Even as some insurance companies wake up to the potential of cryptocurrencies, the vast majority of the insurance industry is holding off, as many insurers taking a “wait and see” approach.
The reasons? Providers won’t be onboard until they’re convinced the level of investment risk in the crypto market is manageable and that crypto exchanges do a better job of securing assets (passing government security checks would be a good place to start.)
Filling that void right now are the crypto exchanges. Noting the rise in cryptocurrency wallet hacks that has led to stolen coins, crypto exchanges have launched de facto insurance programs that enable investors to file a claim in the event of a data hack, and allow them to recover funds.
Crypto exchanges don’t operate like traditional insurance companies. Instead, the bigger crypto exchanges are rolling out their own insurance funds to investors when traditional insurance coverage isn’t available.
In this model, exchanges deduct a modest percentage of each crypto transaction, and use it to fund insurance programs. This “self-insurance” model will hold the fort, industry experts say, until traditional commercial insurance providers enter the fray – a scenario which should generate steam in the second half of 2021 and more so in 2022.
Right now, more substantial cryptocurrency exchanges like Gatehub, which provides wallets directly to investors to purchase insurance, and Coinbase, which offers supplementary insurance to its crypto investors, offer the most insurance to crypto consumers.
There’s a sense among cryptocurrency liability insurance brokers that 90% or more of the cryptocurrency exchanges are under-insured. That’s the biggest problem facing the cryptocurrency sector.
This may be due to a limited number of insurance underwriters backing these policies, and the very high cost of these coverages due to the speculative value of the cryptocurrencies themselves don't pair well with premium costs and claims payments made in U.S. dollars, according to Juliana Neelbauer, senior attorney at the Atlanta, Ga.-based law firm Drew Eckl & Farnham.
Underwriters are careful to write policies that are limited in what they can cover, according to Neelbaur.
In most cases the policy holder should consider these policies as a form of catastrophic insurance, since the scenarios in which coverages would apply may broadly affect their wallet holders,she said.
Even so, crypto experts say that insurance companies will take on a substantially larger role in the crypto sector, and sooner rather than later.
There's a wide array of possible insurances that might come in the future for the cryptocurrency market – industry insiders are even talking about connecting life insurance to crypto, according to James Page, a management executive at Cryptohead, an industry news and advice platform based in Perth, Australia.
