How insurers cover such a highly unregulated industry like crypto

The crypto industry has infiltrated global markets and gained much acceptance in society. But because money doesn't pass through the banking system, the industry remains outside of government control. Financial watchdogs don't currently regulate it, making the chore of protecting crypto companies challenging for commercial insurers. This post reviews some of the most common exposures the crypto industry faces and how insurers provide coverage in an unregulated industry.

Understanding the crypto insurance challenge

Although cryptocurrency isn't shiny new, it's young enough not to have much of a track record. As you might expect, commercial insurers use historical data to assess and price an industry's risk. However, without this valuable information, insurers face many challenges predicting various vulnerabilities. 

For example, underwriters can't predict the likelihood of a cybercriminal stealing crypto assets or how much damage it would cause for the theft of someone's private wallet. 

Another 'wild west' component of crypto involves pricing. Cryptocurrencies are some of the most volatile assets on the market. Consider the massive Bitcoin or Ethereum price swings making headlines regularly. As a result of these ups and downs, it's challenging to pin a definite price tag on cryptocurrencies. Insurers face a tall order in pinpointing accurate insurance pricing.

Lastly, neither SPIC nor the FDIC insures crypto assets, creating an environment protected very little by the federal government. And still, insurers are expected to play the overall safety net for the crypto industry. With the U.S. regulators deliberating over crypto rules and standards frequently, getting everyone on the same page is tricky.

Common risks crypto companies face

While most industries continue to plow through their post-pandemic mess, crypto companies face similar challenges — but with additional niche exposures. Some of these vulnerabilities include the following: 

• Regulatory variability: Till now, the U.S. government's approach to cryptocurrency has ranged from aggressive to indifferent. Only recently have U.S. regulators spotlighted increased awareness regarding responsible crypto innovations. 
• Market volatility: The open market has uncomfortable dips and rewarding highs that all investors and companies must navigate. Cryptocurrency markets might be more vulnerable to the influence of headlines and world news than others, making the fluctuations more challenging. 
• Cybersecurity: Due to the digital nature of cryptocurrency exchanges, cybercriminals frequently target them. Plus, malware and technical issues create more unique dynamics in crypto, creating a digital environment ripe for costly cyber threats. 
• Talent acquisition: Company leaders face unique hiring challenges, mainly because crypto-competent workers are hard to find. Like other industries, cryptocurrency companies must offer potential candidates competitive benefits to attract and retain top talent. 

How insurers provide crypto coverage

Admittedly, considering all pieces of the crypto pie is overwhelming. A better approach is to slice it up into more manageable parts. For example, let's start with the five steps of proper risk management, which includes:

1. Identification
2. Analysis
3. Evaluation
4. Tracking 
5. Treatment

Understanding risk management

Working with a commercial insurance broker specializing in crypto can make these steps effortless. Deciding how to handle risk — avoid, transfer, mitigate, or accept — will be much easier. Insurers can do a better job of protecting crypto merely by getting to know its risks up close and personal, which brings us to the next point.

Providing information

Insurers can provide comprehensive crypto coverage better when they know all the operation's details and have the correct information. For example, what is the company's specific crypto involvement? How do they operate and generate revenue? Using this information, insurers can better identify insurance needs.

Filling the gaps

More specifically, we know SPIC or FDIC isn't in the crypto corner (for now); however, insurers must consider what crypto companies do operationally to lower risks. Another way to look at it is to examine the vulnerabilities the lack of SPIC or FDIC support causes. What gaps does this fallout create? Can the crypto company fill any void? Commercial insurance brokers specializing in crypto can quickly identify ways to make up for the lack of support. 

Avoiding cyber liability

U.S. data breaches cost companies an average of more than $4 million per incident, leaving insurers asking crypto companies what controls they have to avoid cyber litigation. Furthermore, we are starting to see more, still limited but increasing; cyber claims bleed into D&O through shareholder litigation as there is an increased fiduciary duty on the C-suite to maintain proper cyber controls through regulation and industry requirements.

Customizing coverage

The foundation of any risk management plan is undoubtedly preparedness, such as completing the five-step process mentioned earlier and teaming with a specialist. However, it takes a tailored approach to combat crypto companies' unknown risks. 

For example, a hacker can use private details to access a wallet and digitally transfer cryptocurrency into their anonymous account. Only an insurance product designed specifically for crypto companies can protect against such hacks. 

With the increasing number of cryptocurrency companies and exchanges, insurers must think differently — and even go as far as to develop novel products for the industry. Fortunately, plenty of insurtech and legacy players are jumping aboard.

There's no doubt that insurers face challenges covering such a highly unregulated industry. However, we're encouraged to see fresh risk management ideas emerging in support of safer and more secure crypto, regardless of regulatory standards.