If Elon Musk’s Tesla wanted to insure all of its recent $1.5 billion bitcoin investment against the myriad of pitfalls it could encounter, like hacks, theft and fraud, it would be out of luck.
Insurers have yet to catch up with the growing acceptance of cryptocurrencies as an investment and in commerce: Musk said last month Tesla’s customers can now use bitcoin as payment.
Scant regulation and volatile prices of bitcoin and other cryptocurrencies make many insurers reluctant to underwrite the risks, despite booming demand for protection of digital assets and for personal liabilities of directors and executives of companies that deal with cryptocurrencies.
Insurers and brokers estimate that of the few that provide such insurance, none can offer coverage beyond $750 million for any client.
The risks are considerable, with U.S.-based cyber security firm CipherTrace estimating reported losses from theft, hacks, and fraud totalling $1.9 billion in 2020.
“Insurers have only a finite capacity that they can write in this space so it really is a case of getting in quickly,” said Ben Davis, lead for emerging technology and international insurance with Superscript, a Lloyd’s of London broker with cryptocurrency clients.
But while both crime and demand for protection have tracked cybercurrencies’ meteoric rise, underwriting such risks remains a niche business offered by specialist insurers in the Lloyd’s market and in Bermuda. Insurers declined to be named while discussing such a sensitive business area.
The high risk of hacking means smaller companies seeking protection for their ‘hot wallets’ – digital assets stored online – can typically get just about $10 million covered, with the largest limits rarely exceeding the $100-200 million range, insurers and brokers said.
DEMAND RISING FAST
Legal ambiguity surrounding the assets, with top regulators from across the world calling for global rules for cryptocurrencies, also acts as a deterrent for insurers.
Cryptocurrencies have struggled to win the trust of mainstream investors and the general public due to their speculative nature and potential for money laundering.
Insurance for directors and executives of cryptocurrency companies, such as exchanges or custodians seeking to protect their personal assets are also in short supply, brokers and insurers said.
A potential large drop in the value of cryptocurrencies could trigger lawsuits from investors, which in turn could leave the insurer on the hook if the suit affected personal assets of a firm’s executives.
“Insurers get concerned because when there’s volatility they end up holding the bag,” Davis said.
Davis added that Superscript has to put in “a lot of work” to get directors and officers cover for clients.
Brokers say they see growing demand they just cannot match with sufficient supply.
Jacqueline Quintal, U.S. digital asset leader at Marsh, the world’s biggest insurance broker, said she was fielding calls from companies seeking protection for their assets, or individuals running them, a couple of times a week, compared with once every other week about six months ago.
“Just a huge rush to buy insurance. Period,” she said.
Superscript’s Davis said demand has doubled, if not tripled since January over the same time last year.
Many custodians and cryptocurrency exchanges are also looking to increase the limits in their existing policies as the value of cryptocurrencies has risen, insurers and brokers said.
HEADS IN THE SAND
And just as insurers slowly warm to the new business potential as deep-pocketed mainstream financial institutions increasingly embrace cryptocurrencies, they face a fresh challenge in the form of non-fungible tokens (NFTs).
These digital assets, including images, videos, audio or even individual tweets, get authenticated by blockchain, which certifies their originality and ownership, creating a market for art and other collectibles that exists only in digital form.
Insurers face the difficulty of how to price policies and assess how the value of digital art changes over time when there are no available benchmarks yet, a leading London insurer who declined to be named, said.
The establishment of a robust secondary marketplace could help create capacity to insure these assets, the person said.
Many find the concept of ‘minting’ NTFs – to make them part of a blockchain – and the prices that can reach millions of dollars, perplexing, but Davis said it would be a mistake for insurers to dismiss this new market.
“More companies are going to start tokenizing parts of their business. And if you just say, well, we’re not covering it, because it’s represented as a token, it doesn’t make any logical sense,” he said.
“They can’t just bury their heads in the sand and hope that it all goes away, because it’s not and it is here to stay.”