Cryptocurrency: Exploring the Opportunities and Challenges in the Insurance Industry

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Cryptocurrency is going more mainstream, and it has had a concurrent disruptive effect on three other industries – finance, law, and insurance. As for the insurance industry, cryptocurrency is still new enough that insurance providers are struggling to understand where and how they fit into the cryptocurrency ecosystem. 

Actuaries rely heavily on data to boost profitability and inform their decision-making. When new risks accompany a lack of data, insurers have to “shoot in the dark”. At present, they don’t know what parts of the cryptocurrency ecosystem need to be insured, what limits are appropriate, or how to price it. 

To that end, we’ll explore the opportunities and challenges of cryptocurrency the insurance world is facing. 

What Is Cryptocurrency?

It is a digital or virtual currency. Bitcoin launched the first cryptocurrency, and hundreds of other types of cryptocurrencies have emerged since then. The value of cryptocurrency is determined by supply and demand. Since cryptocurrency coins and tokens are secured by cryptography, they are almost impossible to counterfeit or double-spend. People can buy, sell, or exchange coins and tokens on exchanges. 

Cryptocurrency centers around blockchain technology. Essentially, it consists of a distributed ledger that records all crypto transactions, which are permanent and cannot be changed. As the networks are decentralized, they are immune to interference by governments.

Why is cryptocurrency so popular? Some cryptocurrency holders hold onto their coins or tokens hoping the value will rise so they can sell them later at a profit. Others pay interest to borrow cryptocurrency from other holders without having to go through a bank. Cryptocurrency holders can also transfer large sums of money without incurring the high fees associated with banks and financial institutions.  

What Risks and Challenges Are Insurance Providers Up Against?

The current crypto market exceeds $2 trillion, and with few insurers paving the way, the demand for insurance coverage is high. The few insurance players in the space have limited capacity and high pricing. Aon and Marsh are setting the pace, and both having sold insurance policies to large crypto businesses while other players in the space are taking a wait-and-see approach. 

Insurance providers rely heavily on actuarial data, and the lack of historical data with cryptocurrency causes pause for many insurers. This market presents new and unfamiliar risks, making it hard for insurers to design worthy insurance policies. Insurers are also rightly concerned with the rapid pace of fluctuating cryptocurrency exchange rates and the volatility it creates.

Moreover, while counterfeit isn’t an issue, security and systemic risks abound. Incidents of stolen cryptocurrency by hackers who engage in criminal activities are emerging and large amounts of cryptocurrency have already been stolen. 

Finally, governments are still trying to figure out where their role is in the cryptocurrency market, and there is no way to know how regulations could change the insurance role moving forward.  

Some of the types of cryptocurrency risks are known, but not their extent, and the market is new enough that all risks have not been identified. Despite the trepidation over unknown risks, the insurance industry is wide open for new opportunities to insure various facets of the cryptocurrency market.

What Opportunities Does Cryptocurrency Present for Insurance? 

One of the burning questions for insurers, MGAs or brokers interested in getting in on the game of cryptocurrency is, “What are the use cases?” 

We’ll start by covering the four main use cases for crypto insurance, but be aware that others may emerge in the coming years. 

Crypto Wallet Coverage

Crypto wallets are virtual wallets that store crypto coins and tokens. The wallets contain private keys containing cryptographic information which is used to access cryptocurrency and perform transactions. 

Unlike traditional currency, crypto wallets don’t have the same security measures as bank accounts. As a result, they’re subject to being lost or stolen. If a cryptocurrency holder loses access to their crypto wallet, there is no way to access their assets. In the case of theft, hackers can transfer the contents of the wallet elsewhere, making it impossible to recover them. 

Insurance coverage for crypto businesses presents a new opportunity for custodians and customers of custodians to protect against loss or theft. 

Shoutout to Boost and Breach insurance for being a leader in this space. In February 2022, they launched a crypto wallet insurance product, see details here.

Other Crypto Asset Coverage

Insurance industry also has an opportunity to develop products to cover cryptocurrency finance transactions. A decentralized form of finance is known as DeFI in the cryptocurrency market. 

Rather than cryptocurrency holders going through financial intermediaries to lend, borrow, or trade cryptocurrency, DeFi transactions are completed through smart contracts. The interest rates fluctuate based on demand. 

Hackers can exploit vulnerabilities in DeFi protocols enabling them to steal funds without a trace. In 2021, over $474 million in crypto investor funds were stolen in the first half of 2021 due to hacking. In August, hackers broke into the DeFi protocol Poly Network and walked away with $600 million. 

What’s more, bugs or coding defects can cause financial loss if they function incorrectly. For example, Compound Finance accidentally sent out $90 million in crypto tokens to its users. 

These types of issues could be insured to protect crypto investors with a form of smart coverage or DeFri protocol coverage. 

A few decentralized insurance alternative platforms already offer insurance coverage to protect against losses by the devaluation of cryptocurrency. 

Conventional Coverage for Crypto Businesses

While new insurance coverages are needed for crypto businesses, many of the standard commercial insurance coverages also apply such as D&O, professional indemnity, cyber coverage, and property coverage. 

Cryptocurrency as an Alternative Source of Insurance Capital

Because the demand for cryptocurrency insurance outweighs the availability, some crypto coverage start-ups have pivoted to an alternative strategy. They are gathering cryptocurrency from crypto investors and using it as insurance capital, just as wealthy individuals once provided insurance capital in traditional currencies. 

What can insurance providers take away from the cryptocurrency market so far? Without a doubt, there is some overlap between the cryptocurrency market and the insurance industry. While the main risks are known, many are not. 

Frontrunners in the cryptocurrency insurance industry will have a bit of a learning curve until it’s possible to get more historical data for actuaries to sink their teeth into. Overall, the lack of availability of cryptocurrency insurance is indeed creating new, potentially profitable opportunities for the insurance industry. As both industries begin to understand each other better, the cryptocurrency industry could grow exponentially higher.

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