertas.
- Accepting crypto as payments
A growing number of insurers accept cryptocurrencies for payment, with attendant benefits of transparency and payment tracking. In cases where insurers are underwriting crypto assets, accepting premium in the risk currency eliminates FX volatility. AXA Switzerland announced in April that BTC payments would be accepted for nearly all products (except life insurance due to regulatory barriers).
- Holding crypto on balance sheets
Due to its inherent volatility, very few insurers have looked to invest directly in crypto assets. An example of a major insurer holding crypto in its balance sheet is MassMutual which invested $100m into Bitcoin last year. The tide is surely turning, as insurers and investors seek alternatives to historically low yields of fixed income investments.
Last month, Coincover, a leading crypto security firm that specializes in protection and insurance-backed guarantees for cryptocurrencies held online, announced a growth funding round intended to meet growing demand from the cryptocurrency market. Its platform combines a policy underwritten by Lloyd’s with technology created by specialists from government, military and law enforcement.
Demand for cryptocurrencies is booming, as more than 40 million people worldwide use some form. In the short term, the opportunity exists for larger corporate and specialty insurers, that are better equipped to understand and underwrite such a market. In the longer run, with uncertainty of how the boom will play out, insurers would be challenged to test, learn and get familiar with the structures surrounding cryptocurrency.
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