Crypto companies are finally looking to buy insurance. But are the policies out there worthwhile? – Cryptocurrency Market Price
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There is a cliché in cryptos that in a bear market it is time to focus on building. Time, in other words, to avoid flashier work like fundraising and partnerships in favor of quieter product development.
For one of the world’s largest insurance brokers, USI, the situation has been the opposite. The company’s digital asset team will use this period to collectively pursue customers and deals.
USI has been quietly building a crack team of 40 people specializing in cryptocurrency and fintech risks since 2019.
Brokers act as intermediaries between consumers and insurance companies. Their job is to act as an advocate for the insured and help them find the most suitable insurance for their needs. Insurance companies rarely interact directly with customers.
The digital asset sector is woefully underserved in the broader insurance market, partly because it is so young, but also because of its volatility. Broker Aon estimates the crypto market insurance rate to be less than 2% Bloomberg Law article.
But crypto companies are now starting to realize how valuable insurance can be, and demand is growing. In addition to USI, specialized insurance companies such as Evertas and Relm have emerged to offer crypto-specific insurance.
Yet these policies are prohibitively expensive for many smaller businesses. And some wonder if they are worth it.
Taming the Crypto Wild West
Crypto companies may take out insurance for a number of reasons, either to cover the loss of assets or to ensure the protection of data centers and miners’ assets. Last year, at the height of the bull market, insurance for digital asset companies could be a tough sell.
The crypto market was the “Wild West,” said Dave Roque, USI’s director of digital asset underwriting.
“Do we want to buy insurance? Maybe yes, maybe no,” Roque recalled of conversations with clients that range from some of the biggest exchanges to crypto mining companies.
This mentality changed dramatically as the market crashed.
Around the beginning of this year, crypto plunged into a bear market. Bellwether cryptocurrencies such as bitcoin and ether fell more than 50% as investors grappled with rising interest rates, rising inflation and geopolitical tensions.
Struggling with several macro challenges, the crypto industry began to tear at the seams. The popular algorithmic stablecoin TerraUSD (UST) collapsed, taking an estimated $40 billion in value with it.
Several crypto lenders struggled to survive the subsequent liquidity crisis. Players like Celsius and Voyager froze withdrawals, leaving thousands of retail customers stranded.
Hackers of crypto protocols and projects also became more common this year. A The chain analysis report shows that In July, $1.9 billion worth of crypto had been stolen, compared to $1.2 billion in July 2021.
“I think they understand now more than ever how important insurance is,” said Roque, noting that credible new regulation has made it even more important. With little or no crypto-specific regulation, the average number of insurance purchases varied between customers compared to other industries., while future regulation may require “adequate insurance” for crypto companies, Roque said.
Whatever the motivation, crypto companies are now actively taking steps to obtain adequate insurance.
In the last year, USI has seen a 350 percent increase in customer acquisition, all of which are fintech or crypto companies, Roque said.
Not all crypto companies waited until then bear market to secure insurance. USI’s digital resources team has been serving customers since 2019.
“That first policy, I can tell you, it was a little scary,” Roque said.
The practice included multiple exposures, including covering decisions made by directors and officers without crypto restrictions, as well as industry-specific exposures such as crypto fund losses, breaches and embezzlement, Roque said.
“Thank God we had the support of USI, which was 9,000 [people strong],” Roque said. “And we have excellent technical resources here that really helped us build the first policy.”
Special companies like Casualty and Kingdom have come to serve crypto customers. They provide insurance for everything from theft and crime and arrest-related losses to narrower services such as faulty smart contracts and losses caused when an affiliated validator is “cut” by malicious network activity.
Over the years, big names have liked the guardian BitGo and exchanges, e.g Gemini and Bitstamp have integrated all insurances into their services.
It’s all about D&O
However, the hottest service of the moment is known as directors and officers (or D&O) insurance.
A D&O policy can cover claims against directors and key executives by regulators, investors, employees or third parties.
That’s been a growing trend for the past year or two, said Jeff Hanson, vice president of Paragon Brokers — and demand is only getting stronger in bear markets.
The collapse of several crypto companies this year has seen a corresponding increase in lawsuits against crypto companies and their executives. One prominent example is a lawsuit filed against the bankrupt lender Celsiuswho accuses the company’s CEO of running a Ponzi scheme.
Violations of fiduciary duty against the company and its shareholders are typically covered in D&O policies, said J. Gdanski, CEO and founder of Evertas. However, since a clear regulatory direction has not yet been presented, the actions of an aggressive regulator cannot be covered, he added.
Gdanski describes this as the “Gensler effect,” referring to Securities and Exchange Commission Chairman Gary Gensler. He explains that if Gensler woke up one day and sued a significant number of crypto companies, it would be a huge hit to insurance companies.
Insurers fear the risk because there are no standards or clarity about what could trigger regulatory action, Gdanski said. That makes D&O a high risk, which makes it expensive and hard to find, he added.
Yet as companies begin to solidify their board of directors, talent is asking, “How much D&O do you have?” said Hanson.
“You’ve actually, in many cases, prevented some high-quality, high-level, high-risk veterans in various industries from joining crypto companies because there’s no D&O insurance,” Gdanski said.
Wave Financial is one example of a crypto asset manager that has successfully obtained D&O insurance.
“When we got the policies — again, SEC regulated, big, profitable, surrounded by a lot of big-name advisers and things like that — it was very expensive,” said David Siemer, CEO of Wave Financial, describing how only three of the 50 firms would bid on the policy.
“If you’re an early-stage startup, you don’t have a million dollars a year just for D&O insurance,” he added. “So, I know quite a few crypto companies that have it.”
Is it worth it?
Getting a good deal depends on many key elements, such as the company’s management team, staff turnover, balance sheet size, litigation and capital raising initiatives, said Joseph Ziolkowski, founder and CEO of Relm, an emerging industries insurer. .
“We start with traditional reservation methods and then we customize the products and pricing, and I do the reservation based on some of the unique features of the crypto market,” said Ziolkowski. He then Tailored the policy to take into account the uncertain regulatory environment and the volatility of cryptocurrencies.
However, it is questionable how useful the insurance is for those who secure the insurance, because the insurance companies have a proscriptive attitude towards the outlined risk factors and possible risks.
For example, companies often need to list exactly what policies and procedures they have in place and the corresponding risk factors. Most are self-reported activities that are nearly impossible to track, Wave Financial’s Siemer said.
“If you get it, it’s probably written so narrowly that it wouldn’t be of any use in a bad case,” Siemer said. He explains how rarely human error is covered, making the value of these policies questionable.
“You’re paying a huge premium for very poor insurance in almost any case,” he added.
Finally, there is another crypto-specific issue. Most crypto companies using a traditional business model can at least get a quote, but insurance companies are much less certain about experimental models like the Decentralized Autonomous Organization (DAO).
“It’s still a little bit of a work in progress,” said Hanson.
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