The potential for cryptocurrency insurance to grow into something “major” has been identified by a study published by Bloomberg. A representative for Allianz told the media outlet that the company was exploring cryptocurrency-related product and coverage alternatives since digital currencies were “growing more relevant, vital, and prominent in the real economy.”
According to publicly available data, even Coinbase, the largest cryptocurrency exchange in North America, has only 2% of its coins insured with Lloyd’s of London. The climate-controlled storage facility where these coins are housed (or are connected to the Internet). Not only are the other people not online, but their insurance status is also a mystery.
Bitcoin’s ecosystem is fragile enough that having cryptocurrency insurance plans in place is essential. As the price of bitcoin and other cryptocurrencies has risen, a wave of massive thefts from digital wallets and exchanges has followed. It was reported in January 2018 that a bitcoin worth $500 million had been stolen from the Japanese cryptocurrency exchange Coincheck. As a result of all these breaches piling up, a precarious situation has developed, which the conventional financial system has either failed to recognise or chosen to ignore.
One company’s experience shows the risks of buying bitcoin insurance: BitGo, a blockchain security firm. In 2015, the company gained attention when it disclosed that it had purchased XL Group insurance for the coins it was hoarding. Nevertheless, following a hack at Bitfinex, a customer cryptocurrency exchange, which resulted in the loss of over $70 million in bitcoin, the business temporarily pulled the plug and then reposted a blog post announcing the news.
Because of the popularity of Bitcoin and other cryptocurrencies, insurers must deal with a number of new challenges. Insurance premiums are typically determined by looking back at prior claims. For cryptocurrency, this kind of detail just isn’t kept. Similarly, premiums may be affected by the increased value volatility, with price swings in the three-figure range being far from exceptional as fewer coins will be insured, leading to higher costs overall. Due to legislative ambiguity and a lack of oversight at bitcoin exchanges, insurance firms interested in providing services to the cryptocurrency market may find themselves in a precarious situation.
Indeed, insurance companies have been monitoring bitcoin for some time now. In 2015, Lloyd’s, an insurance firm, produced a paper describing the dangers of bitcoin trading. This company claims that “substantially aiding risk management and insurance supply” may be achieved by widespread implementation of recognised security standards for both cold (offline) and hot (online) bitcoin storage. Also, it suggested using server-side security, cold storage, and multi-signature wallets to lessen the impact of future network attacks.
Bitcoin ecosystem issues may be bad for business, but they could be good for the insurance industry. Most insurance products aimed at the industry are tailored to the individual needs of each client. Bloomberg found that businesses operating in the bitcoin industry are more likely to choose theft coverage (including cyber and criminal insurance) than those in any other industry. Contrarily, hackers are not allowed. The research indicates that startups may have to pay as much as 5% of their coverage limits for this reason. Costs for theft insurance could exceed $10 million per year, according to the Insurance Journal. To ensure that no single insurer is held liable for a hacking incidence of this scale, large sums of money are covered by a pool of underwriters who each take responsibility for $5 million to $15 million.
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