Cryptocurrency cover comes with need for expertise

Lloyd’s has hailed the launch of a new policy to protect cryptocurrency held in online wallets as another example of the market’s ability to innovate. However, the product entails a leap of faith with claims data thin on the ground.

The market said the product is designed to support firms which offer the secure hosting of cryptocurrency wallets and support their guarantee that the wallets will not be hacked and the contents stolen.

Trevor Maynard, Head of Innovation at Lloyd’s, explained: “As more money flows into the crypto asset market, losses from hacks are on the rise. Nevertheless, cryptocurrency companies have found ways to protect their digital assets from theft and, by working closely with Lloyd’s underwriters, to insure losses that do slip through the net.

“Lloyd’s is the natural home for insurance innovation because of the unique ability of syndicates to collaborate to insure new things. I am delighted that our Product Innovation Facility (PIF) is providing a fast route to increase insurance capacity for difficult and hard-to-insure risks.”

It has been described as a first-of-its-kind liability policy, with flexible limits from as little as £1,000, and was created by Lloyd’s syndicate Atrium in conjunction with cryptocurrency firm Coincover.

New wave

David Janczewski, chief executive, Coincover, said: “As the crypto asset market heats up again at the start of 2020, a new wave of crypto-curious customers are standing by at the ready to jump in, having previously been put off by the lack of adequate protection against theft and loss. It represents another step forward in enabling cryptocurrency adoption.”

Matthew Greaves, underwriter at Atrium, added: “There is a growing demand for insurance that can protect cryptocurrency as it becomes increasingly popular. It is a testament to Lloyd’s that the market has put together an innovative solution to mitigate these new risks and protect against theft, from physical as well as online vaults.”

The policy has a dynamic limit that increases or decreases in line with the price changes of crypto assets. This means that the insured will always be indemnified for the underlying value of their asset even if this fluctuates over the policy period.

The policy is backed by a panel of Lloyd’s insurers many of which are members of the PIF.

James Gadbury, Senior Broker at Prospect, the insurance broker that worked with Atrium and Coincover to create the policy, told Insurance Times: “We have seen some investors looking to cryptocurrency as an attractive option to divest their portfolio.

“The policy is offering an guarantee to the customers that they will be covered if they are hacked and currency is stolen from their wallets.”

Different business classes

Gadbury added that given the unique nature of the risk individual syndicates were allocating the risk into different business classes.

“Atrium for instance has a cross class mix in its innovation team,” he explained. “Arch and Markel are underwriting the policy via their specie teams, as some of the keys are being kept off line in secure locations.

“Hamilton is participating via its FI team, while TMK is using its cyber and innovation underwriting teams.”

As part of the risk assessment process for the creation of the policy the underwriters undertook a penetration test to assure themselves of the security levels around the wallets. It has also put in place systems to ensure no breach of money laundering regulations.

“The individual wallets may not involve significant values but there is a level of aggregation risk,” added Gadbury. “The market will grow over the next three to five years as we are seeing a rising appetite for cryptocurrency and as technology is implemented more widely across business, the market can only increase.

“However, the product has been built without any real level of historical claims data on which underwriters can base their pricing and wordings.

“It has been an almost unique part of the development of the product as the underwriters have had to have faith in the work which has been carried out around the risk assessment to provide a policy that is set to expand as the rise in cryptocurrency investment grows.”

Sarah Reynolds, global head of Cyber Risks at loss adjusters Global Risk Solutions welcomed the launch and the opportunity to support the cryptocurrency market as it continues to evolve.

“The experiences gained from supporting specie, cyber and technology insurance products provide an invaluable starting point for providing crisis management support and claims support for the different insurance programs available for digital assets,” she told Insurance Times.

“However, the technology, market practise, expectations and expert resources in this space are highly specialised and very different to those typically associated with cyber and technology market. Thus whilst this is an exciting area of development it has been essential for us at GRS, to have invested time and resource in advance to understand the how this market place operates as well as the requirements of our Insurer clients to ensure that all expectations are met from the outset.

“For example, how will the anonymity synonymous with crypto assets be accommodated during the claims process? What additional expert resources are necessary? How can we continue to meet the compliance requirements applicable to financial institutions whilst participating in a non regulated environment

“The market needs to be confident it has the expertise and capabilities to react when claim is submitted and has service providers who will keep up with the pace of technological and product change present in this marketplace as well as the legal and regulatory controls that are likely to follow.”

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