Sarah Downy is the Managing Director of FINPRO and co-leads the DART, Digital Asset Risk Transfer, team. In this podcast Sarah shares her insights of the crypto insurance market for 2019 and 2020 along for the need for more education of insurers on the opportunity to serve the need of companies who build blockchain technology and of companies who hold or interact with digital assets.
What is blockchain?
As an insurance person, Sarah defines blockchain technology as a technology that stores digital information on a public database with a number of interesting features such as immutability, transparency and traceability. The way blockchain works is that it stores transactions on blocks that are verified and assigned a hash.
She also notes that insurers often confuse blockchain technology with crypto and illicit behaviour. A perception that Sarah and her team are working very hard to change.
Overview of the Crypto Insurance Market in 2019
Sarah, describes the crypto insurance market in 2019 as very hesitant and uncertain. The cost of insurance was very high and coverage was very limited. The process for clients to get coverage was both complicated and a lengthy one. Marsh’s clients were mainly focused on two types of insurance:
- D&O insurance
- Commercial crime and specie market coverage
D&O insurance, director’s and officer’s liability insurance protects the individuals running the company. It covers claims brought by investors, shareholders, regulators, against the directors, officers and employees associated with things like a breach of a duty, securities violation, regulatory investigations, or proceedings.
Commercial crime is the coverage that reimburses companies for loss due to theft, disappearance or destruction of property. In the case of digital asset, it protects warm and hot storage wallets as compared to the specie market coverage provides coverage for the loss of digital assets from internal and external theft, damage or destruction of private keys.
A hot wallet is a digital wallet that is online whilst a cold wallet is one which is completely offline. The specie market is insuring vaults that custodians are using to store the private keys.
Sarah notes that if a company is building blockchain technology the pricing should be more favourable and the insurance capacity should be more readily available as opposed to a company that holds a large amount of digital assets or is working with digital assets. However unfortunately companies that build blockchain technology are not being treated in a similar manner to a normal company building legacy or well known technologies as insurers still think of blockchain technology as crypto and elicit behaviour and they can’t separate them out.
However 2019 was also a year of innovation for Marsh as it is the year they launched their Blue Vault facility.
5 key trends evolving in the crypto insurance market in 2020
In spite of COVID19 five key trends have emerged in the crypto insurance market in 2020:
- More regulatory certainty
- Transitioning market
- More insurance purchasing
- Crypto maturity
- Testing of an untested market
More regulatory certainty
In the insurance industry we are seeing a desire for more regulatory certainty around the digital asset space. Many insurers are tracking what the SEC (US Securities and Exchange Commission) is doing. For example: Spotlight on Initial Coin Offerings and Digital Assets.
Insurers are also watching the OCC (Office of the Comptroller of the Currency) who for example recently published some favourable guidance letters around the use of and storage of digital assets for regulated banks.
With increased regulatory certainty comes more comfort from the insurers.
Commercial insurance markets in general, are becoming much more challenging, and some might even call them hard markets. Unrelated to digital assets, there has been a large increase in litigation over the last few years resulting in an increase in rates and narrowing of coverage. This has impacted crypto companies where some insurers have decided to simply leave the crypto space thus creating a fair amount of challenges for them to get insured.
More insurance purchasing
The third trend is more insurance purchasing or a shift in the motivation for insurance purchasing. Over the past two years, insurance purchasing really was mainly driven by two things. One was marketing purposes. If a crypto company custodies their assets with an insurance company, their assets are protected. The second was for hiring of experience board members. Board members who have been in traditional industries know that D&O insurance is here to protect them and their personal assets.
There’s an increase emphasis on consumer protection from both regulations and customers. A number of Marsh’s crypto clients are now considering errors and omissions coverage also known as professional indemnity coverage.
Insurers like data, they like to have access to long financial histories and to track records of no claim. As the crypto space is still fairly. Young there isn’t quite enough data just yet. So insurers are looking to experienced board members to help them feel more comfortable with insuring a prospective crypto company. They are also looking to see if the company is focused on becoming more regulatory compliant, does the company work with third party vendors such as auditors, accountants and lawyers.
Testing of an untested market
Sarah is wondering if we’re going to see insurance policies being triggered in 2020. Whilst there been a number of highly publicised hacks involving crypto, the crime market hasn’t seen any losses, mainly because those companies that have been hacked, didn’t have insurance.
For Sarah, the idea of a large and very public hack could cause a lot of concern, but on the other, the insurance coverage needs to be tested, and the carriers need to see how it works to find out how to strengthen the offer. As the purchasing of coverage in the space expands, and more policies are offered, the higher the likelihood that an event will actually test the coverage.
Introduction to Marsh’s DART
Marsh’s DART has a team of 15 – 20 people located around the world from NY in the US to Canada, the UK, Bermuda and Asia. They have clients globally.
DARt has two purposes:
- work with great clients in the crypto space and help them find the insurance coverage that they need
- educating insurers so that they are more comfortable and willing to provide insurance capacity to DART’s clients
Launched in late 2019 through the specie market at Lloyd’s in London, the Blue Vault facility is a $150 million cold storage insurance facility. This facility provides coverage for loss of digital assets from internal and external theft or damage or destruction of the private keys.
Blue Vault works with a single underwriter that happens to be a Lloyd’s syndicate. That underwriter has the authority to bind up to $100 to $150 million in coverage. The cold storage coverage has an easy process to set up and coverage can normally be put in place in a couple of weeks.
Types of requests for blockchain and digital asset risk transfer insurance
The type of requests Marsh’s DART team gets depends on the requested coverage, the reasons behind needing the coverage and the type of clients. They work with a wide range of clients ranging from crypto exchanges, brokers, dealers, custodians, tech companies and investment advisors to name a few.
For example, a crypto exchange that is holding assets for their customers, theft of assets is obviously top of mind. They would look for crime and specie market coverage to protect against the theft of assets. If there’s a theft or breach, the policy would reimburse the insured company and their customers for the theft of those assets for the value of those assets that were stolen.
For companies who have very experienced directors or officers, those individuals would want to be protected, and would thus be looking to buy D&O insurance. D&O is an old product that’s evolved throughout the years and changing it slightly to make it fit better for blockchain technology companies and digital asset ones. Another popular insurance policy is for errors and omissions coverage, also known as professional indemnity coverage for clients who provide services to customers.
A number of Marsh’s clients who are concerned about a handful of individuals running the company who either know how to access the funds being held or simply the company can’t operate without them, they would look to purchase kidnap and ransom insurance.
What is important to note is that the requests for these types of products aren’t different from requests from more traditional companies. All businesses need certain types of insurance to operate and to grow and to transfer risk away from them and onto a third party. What is different is that because those companies either build blockchain technology or are involved with digital assets the insurance companies treat them differently because of their lack of knowledge about this space.
Measuring risk and pricing the risk
For the most part, what insurers already offer can be modified to fit the crypto space. However due to the lack of data on that space, insurers have a close look at the company’s specific such as how experienced the management team are, what is the company’s story, what do they want to deliver, what is their long term plan, and how regulatory focused are they?
With regards to pricing, when there’s a lack of supply and more exposure, the insurers price the risks towards the high end of what they would offer a more traditional company. However, when the insurers really connect with a client, and they’re comfortable with the client story, and what they do, and how they do it, pricing tends to be more reasonable.
Sarah though admits that it is a struggle to get upper level management of insurers comfortable with blockchain technology and the type of digital assets. This requires either a deep dive into understanding the space or a leap of faith for those who can’t devote the time to learning it.