Crypto asset trading is rising rapidly. There are currently more than 2,000 crypto assets that can be bought, sold or transferred on approximately 200 platforms around the world. Many crypto asset trading platforms operate globally and without much, or even any, regulatory oversight – but that’s now changing. Jurisdictions around the world are starting to introduce regulatory frameworks and recommendations to control the trading of crypto currency and other digitized assets.
On March 14, the Canadian Securities Administrators (CSA) and Investment Industry Regulatory Organization of Canada (IIROC) co-published a consultation paper seeking stakeholder input regarding the development of a regulatory framework for crypto-asset trading platforms in Canada. This consultation and resulting regulatory framework is vitally important for the insurance industry, which will be required to craft coverage and risk management solutions around this rapidly emerging, but still extremely volatile and risky business.
“I think the insurance industry will be looked to as a solution for the risks that cannot be dealt with by hard regulation, and it will have to do that at a time when there’s still a need for rapid knowledge expansion as to what the nature of the risks are,” said Alison Manzer, partner, Cassels Brock. “The insurance industry is going to be challenged to provide underpinnings for these crypto asset exchanges and platforms that best deal with the perceived risks.
“Insurance for crypto asset trading platforms will, in my opinion, resemble some of the older asset exchange requirements in terms of general errors & omissions, directors & officers insurance, and other liability coverages that the industry is already comfortable with. However, insurers will have to extend their expertise quite considerably in order to create new or expanded products to deal with identified risks in the sector, which include a much more significant concern around cybersecurity and privacy.”
Cassels Brock financial services lawyer, Marisa Coggin, recently published a bulletin in reaction to the CSA and IIROC’s consultation paper, entitled: ‘Risky Business – Opportunities and Challenges for Growth in the Crypto Insurance Market’. In this bulletin, Coggin outlines several challenges insurers face when dealing with the emerging crypto asset market.
“Historically, insurance premiums have been determined based on actuarial data,” she wrote. “Actuarial data for crypto-currency attacks is relatively scarce compared to other types of insurable losses. As a result, we expect some volatility in pricing for the time being. Policy applications tend to be lengthy, involve a high level of diligence, and require policyholders to provide comprehensive representations and warranties. Policies may also require a significant deductible. Similar to cyber insurance, insurers may partially control risk by offering lower policy limits. As a result, the market may be under-served in the short-term.
“There is presently insufficient supply in the Canadian market to meet the demand for insurance coverage. Insurers in Canada have an opportunity to reduce the supply-demand gap, but must do so with caution and ensuring potential risks are appropriately managed. The primary challenge will be to manage adverse selection. Insurers must develop an underwriting process that ensures proper disclosure is provided for the underlying risk, which is inherently higher than many other business lines. Although most insurers have robust regimes to detect and prevent money laundering, anti-money laundering systems and policies should be tailored to address the unique challenges of the crypto currency market.”
While insurance for the crypto asset market has its challenges, it also offers great growth opportunities for insurers willing to invest time and resources into understanding the risks involved, according to Coggin. She points interested parties towards a Lloyd’s of London market bulletin, published in July 2018, which she describes as “an excellent resource” that lays out “some really excellent guidance for underwriting considerations.”
“In the Canadian market, I think the MGAs are probably the most likely adopters of this type of business because they tend to write more specialized business and they tend to have very high underwriting expertise,” Coggin told Insurance Business. “I think it will be a similar approach to those that are writing cybersecurity. It’s critical to get the right expertise in-house so that you have a good understanding of the underlying asset and can make sure you’re properly addressing the risks.”