Trading in cryptocurrencies used to be the domain of bedroom boffins - but now it has grown into a market worth well in excess of $100bn. However, those dealing in crypto are struggling to get insurance cover.
Even with the likes of JP Morgan exploring options for creating its own coin, in today’s market finding insurance to cover the potential downside risk is difficult.
Insurers like risks they can understand, that are well modeled. That’s why it remains difficult to buy cyber cover that meets the demands of most risk managers. And for insurers, crypto poses an even greater threat.
Rachel Turk, head of D&O insurance and US executive risks at Beazley, is one of the few underwriters to embrace opportunities in the crypto space.
However, even she notes that crypto is complicated, which means underwriters need a very good relationship with the brokers placing the business.
“Underwriters, brokers and clients all need to work together to understand what we’re insuring,” she said, speaking at the inaugural CryptoRisk event in London,.
“Because the worst thing we could do is to offer an insurance product - not under false pretenses - but just not understanding what the risk is.”
One of the brokers Turk works with is Rhys James from Paragon. He sees his role as bringing the crypto community’s story to the insurance market.
Also speaking at the conference, James said: “Part of the work that we’ve been doing in the sector is really to engage with the client because what we need to do is take their story and how they’re managing that risk and distil it down to its core elements.”
He said that involved asking about things like the client’s regulatory risk, their exposure to fluctuations in coin valuation and the risk of losing the keys that give access to those coins.
“The only way that you get insurance capacity is by creating mutual confidence between the underwriter and the client,” he explains.
“There has to be a handshake at some point where both parties mutually accommodate each other.”
Turk, says one of the key questions she asks of her insureds is: “Do we even understand what they’re trying to do?”
She answers that saying: “I’m very much of the view that if the management team can’t explain it to me in words of one syllable then investors aren’t going to understand.
“And everyone needs to understand what the business is doing,” she reiterated.
She said one of the biggest risks is the regulatory environment, which differs around the world. And because a lot of those regulators remain untested, the potential exposure remains a mystery.
As a result, securing insurance cover remains difficult. Turk notes that terms of cover can be quite restrictive, while the value of cover available is still limited.
It is thought that the maximum limits available for crypto risk are less than £5mn. Turk said underwriting crypto liabilities required education and an understanding of the risk.
“You have some people that are very evangelical about cryptocurrency and think it’s the best thing ever and you have a lot of naysayers that think it’s terrible,” she said.
“I personally don’t think you have to be in either camp to underwrite it, you just need to understand it.”